[2025] UKUT 88 (LC)

The FTT approached the RTM Company’s request to introduce clause 3(13A) by comparing the proposed new right for the landlord (and by extension, the RTM Company) to recover costs of enforcement with the right originally agreed when the leases were granted, which was clause 3(13). The original clause allowed the landlord to recover costs incurred “of and incidental to the preparation and service” of a section 146 notice, whereas the proposed variation would have allowed the recovery of expenses incurred “in connection with or in contemplation of the enforcement of any of the Lessee’s covenants.”

The FTT considered this a difference of significance. The original leaseholders had not agreed to pay expenses incurred by the landlord “for the purpose of” the preparation and service of a section 146 notice. The Court of Appeal had decided in Mayor and Burgesses of the London Borough of Tower Hamlets v Khan [2022] EWCA Civ 831, at [50], that a covenant to pay expenses “of and incidental to” the preparation and service of a section 146 notice was not wide enough to oblige the leaseholder to pay the costs of proceedings to recover unpaid service charges in the County Court or in the FTT where no section 146 notice had ever been served. The proposed variation would have widened the scope of the existing provision to include such expenses, because they would be “in connection with or in contemplation of the enforcement of” the leaseholder’s service charge covenant. That led the FTT to ask itself two rhetorical questions, namely:

“55.

So why should the Applicant recover litigation costs when the Freeholder could not recover litigation costs? Why should the lease be varied in this way when the existing clause is clear and workable: see Triplerose Ltd v Stride [2019] UKUT 99 (LC) and Camden LBC v Morath [2019] UKUT 193 (LC).

56.

So, even if we felt we had jurisdiction [we] would not make the variation suggested.”

The FTT’s second question (“Why should the lease be varied in this way when the existing clause is clear and workable”) was obviously intended to invoke a negative response, but it did so without explanation. The two decisions of this Tribunal to which the FTT referred, Triplerose Ltd v Stride [2019] UKUT 99 (LC) and Camden LBC v Morath [2019] UKUT 193 (LC), were concerned with the circumstances in which a lease will fail to make satisfactory provision for any of the matters in section 35(2)(e). In Camden v Morath the Tribunal (Judge Cooke) considered Triplerose v Stride and another of its previous decisions, Cleary v Lakeside Developments Ltd [2011] UKUT 264 (LC), before continuing, at [16]:

“What I take from those decisions is that the Tribunal will consider whether the wording of the lease as it stands is clear, and whether the term sought to be varied is workable. If it is clear and workable then it is not unsatisfactory. Obviously, the question whether the bargain as it stands works in practice has to be considered on the basis of the evidence in each case. But section 35 does not enable the Tribunal to vary a lease on the basis that it imposes unequal burdens or is expensive or inconvenient. It would be very strange if it did, in view of the law’s general resistance to the temptation to interfere in or improve contractual arrangements freely made.”

In this case, the FTT’s reference to the lease being “clear and workable” is clearly derived from this passage in Camden v Morath and was used by it as a shorthand test for whether the leases failed to make satisfactory provision for the recovery of expenditure incurred by one party for the benefit of another. The second question was concerned with whether the ground under section 35(2)(e) had been made out, and I will refer to it as the ground (e) question. The first question was relevant to the exercise of discretion, and I will call it the discretionary question. I will reverse the order in which the two questions were dealt with by the FTT.

As the FTT pointed out in granting permission to appeal, there is remarkably little authority on the application of section 35. In a featureless landscape the aphorism that “if it is clear and workable then it is not unsatisfactory” has been welcomed as a guide (for a very recent example, see Weycroft, Weybridge Ltd v Wilson [2025] UKUT 64 (LC), at [35(4)]).This appeal provides an opportunity to review such earlier authority as there is under section 35(2) and to consider the reliability of the aphorism or whether too much might have been read into it.

