[2025] UKUT 88 (LC)

The FTT rejected the second variation proposed by the RTM Company, which would have enabled it to recover the cost of enforcement of any leaseholder’s covenants as a service charge expense payable by all of the leaseholders collectively. It decided that it did not have jurisdiction to introduce the proposed alteration under section 35(2)(e) for the same reasons it had refused jurisdiction to introduce an administration charge. Nevertheless, it said that it was able to give section 35(3A) “a wide and purposive construction to fill a significant lacuna in the Act as originally drafted”. On that basis the FTT held that it had jurisdiction to make the second of the proposed variations.

As I have previously explained when considering issue 1 above, the FTT was mistaken in its understanding of section 35. The submissions of Mr Demachkie which had persuaded it that it had no jurisdiction to vary the leases to introduce an administration charge were equally mistaken when applied to the proposed variation in the service charge provisions of the lease. The “significant lacuna” which the FTT detected was illusory and, in any event, subsection (3A) does not provide an alternative free standing ground of application.

The only jurisdiction question which the FTT needed to consider was whether each of the leases made satisfactory provision for the recovery by the Lessor or the RTM Company of expenditure incurred or to be incurred by them for the benefit of the individual leaseholder or for the benefit of a number of leaseholders. It did not consider that question.

In refusing to exercise its discretion to give effect to the proposed alteration making the costs of enforcement recoverable through the service charge, the FTT said that it would apply the approach of this Tribunal in Shellpoint Trustees v Barnett, which it described as “the most detailed and authoritative decision under section 35”. In Shellpoint the Tribunal refused to vary leases in a development to allow the landlord to recover its costs of bringing proceedings against one leaseholder at the request of another. In their original form the leases required an individual leaseholder to indemnify the landlord against the costs of proceedings brought at their request against a fellow leaseholder. The Tribunal said of the proposed change, which would have dispensed with the need for an indemnity and added the landlord’s costs to the service charge:

“It is in our judgment a quite exceptional, and substantially prejudicial, thing to enable the landlords to recover its costs not only of recovering the service charge but also of enforcement of all of its covenants from all tenants through the service charge, particularly where the landlords are not owned or controlled by the tenants and there is no evidence that the landlords cannot afford to do so or that the absence of such covenants has caused any difficulties in the past or will or is likely to in the future. It would enable the landlords to decide how, when, by whom and at what cost they should enforce covenants. That would shift all the financial risk and liability from the landlords to the tenants whose only control would be proceedings via the LVT and all the time, trouble, cost and uncertainty that that involves. The appellants have put forward no justification for such a major risk and liability transfer and all that that entails.”

The FTT acknowledged that the circumstances of this application were not the same as those considered by the Tribunal in Shellpoint (in particular, the RTM Company is controlled by the leaseholders, there is evidence that it cannot afford to litigate, and its case is that without the variation it will continue to experience difficulty in enforcing its right to collect service charges). Nevertheless, it considered that the decision was not confined to its own facts and that “[t]here is no reason why this approach should not apply to RTM Companies as well.”

The FTT appears not to have appreciated that Shellpoint was not an appeal under section 35 at all. It was an appeal from the decision of an LVT on an application under section 37 brought by the landlord of a development of 365 leasehold flats with the support of the majority of the leaseholders. The applications sought variations to each of the leases to enable the communal heating and hot water systems to be replaced with individual boilers in each flat with consequential provisions for recovery of those costs through the service charge together with other unrelated variations to enable the landlord to recover its costs of enforcing covenants contained in the Leases through the service charge.  No evidence at all was tendered as to why the variations unrelated to the replacement of the heating system were required, or what their object was; in particular, there was no evidence or suggestion that the landlord had been unable to properly manage the blocks or enforce any of the covenants due to being unable to recover such costs via the service charge.  The LVT allowed the variations so far as they concerned the communal systems but refused those concerning the service charge and the recoupment of the costs of enforcement.

The Tribunal held, at [64], that the applications failed because the sole object of the package of variations could be achieved without making amendments unconnected to the replacement of the communal systems. That was a reflection of the single available ground of application in section 37(3), which is not a relevant consideration in an application under section 35.

One unusual feature of the appeal was the acknowledgement by the appellant landlord’s counsel that neither he nor his clients had appreciated the far reaching scope of the proposed variation to permit the addition to the service charge of the costs of enforcement of all leaseholder covenants, not just service charge covenants (see [90]). They now considered that to order such a variation would be wrong. Despite this acknowledgement, the Tribunal, at [98], considered that “[t]he proposed variations may well be appropriate where the landlord is a single asset company owned and controlled by the tenants with no source of revenue other than the service charge and rent.” But there was no evidence or suggestion that the landlord met that description.

The passage from Shellpoint quoted by the FTT (see [92], above) was in part of the Tribunal’s decision considering the issue of prejudice and section 38(6) (which applies equally to applications under section 35 and 37). Reading the decision as a whole, it is apparent that it was the breadth of the proposed variations, going far beyond what the landlord had understood it was proposing, which the Tribunal considered to be “substantially prejudicial”. The Tribunal took exception to the proposal for the landlord “to recover its costs not only of recovering the service charge but also of enforcement of all of its covenants from all tenants through the service charge”. The decision was emphatically not that allowing the recovery through the service charge of the costs of collecting unpaid service charges (to the extent that they were not recouped from the defaulting leaseholder) was prejudicial or unreasonable. Nor, importantly, was it a decision that the proposed variations would not have been justifiable if the landlord had been owned by the tenants.

The FTT drew attention to the factual differences between Shellpoint and the current case but it made no assessment of their significance. On proper analysis, Shellpoint contains very little of relevance to the current application and by simply adopting the approach taken in that case as if it reflected a rule of general application, the FTT failed to give proper consideration to the matter before it.

It follows that neither the FTT’s assessment of the gateway condition, nor its approach to the exercise of its discretion, can be allowed to stand. For these reasons I allow the appeal on issue 3.