[2025] UKUT 88 (LC)

56 Westbourne Terrace in Paddington is a four storey, mid-nineteenth century terraced house divided into 11 self-contained flats, each held under a long lease. In each lease the leaseholder covenants to pay a service charge for services described in the Third Schedule.

The freehold of the Building is owned by a company, 56 Westbourne Terrace Freeholders Association Ltd (“the Freeholder”), in which the owners of each flat hold one share. The only leaseholder who owns more than one flat, and who therefore holds more than one share, is Mr Davies, who owns Nos. 9 and 11. Mr Polturak owns No. 3.

Although, between them, Mr Davies and Mr Polturak own only 3 of the 11 shares in the Freeholder, they are its sole directors. The other leaseholders have tried but have so far been unable to replace them in those positions.

The application is part of a wider dispute between Mr Polturak and Mr Davies and the RTM Company, which has its roots in earlier disagreements between the Freeholder and individual leaseholders going back at least to 2010. Although there is reference in the evidence to the existence of these disputes, the FTT was given no proper account of them and was not asked to form any view on their merits. It is sufficient to say that in 2018, after several years of discord between the Freeholder and individual leaseholders, a sufficiently large group of leaseholders joined together to form the RTM Company and took over management of the building.

The FTT found that Mr Davies and Mr Polturak had refused to pay any service charges although exactly when this began is disputed. Some payments may have been made recently but Mr Demachkie was at pains to stress that Mr Polturak considers that he has legitimate grounds to withhold payment. Whether he is right about that or not, the RTM Company has been unable to manage the building as it would have liked to because of the substantial arrears attributable to the three flats belonging to the directors of the Freeholder.

Leases of the flats in the building were originally granted in 1983 and 1984. In 1991 they were extended on substantially the same terms other than as to their duration. The form of the covenants in the leases therefore dates back more than 40 years and predates the significant leasehold reform introduced by Part 2 of the Commonhold and Leasehold Reform Act 2002 (the 2002 Act). That reform included the introduction of the right to manage and the creation of a new type of company, the RTM company; it also included restrictions on forfeiture introduced by section 168 which prohibit the service of notice under section 146 of the Law of Property Act 1925 as a prelude to forfeiture for breach of covenant without the tenant first having admitted the breach or the landlord having obtained a determination from the FTT that it has occurred.

In this case, the only provision of the leases which allows the landlord to recover the costs of enforcing its right to receive the service charges is clause 3(13), by which each leaseholder covenants:

“To pay all expenses including solicitors’ costs and surveyors’ fees incurred by The Lessor of and incidental to the preparation and service of notice under Sections 146 and 147 of the Law of Property Act 1925 (or any other notice hereunder) notwithstanding that forfeiture be avoided otherwise than by relief granted by the Court.”

In the event of non-payment of a service charge, or any other breach of covenant by a leaseholder, the Freeholder has the right, now subject to section 168, 2002 Act, to serve a section 146 notice before proceeding to forfeit the lease. Clause 3(13) gives the Freeholder a contractual right to recover any costs it incurs “of and incidental” to that notice directly from the defaulting leaseholder.

Since it acquired the right to manage in December 2018, the RTM Company has been responsible for the management and upkeep of the building and has been entitled to collect the service charges payable by the leaseholders. But it is not entitled to serve notice under section 146. Sections 96(6)(b) and 100(3) of the 2002 Act specifically exclude functions relating to re-entry or forfeiture from the management functions conferred on an RTM company. It follows that legal expenses which the RTM Company incurs in collecting service charges are not recoverable by it under clause 3(13) of the leases.

The members of the RTM Company are unable, or unwilling, personally to fund proceedings against Mr Davies and Mr Polturak to recover unpaid service charges. They are unable, or unwilling, personally to fund the contributions towards necessary repairs which Mr Davies and Mr Polturak consider themselves entitled to withhold. The parties have therefore reached a stalemate. They agreed that the FTT need not make findings of fact or allocate blame for the position they find themselves in. Nevertheless, the FTT rightly saw the existence of the dispute as highly relevant to the application it had to determine.