The textbook writers and websites do not mention any relevant reported decision under Part IV between the commencement of the 1987 Act and the transfer of jurisdiction to tribunals in 2003. Thereafter, the earliest appellate consideration of section 35 of which I am aware was by the Lands Tribunal (George Bartlett QC, President) in Gianfrancesco v Haughton (2008) LRX/10/2007 (unreported). The unconventional lease of a flat on the two upper floors of a converted house required the leaseholder to maintain the exterior of the flat including the roof and to contribute half of the cost of repairs to the lower flat undertaken by the landlord, but it contained no mechanism to enable the leaseholder to collect a contribution towards the repairs she was obliged to carry out. She applied for a variation to make the landlord responsible for all works subject to the leaseholder paying half the cost; other variations she proposed would have incorporated into the lease express rights of access which the Tribunal considered were already to be implied. The FTT described the existing arrangements as “satisfactory and workable” and refused the proposed variations. The Lands Tribunal dismissed the leaseholder’s appeal. The President made the following observation at [21]:

“Whether the lease fails to make satisfactory provision is one for the tribunal to judge in all the circumstances of the case. A lease does not fail to make satisfactory provision, in my judgment, simply because it could have been better or more explicitly drafted. For instance the need to imply a term is not necessarily, or even probably, an indication that the lease fails to make satisfactory provision for the matter in question.”

The only other statement of potentially wider application in Gianfrancesco was that it would normally be wrong to base a refusal of an application under section 35 on an expression of willingness by a party to do more than they were contractually obliged to do; if the relevant provision of the lease was not satisfactory, such willingness would not make it so, as the willing individual might change their mind or be replaced by another person differently disposed.

The decision of the Lands Tribunal (HHJ Huskinson) in Mawhood v Sinclair Gardens Investments (Kensington) Ltd (2008) LRX/59/2007 (unreported) also concerned an application to vary the long leases of flats in a converted house. The leases were agreed to be unsatisfactory, so the decision has nothing to say about the section 35(2) gateway conditions. The Tribunal directed itself that it should consider the rival variations put forward by the parties in the circumstances existing at the date of the hearing. It made only modest adjustments to the leases, asking itself, based on section 38(6)(b), whether the proposed variations appeared reasonable in view of an impending enfranchisement. The approved variations included a new obligation to pay interest on unpaid service charges.

In Morgan v Fletcher [2009] UKUT 186 (LC) this Tribunal (HHJ Jarman QC) considered the interpretation of subsections 35(2)(f) and (4). The issue was whether subsection (4) provides an exhaustive list of the ways in which a lease might fail to make satisfactory provision for the computation of a service charge, or whether they are simply illustrations. After noting the contrasting language of subsections (3) and (3A), and after consulting the report of the Nugee Committee on which the 1987 Act was based and ministerial statements made in the course of the passage of the legislation through Parliament, the Tribunal decided that section 35(4) was intended to be exhaustive and that service charges which added up to exactly 100% of expenditure did not “fail to make satisfactory provision”. The Judge explained his reasons at [19], as follows:

“As was recognised by the authors of the report, their recommendations represented an intervention without majority approval in the contractual freedom of the parties and accordingly required justification. The justification given was that such intervention is needed where the scheme is seriously defective, and the defects have a direct bearing on the upkeep and fitness for habitation of the flats in the block. It seems to me that an intervention in the proportions in which the service charge is made also requires justification but cannot be said to have a bearing on the upkeep and fitness for habitation of the flats in the block. It may well be that such intervention can be justified, but it was not a justification which was made or articulated in the report or in the passage of the Bill through Parliament. The reason, I am satisfied, is that that was not the mischief which the provisions were intended to remedy.”

