[2025] UKUT 88 (LC)

The FTT decided that it had no power under section 35 to vary a lease to include an administration charge. The new clause 3(13A) proposed by the RTM Company is an administration charge. It would require an individual leaseholder to pay the reasonable costs and expenses (including professional fees) incurred by the Landlord in connection with or in contemplation of the enforcement of any of the Leaseholder’s covenants.

The expression “administration charge” is not used in the 1987 Act. It is defined in paragraph 1(1) of Schedule 11 to the 2002 Act as an amount payable by a tenant of a dwelling as part of or in addition to the rent and which is payable, directly or indirectly, in respect of certain matters which include a failure by the tenant to make a payment by the due date, or in connection with a breach (or alleged breach) of a covenant or condition in the tenant’s lease. The important difference between an administration charge and a service charge is that an administration charge is payable only by the particular leaseholder who has failed to make a payment or breached their lease; a service charge, by contrast, is a contribution payable by all leaseholders, whether or not they were responsible for, or benefitted from, the relevant expenditure.

Two submissions by Mr Demachkie persuaded the FTT that it lacked jurisdiction under section 35 to introduce a new administration charge. Those were, first, “that section 35(2)(e) cannot apply because the Lessees can only vary a lease to recover expenditure incurred on their behalf for the benefit of another party”. The FTT considered that any expenditure under the proposed new clause “would not be for the benefit of another party, but in fact to his detriment” (the FTT was presumably referring to Mr Davies or Mr Polturak). Secondly, the FTT accepted Mr Demachkie’s alternative submissions that section 35(3A) “clearly applies to service charges but not to administration charges.”

The FTT’s first reason was based on a misreading of section 35(2)(e). It was persuaded to read ground (e) as if it was concerned with the recovery, for the benefit of B, of expenditure incurred by A. Mr Demachkie repeated that reading in his skeleton argument for the appeal, suggesting that a variation “is permissible only if it is for the benefit of the other party (or for a number of persons who include that party)”.

As I have explained, at [31] above, the correct reading of ground (e) is that it is A’s original expenditure, which it wishes to recover, which must have been for the benefit of B. That was Mr Fain’s submission and after hearing it Mr Demachkie did not advance any contrary argument of his own on this aspect of the appeal.

The second proposition of which the FTT was persuaded by Mr Demachkie, but which was not pursued at the hearing of the appeal, was that section 35(3A) “clearly applies to service charges but not to administration charges.” That is a second misreading of the section. The purpose of subsection (3A) is to provide an example of one way in which a lease may fail to make satisfactory provision “in relation to a service charge”. Those words do not purport to limit the scope of ground (e), or to define it; they simply identify one particular context in which a provision for the recovery of expenditure by one party for the benefit of another may not be satisfactory. Moreover, subsection (2) does no more than to identify the grounds which may be relied on to justify a variation; it does not identify the variation which may be made if one of those grounds is made out.

It is for the FTT to determine the variation required to deal with the absence of satisfactory provision for any one of the matters in subsection (2). If, in relation to the recovery of service charges, the FTT is satisfied that the lease makes less than satisfactory provision for the costs of enforcement, there is nothing in subsections (2)(e) or (3A) which limits the order it may make to one varying the service charge provisions alone. Adding the cost of enforcement to the expenditure which may be recouped through the service charge would be one way of addressing the absence of satisfactory provision concerning that matter, but it need not be the only one. I can see no reason why, in principle, a lease could not be varied to make a defaulting leaseholder responsible for the costs incurred by the landlord or the RTM Company in enforcement proceedings against the leaseholder, in addition to, or instead of, a variation to add the costs of enforcement to the service charge payable by all leaseholders.

The FTT considered that the proposal to vary the leases to introduce an administration charge raised an issue of jurisdiction. In that respect it was mistaken. The scope of the FTT’s jurisdiction is defined by subsection (2). If one of the grounds in subsection (2) is made out, there is no jurisdictional barrier to the sort of variation which may be ordered. Except in an insurance case when subsection (7) will apply, the only controls over the variations which may then be made are those provided by section 38(6) i.e. whether the variation would cause substantial prejudice incapable of adequate compensation by a payment of money, and whether for any other reason it would not be reasonable.

In my judgment, therefore, the FTT was wrong to dismiss the application to introduce clause 3(13A) simply on the basis that it would add an administration charge. The FTT had jurisdiction to vary the leases to make each leaseholder responsible for the costs of enforcement of their own covenants against them. But, of course, the suggested absence of jurisdiction was not the only basis for the FTT’s refusal to vary the leases.