[2025] UKUT 88 (LC)

When the FTT granted permission to appeal it commented that “there is remarkably little appellate authority on these difficult provisions in this difficult Act”. With that observation in mind, it is convenient at this stage to comment on the structure of sections 35 and 38 and the logical sequence of steps which a tribunal asked to apply them might choose to adopt.

Section 35(1) is introductory and explains who may make an application for an order under it, namely, any party to a long lease of a flat. A tribunal determining an application under section 35 should satisfy itself first that the applicant is entitled to make the application. A “long lease” is defined by section 59(3) and includes any lease for a term certain exceeding 21 years. Section 35(6) excludes leases which demise three or more flats.

Section 35(2) then identifies the grounds on which an application may be made. No order varying a lease may be made unless one of them is made out.

Each ground requires that the lease “fails to make satisfactory provision with respect to” one of the matters listed in subsections (2)(a) to 2(f) (the power in sub-section 2(g) to prescribe other matters has not been utilised). Whether the lease fails to make satisfactory provision with respect to one of those matters is therefore the gateway or threshold question which the tribunal should address next.

The six matters are, in broad terms: (a) repair, (b) insurance, (c) installations, (d) services, (e) recovery of expenditure, and (f) computation of service charges. They are not entirely self-contained and there may be potential for (a), (c) and (d), or (b), (e) and (f) to overlap.

Subsections (3), (3A) and (4) supplement four of the six matters in subsection (2). Subsection (2)(c) and (d) should be read together with subsection (3); subsection 2(e) with subsection (3A); and subsection (2)(f) with subsection (4). It is important to appreciate however that subsections (3), (3A) and (4) are not additional, free standing grounds for making an order. They are illustrations or examples of ways in which a lease may fail to make satisfactory provision for the particular matter with which they are associated.

This appeal is concerned with subsection (2)(e) and I will restrict these initial observations to that provision and subsection (3A) which supports it.

The ground in subsection (2)(e) will only be satisfied if the lease fails to make satisfactory provision with respect to the recovery by one party to the lease, whom I will call A, from another party to it, whom I will call B, of expenditure incurred or to be incurred by A, or on A’s behalf, for the benefit of B or for the benefit of a number of persons who include B. Subsection (3A) provides an example of one relevant “factor”, in relation to a service charge, which may be relied on when determining whether a lease makes satisfactory provision with respect to that matter. That factor is whether the lease “makes provision for an amount to be payable (by way of interest or otherwise) in respect of a failure to pay the service charge by the due date”.

Unpacking subsection (2)(e) a little, it can be seen that it is concerned with the provisions of a lease which allow A to recover from B expenditure incurred by A for B’s benefit. It is necessary that A’s original expenditure must have been for the benefit of B (or B and others). It is not necessary that the recovery of that expenditure by A should be for B’s benefit. Nor will it be, since at least in purely financial terms, B would obviously be better off without being required to reimburse A’s expenditure.

The example furnished by subsection (3A) assists in understanding subsection (2)(e) in at least two ways. First, it makes it clear that the reference in subsection (2)(e) to the recovery of expenditure includes the recovery of expenditure through a service charge; that might have been inferred from the reference to expenditure for the benefit of a number of persons who include B, but it is put beyond doubt by the reference to a failure to pay a service charge. Secondly, subsection (3A) demonstrates that a lease may fail to make satisfactory provision for the recovery of expenditure incurred by A for the benefit of B not only in the way it deals with the recovery of that expenditure, but also in the way it deals with ancillary or consequential matters, such as interest. That suggests that that the scope of subsection (2)(e) is broader than might have been thought had subsection (3A) not supplied a practical illustration.

Once a tribunal has satisfied itself that the applicant is party to a long lease of a flat, and that one of the grounds in subsection (2) is made out, it is next necessary for it to consider section 38(6) and (7). By section 38(1) the discretion to make an order varying a lease is expressly made subject to those provisions. Subsection (7) is engaged only where the application relates to insurance, but subsection (6) is of general application. It requires the FTT to consider two additional questions.

The first question is in two parts, arising from subsections (6)(a) and (10), namely: first, whether the variation which the tribunal is considering would be likely substantially to prejudice any respondent to the application or any other person who is not a party to the application, both of whom I will call C; and, secondly, if so, whether C would be afforded “adequate compensation” by an order providing for any party to the lease to pay compensation to C in respect of any loss or disadvantage that the tribunal considers C is likely to suffer as a result of the variation. It follows that substantial prejudice alone is not a bar to the making of a variation order; the FTT is prevented from making an order only if substantial prejudice could not be compensated adequately by a payment of money.

The final question arises from subsection (6)(b), and is whether, for any other reason, it would not be reasonable in the circumstances for the variation to be effected.

If the answer to either of these questions is affirmative the tribunal must not make an order under section 35.

If the qualifying conditions in subsection (1) are satisfied, and one or more of the threshold grounds in subsection (2) have been found to exist, the decision whether to order a variation is a discretionary one. The discretion is removed if substantial prejudice would be caused by the variation and it could not adequately be compensated by money, or if there is any other reason why making the variation would not be reasonable. If the application survives those hurdles the discretion is available to be exercised, but it is hard to see what would remain to be considered by a tribunal in those circumstances. If no other reason is found why it would not be reasonable for the variation to be effected, the obvious conclusion is that the variation should be effected.

I would add three footnotes to this overview.

First, although the lease or leases which may be varied and the grounds of the variation are both defined by the application, the FTT is not otherwise restricted by the terms of the application and may order a different variation from the one proposed by the applicant (subject, of course, to the parties having the opportunity to make submissions on any which the FTT have in mind). That is apparent from section 38(4) which permits the making of the variation proposed in the application “or such other variation as the tribunal thinks fit”.

Secondly, prejudice to C will only be a bar to the making of a variation order if it would be caused by the making of the order and would be both substantial and incapable of being adequately compensated in money. Prejudice caused by a variation which is not substantial and so is not a bar to the making of a variation order, may still justify an award of compensation for loss or disadvantage under subsection (10).

Thirdly, in a case under subsection (2)(e), party B for whose benefit expenditure has been incurred, and party C who may suffer prejudice and be entitled to compensation, are likely to be the same person.