Baystone Investments Ltd v Perkins [2010] UKUT 70 (LC) was another case in which the parties agreed that leases were unsatisfactory and that a variation was required to impose a specific obligation on leaseholders to contribute towards the cost of maintaining the common parts. The only appeal was against the LVT’s decision to vary the leases to make the landlord pay all the costs of implementing the variation, which the Tribunal (HHJ Jarman QC) reversed. The Tribunal was prepared to assume that the LVT’s “wide discretion” under section 38(1) to make an order varying the lease “in such manner as is specified in the order” extended to ordering a variation which required one party to pay the costs of the variation. The Tribunal also placed weight on the LVT’s assessment that long term benefits to the leaseholders in terms of quality of life and possibly enhancement of the value of their leaseholds as a result of the improved condition of the property, justified a decision not to award them compensation under section 38(10).

In Cleary v Lakeside Developments Ltd [2011] UKUT 264 (LC), the LVT had varied the leases of four flats in a block of six to introduce a right for the landlord to recover a contribution towards its costs of employing a managing agent, in circumstances where the more recently granted leases of the two remaining flats included such a clause. On appeal, the issue of principle considered by the Tribunal (George Bartlett QC, President) was whether the condition in section 35(2)(e) was satisfied by reason of the landlord’s inability to recover all its expenditure on management. In the course of its decision that the gateway condition was not satisfied the Tribunal made the following points, which may be regarded as statements of principle. First, at [26], as regards clarity, a lease might be unsatisfactory if it leaves some matter of significance to be implied rather than being expressly stated, as there could be disagreement about it. Secondly, at [27], as regards uniformity: “there is … nothing arguably ‘unsatisfactory’ in the fact that two lessees pay a contribution to the lessor’s costs of management and four do not”; that simply reflected “different contractual provisions that do not appear to have caused any difficulty in interpretation or application”. Thirdly, at [30], as regards the risk of future neglect:

“… there may be circumstances where the financial position of the lessor may make the absence of a lessee’s covenant to pay for the cost of management unsatisfactory. This could be the case, for instance, where there was an RTM company with no other source of income. But evidence would be needed to show that there was a particular need in the circumstances of the case.”

Finally, as regards compensation (which did not have to be considered in detail), a loss or disadvantage need not be measured only by a diminution in value of a lease; it was hard to see how the leaseholders being required in future to pay for management for which they currently paid nothing would not be a loss or disadvantage requiring the payment of compensation.

The decision of the Tribunal (HHJ Huskinson) in Brickfield Properties Ltd v Botten [2013] UKUT 133 (LC) concerned the date from which a variation could take effect. The Tribunal noted that the purpose of an order under section 35 was “to cure a defect” and said there was nothing in the statute to suggest an intention to cure a defect prospectively rather than from the time that it arose. The nature of the variation which could be applied for was expressed “in wide words” in sections 38(1) and (4) and, in that case, it was reasonable to backdate the variation to the date on which the defect had begun to cause the total service charge contributions to fall below 100% of the landlord’s expenditure.

On similar facts to those in Cleary v Lakeside Developments. the Tribunal (Judge Behrens and Mr AJ Trott FRICS) in Triplerose Ltd v Stride [2019] UKUT 99 (LC) followed the same approach, holding once again that the fact that the leases of flats in the same building provided that different tenants had to make different contributions towards service charge costs did not of itself make a lease unsatisfactory. The FTT had varied the lease of one flat to make the leaseholder contribute, for the first time, to the cost of maintaining the structure of the building, a provision described as “absolutely standard”. On appeal the Tribunal accepted the leaseholder’s submissions that the lease was “satisfactory” and that the fact the proposed variation was “standard” or “common” was irrelevant. It also accepted that, because the landlord was a company owned by the leaseholders,there might be circumstances where the lack of adequate contributions from the appellant could render the lease unsatisfactory. However, that could only be established by evidence (for example that major structural repairs were beyond the means of the members of the company). But the only evidence was that the building was in reasonable condition and any shortfall in the service charge was being funded by the members of the company. The appeal was therefore allowed, and the variation refused. In case it was wrong, the Tribunal considered how compensation might have been assessed if the variation had been permitted and it described the method proposed by the appellants’ expert (which produced a compensation figure of £9,500) as “a reasonable approach”.

