[2025] UKUT 120 (LC)

The FTT decided that the appellant was not entitled to transfer any difference between the budgeted expenditure payable by leaseholders and the actual expenditure incurred to reserves, as is said to have been its practice since 1978.

Mr Dickin acknowledged that long usage was not a sufficient justification for that practice if, correctly interpreted, the lease required that any surplus be credited to the leaseholders when the annual adjustments were certified. He advanced two arguments in support of the practice.

First, he pointed out that clause 5(iii) of the lease gave the landlord a discretion over whether there should be a reserve fund at all, and over the amount to be allocated to it “from time to time”. That is clear enough. He then noted that the clause required only that “a proportion of any sum so allocated” be included in the annual estimate of expenditure prepared under paragraph 2 of the Fourth Schedule. It was therefore permissible, Mr Dickin suggested, for the appellant to nominate, at a different time, a sum which would not become part of the estimate of expenditure and allocate it to the reserves. That is what the appellant did when it allocated year end surpluses to reserves.

I do not accept Mr Dickin’s argument for two reasons.

First, it is clear from clause 5(iii) that the sum allocated to reserves is exempted from the adjustment required by paragraph 2 of the Fourth Schedule. It would be circular to treat the product of that adjustment as a sum which could then be allocated to reserves.

Secondly, and most significantly, the suggestion that the product of the “adjustment certified as due from or to the Tenant” by the accountant can be allocated to reserves at the appellant’s discretion is directly contrary to the instruction that the same sum “shall be paid by the Tenant or credited to the Tenant on the date for payment following the issue of such certificate” as paragraph 2 requires.

I agree with Mr Dickin that the reference to “a proportion” of the sum allocated to reserves being included in the estimate is odd; it may be a reference to the payments by equal instalments, or simply be a mistake, but in any event it is not a sufficient reason to depart from the explicit instruction to credit the Tenant.

Mr Dickin’s second submission challenged the FTT’s assumption that crediting a surplus required that the sum be paid to the leaseholder or credited against their next demand. He suggested that a sum could still be credited to the leaseholder if it was transferred to reserves. I do not accept that argument either. A sum which is added to the reserve is then available for the appellant to use as it decides. It is not in any sense credited to an individual leaseholder. It cannot be used, for example, to reduce the leaseholder’s obligation to contribute their apportioned part of the £10,000 allocated annually to the reserve. Nor can it be recovered by the leaseholder if they transfer their lease. The fact that the managing agent may be able to calculate how much any individual leaseholder has contributed to the reserves is neither here nor there. The sums in reserve do not stand to the credit of the individuals who contributed them.

I am satisfied that the FTT came to the correct conclusion on this issue. The lease provides for any surplus to be credited to individual leaseholders and not taken into reserve. Of course, that does not prevent individual leaseholders from agreeing that any sum otherwise due to them could be credited to the reserve. If all agreed, the practice of previous years could be continued. But no individual could be obliged to agree, nor could a majority insist on agreement. Without unanimity, a voluntary contribution to reserves would not be likely to be attractive.