That brings me finally to Camden v Morath, the Tribunal’s decision in which it was said that the established meaning of “satisfactory” was that “if it is clear and workable then it is not unsatisfactory”. That was another application based on section 35(2)(e), and on the landlord’s inability to recover all of its expenditure on services. Leaseholders who occupied flats on a large estate under a particular form of lease were obliged to contribute towards the cost of services provided to their own building but not towards the landlord’s expenditure on the common parts of the estate as a whole from which they also benefitted. The Tribunal’s commentary on the two authorities to which it referred, Cleary and Triplerose, has already been quoted, at [57] above, and need not be repeated. The Tribunal found no reason to adopt a different approach, as it explained, at [33]:

“It has not been argued that those two decisions were made in error, and I see nothing in the facts of this case that might persuade me to depart from the construction of “satisfactory” adopted in them. Exactly as in those cases there is here a perceived inequity in the bargain made between the parties. Why it was so made is not known, but it was clearly made and the provisions are workable. There has been no evidence to show that they are not. There is no suggestion that the appellant cannot meet its contributions.”

Cleary, Triplerose and Camden were all appeals in applications relying on section 35(2)(e). Additionally, and significantly, they were appeals in which an existing allocation of responsibility for the cost of services was being challenged on the grounds either that it did not allow the landlord full recovery or that the contributions of different leaseholders were unequal. It is therefore understandable that great weight was placed on the fact that the existing provisions of the lease were clear, so that there was no uncertainty over what they meant, and that they were workable, in the sense that there was no evidence that they had given rise to practical problems or led to the building or the estate in question not being properly maintained. Those are clearly relevant considerations in determining whether agreed contractual terms are satisfactory.

But I respectfully suggest that clarity and workability cannot provide a comprehensive test for whether the provisions of a lease are satisfactory. First, because the question asked by the statute is whether the provisions are “satisfactory”, and there is no reason to substitute different and significantly narrower language, nor would it be permissible as a matter of interpretation. Secondly, because there are six distinct grounds in section 35(2), four of which are elaborated on in subsections (3), (3A) and (4), and a test of clarity and workability would not adequately address the variety of circumstances and relevant factors which Parliament has identified as capable of being less than satisfactory. Thirdly, and illustrating the previous point by reference to section 35(2)(e), the circumstances in which a lease will fail to make satisfactory provision for the recovery by A of expenditure incurred for the benefit of B include, by subsection (3A), 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. It could not be said that the absence of a provision for the payment of interest would make a service charge obligation unclear or unworkable, yet Parliament obviously considered that such a lease may fail to make satisfactory provision and intended the FTT to have power to reverse the omission.

It should also be noted that, in Camden, although the Tribunal referred, at [26], to “the well-established meaning of the term ‘satisfactory’ in s.35(2)”, its focus subsequently narrowed. At [33], it said that speculation about the intention of the parties was of no value in assessing whether the relevant provision of the leases was satisfactory “within the meaning of section 35(2)(e)”.

My own reading of Cleary and of Triplerose is that they support the proposition that a service charge provision which is clear and which has not produced practical problems is not unsatisfactory merely because it does not allow A to recover all of its expenditure from a group of leaseholders including B. Unequal contributions are not enough, but other factors, including an absence of alternative sources of funds to enable A to meet its responsibilities, may combine to undermine the workability of a provision and to render unsatisfactory that which was previously satisfactory. In my judgment neither decision supports the broader reading suggested in Camden, nor do any of the trilogy consider the meaning of “satisfactory” in the context of the other available grounds in section 35(2). The clarity of existing provisions and the results which they have produced or are expected to produce in future are likely to be relevant considerations in many cases, but they are not exhaustive.

The FTT was therefore in error in substituting consideration of whether the lease was “clear and workable” for the statutory question of whether it made “satisfactory provision” with respect to the recovery by A of expenditure incurred on B’s behalf.

The FTT’s first question invited a comparison between the position of the RTM Company and the position of the Freeholder in relation to the recovery of costs: “why should the Applicant recover litigation costs when the Freeholder could not?”. Expressing the comparison in that concise way makes it a little difficult to identify the point the FTT was making. It might have been comparing the position of the Freeholder and the RTM Company after the making of the proposed variation; or it might have been comparing the position of the Freeholder before the variation with the position of the RTM Company after the variation.

It seems unlikely that the FTT had the first comparison in mind. The RTM Company’s proposal was for the lease to be varied so that the Lessor would be entitled to recover its costs incurred in connection with or in contemplation of the enforcement of any of the leaseholder’s covenants. The variation did not refer to the RTM Company at all and it would not give the RTM Company any different rights from those which the Freeholder, as Lessor under the leases, would enjoy once the variation took effect. The RTM Company would benefit from the variation indirectly, through the effect of section 102 and paragraph 10 of Schedule 7 to the 2002 Act.

The comparison the FTT is more likely to have considered significant was between the rights of the Freeholder, as Lessor, before the proposed variation, and the rights of the RTM Company once it had taken effect. Why, it may have thought, should the RTM Company have greater rights than the parties originally agreed the Lessor should have? That is a relevant question, but unfortunately the FTT did not attempt to answer it.

Mr Fain criticised the FTT for basing this part of its decision on whether the leases, as currently drafted, would have permitted the Freeholder to recover the costs of enforcement. It failed to consider the extent to which the Freeholder could recover its costs or the reasons why the RTM Company could not. It therefore failed to have regard to relevant considerations when exercising its discretion.

I agree with Mr Fain’s submission on the adequacy of the FTT’s assessment of the relevant circumstances. For one thing, as Lessor, the Freeholder was entitled to the benefit of clause 3(13) and could recover the costs of and incidental to the preparation and service of a section 146 notice. Additionally, once a section 146 notice was served and forfeiture proceedings were commenced, the Freeholder would expect to recover all of its costs as a condition of relief against forfeiture. In principle, those would include costs incurred in contemplation of service of the notice, and in any previous proceedings before the FTT under section 168, 2002 Act for a determination of breach, or under section 27A, Landlord and Tenant Act 1985 for quantification of the leaseholder’s service charge liability.

In Barrett v Robinson [2014] UKUT 322 (LC), at [48], I sought to explain the purpose of a clause like clause 3(13) (the equivalent in that case was clause 4(14)), as follows:

“The real purpose of a clause in the form of clause 4(14) can be seen from its concluding words: “notwithstanding forfeiture is avoided otherwise than by relief granted by the Court.” Where a forfeiture is avoided by relief granted by the court, the terms of relief reflect the principle that the landlord should be put in the position it would have been in but for the forfeiture (i.e. if the tenant had not committed the breach of covenant on which the forfeiture was based)(see Woodfall: Landlord and Tenant, para 17.169; Egerton v Jones [1939] 2 KB 702). That principle will normally require that the tenant reimburse any costs incurred by the landlord in serving the required section 146 notice and in bringing the proceedings. However, the purpose of a notice under section 146(1) is to allow a tenant who is in breach of covenant the opportunity to remedy the breach. Where a breach has been remedied within a reasonable time, the notice will have been complied with and the landlord will have no continuing cause of action, nor any reason to commence proceedings to forfeit the lease. The same landlord may nonetheless have incurred significant costs in the preparation of the notice itself. The object of a clause such as clause 4(14) is to give the landlord the contractual right to recoup the costs incurred in taking those preparatory steps, even where no proceedings eventuate in which the payment of the landlord’s costs could be made a condition of relief against forfeiture.”

The RTM Company has no right to serve a section 146 notice, and therefore no right to recover the incidental costs of doing so. Nor has the RTM Company any opportunity to seek the forfeiture of a lease. Accordingly, with the leases in their current form, it will never be in a position to recover the costs it might incur in taking steps to enforce the leaseholder’s covenants whether under clause 3(13) or as a condition of relief against forfeiture. Those are relevant differences between the rights of the Freeholder and the rights of the RTM Company which the FTT overlooked.

Another relevant consideration overlooked by the FTT is that in 1983 and 1984, when the leases were granted, the distinction on which it placed such importance, between costs “of and incidental to” the preparation and service of a section 146 notice, and costs “in connection with or in contemplation of” the enforcement of leaseholder’s covenants, would have been of very little, if any, importance. Before the commencement of sections 81 of the Housing Act 1996 there was no need for a landlord to obtain a final determination of a court or tribunal concerning the amount of a service charge or administration charge payable by a leaseholder before proceedings could be commenced for the forfeiture of a lease for non-payment of the charge. Before the passing of section 168 of the Commonhold and Leasehold Reform Act 2002, there was no need for a landlord to seek a preliminary determination from a tribunal that a breach of covenant had occurred, before serving a section 146 notice. All of the Lessor’s costs of enforcement through the threat of forfeiture up to and including the service of a section 146 notice (which at that time was almost invariably a landlord’s preferred method of enforcement) would have been covered by both formulations. The costs of any preliminary investigation or advice which preceded the drafting of a section 146 notice would be costs “of and incidental to” the preparation of the notice.

It is true that the extensive statutory interventions since the original leases were granted limit the circumstances in which a lease can be forfeited, and it might be said that since forfeiture is a remedy which is not available to an RTM Company the changes are not relevant to the proposed variations. But it remains the case that the RTM company is a creation of statute which did not exist when these leases were first granted. The idea that responsibility for the maintenance of the building might become detached from the conventional remedy of forfeiture would not have occurred to the parties.

Additionally, the leases were first granted in a context in which a leaseholder who failed to pay service or administration charges which were properly due would have been liable to pay the landlord’s costs of enforcement either as a result of a court order or by the contractual route provided by clause 3(13). The current position is that proceedings to quantify a defaulting leaseholder’s liability will almost always take place in a tribunal where costs-shifting powers are available only by exception, leaving the landlord or the RTM Company unable to recover their costs of enforcement. Although the Freeholder and the RTM Company would, in that respect, be in the same position, that does not mean that changes since the commencement of the original leases are irrelevant to the question whether it would be reasonable to effect a variation.

One response to the FTT’s question (why should the RTM Company recover litigation costs when the Freeholder could not recover litigation costs?) might therefore be that because of statutory interventions since the leases were granted, they now fail to make satisfactory provision for the costs of enforcement, whether by the Lessor or by an RTM Company. The FTT did not consider that possibility. By limiting its consideration of the relevant circumstances to a simple comparison between the rights of the Freeholder and the rights of the RTM Company, the FTT failed to consider whether the position which both found themselves in was unsatisfactory. At the very least, the consideration it did give to the application failed to take account of the different rights of the Freeholder and the RTM Company, and the changes brought about by statute since the leases were granted.

Those were all relevant circumstances which ought to have been taken into account. Had the FTT addressed the relevant questions in their logical sequence having regard to the relevant considerations its conclusion might have been different. Because it did not, its decision on the introduction of the proposed clause 3(13A) must be set aside.

Nor did the FTT address the remaining questions raised by section 35 and 38, namely, whether the leaseholders would be substantially prejudiced by the variation in a way which could not adequately be compensated by an award of money, and if not, whether there was any other reason why it would not be reasonable in the circumstances to order the variation. It is understandable that, having decided that it did not have jurisdiction to make the proposed variation, and that none of the grounds in section 35(2) had been made out, the FTT felt it sufficient to provide only one reason why it would not have exercised the power if it had enjoyed it. But the result is that those matters remain to be considered for the first time either by this Tribunal if I remake the decision, or by the FTT If I remit the proceedings for further consideration.

For these reasons I allow the appeal on ground 2 and set aside the FTT’s decision so far as it concerned the variation of the leases to allow the Lessor to recover the costs of enforcement directly from the defaulting leaseholder.