[2025] UKUT 292 (LC)

Ground 1 is argued only by the second and third appellants. They point to section 38(6) of the 1987 Act which provides that the FTT “shall not” vary the lease if it appears to the FTT that the variation would be likely substantially to prejudice anyone and that an award under section 38(10) would not afford them adequate compensation. The appellants say that the FTT jumped the gun in deciding to exercise its discretion before it had considered whether they would suffer substantial prejudice and whether a payment under section 38(10) could compensate them.

The FTT gave directions on 4 September 2024, stating that at the hearing on 18 November it would consider first jurisdiction and then discretion, and that if it concluded that it had jurisdiction so as to proceed to discretion it would “then consider how to deal with the issue of compensation, giving directions for further submissions/evidence/hearing date as may be necessary.” In its decision of 11 December 2024 the FTT explained that direction as a decision that it would at the hearing consider whether it had jurisdiction to vary the leases “and if so whether it should exercise its discretion to do so, with the issue of compensation being determined at a later date.”

The FTT then went on to consider jurisdiction by looking at the requirements of section 35, and concluded that it had jurisdiction (which is challenged in grounds 2, 3 and 4). It then said:

“36 …The question then is whether we should exercise our discretion and make any of the variations sought by the Applicant. … Mr Upton urged us not to embark on this exercise until the Respondents had the opportunity to establish whether or not they might be prejudiced by any or all of the proposed variations. He could not suggest any mechanism by which the value of either the reversion or of the leasehold of Flats 16, 19 or 23 might be adversely effected by any of the proposed variations.

37.

In our view the best of the three proposed variations is the variation to the interim maintenance charge. …

38.

As the Tribunal has already decided that the issue of compensation will not be considered as part of this determination, we will postpone consideration of the Respondents’ application under section 20C LTA 1985 or Paragraph 5A of Schedule 11 to the CLRA 2002, should it wish to pursue it. Directions for a case management hearing to deal with those applications, the registration of the variation against the relevant leasehold and freehold titles, and the issue of compensation will follow this decision.”

That, say the appellants, is to miss out a stage in the reasoning process; the FTT exercised its discretion before ascertaining whether it could do so under the terms of section 38(6). They point out that in 56 Westbourne Terrace in paragraphs 23 to 41 the Tribunal explained the steps to be taken by a tribunal in deciding whether it had jurisdiction to vary a lease. Mr Bates KC and Mr Upton identified six numbered steps; that is not how the Tribunal put it in 56 Westbourne Terrace and I think it is unnecessary and over-complicated to look at the analysis in that way. The important point is that the FTT cannot exercise its discretion if section 38(6) prevents it from doing so, and therefore before exercising its discretion it has to give consideration to section 38(6).

If this ground of appeal succeeds they say that the FTT’s decision should be set aside and the matter remitted to the FTT for a decision once the first and second appellants have had the opportunity to instruct experts and produce evidence of substantial prejudice.

The respondent’s answer to this ground is simple: the restriction on the FTT’s discretion imposed by section 38(6) was not engaged because it was not part of the appellants’ case that they were likely to suffer substantial prejudice. Substantial prejudice was not pleaded by the appellants.

Specifically, in their statement of case in the FTT the appellants’ case was that the grounds relied on in section 35(2) were not made out; but if the FTT found that they were then the appellants sought “an order that [the RTM company] pays compensation in respect of any loss or disadvantage that they are likely to suffer as a result of these variations.” In other words the appellants relied on section 38(10) if an order varying the leases was made, but it did not suggest that there would be substantial prejudice to them and that therefore such an order could not be made.

The appellants applied in August 2024 to have the jurisdiction issue decided as a preliminary issue. Mr Rainey KC took the Tribunal to the appellants’ application form, where the appellants said:

“[the second and third appellants] (being residential leaseholders in the subject premises) also wish to rely on expert evidence supporting their cases under section 38(10) of the Act (if the Tribunal makes an order varying their leases)”.

That, said Mr Rainey KC, makes it clear that the appellants were not relying on section 38(6); they wanted compensation only if the FTT made the order varying the leases. They did not seek to rely upon substantial prejudice as a reason why the FTT should not make such an order. In a “rider” to that form of application, the appellants said that there were three issues before the FTT, namely jurisdiction, discretion and compensation. Paragraph 4 of that rider referred to section 38(6), but although the effect of the section was set out it was not suggested that substantial prejudice would arise from the variation of the lease.

That document was followed up by a further letter to the FTT arguing that there be a hearing on jurisdiction, and then a hearing on discretion and compensation. In response, the FTT gave its directions of 4 September 2024 (see paragraph 29 above). Following those directions, said Mr Rainey KC, it must have been clear to the appellants that both jurisdiction and discretion would be addressed at the hearing on 18 November 2024 and that therefore if they wished to raise substantial prejudice and to rely on section 38(6) they must make that argument at that hearing.

They did not do so. Mr Upton’s skeleton argument before the FTT mentioned section 38(6), stated that the issue of discretion was “inextricably bound up” with compensation, and asked the FTT to give directions for expert evidence on compensation; but there is still no suggestion that the appellants would suffer substantial prejudice. Indeed, neither at the hearing nor elsewhere did the appellants say what prejudice they would suffer, whether substantial or otherwise, and counsel before the FTT could not think of any loss at all (as the FTT said at its paragraph 36, quoted above at paragraph 30)– and that is hardly surprising, said Mr Rainey KC. As leaseholders they will have to pay for the work on the tower; all that is going to change is that they will have to meet more of that liability in advance than they can be required to under the lease as it stands.

I agree with the respondent. If the second and third appellants had argued that the FTT could not vary the leases because they were going to suffer substantial prejudice as a result and that that prejudice could not be compensated by an award of compensation under section 38(10) then the FTT would have had to make a decision on that argument before deciding to vary the leases. As discussed above, section 38(6) limits the FTT’s discretion and therefore consideration of an argument about substantial prejudice is part of the FTT’s consideration of discretion. I do not see that the directions given on 4 September 2024 by the FTT (paragraph 29 above) ran contrary to that. Where section 38(6) is in issue, compensation does not have to be quantified; the FTT simply has to decide whether there will be any substantial prejudice that cannot be compensated, and if there is none then it can proceed to vary the lease, leaving the quantification of compensation for a further hearing. But in the present case when the FTT gave its direction on 4 September 2024 there was nothing in the appellants’ pleading or in the application for a split determination to suggest to the FTT that the appellants thought they would suffer substantial prejudice and so there is no explicit mention of a consideration of section 38(6) in those directions.

I can see that in correspondence with the FTT and in Mr Upton’s skeleton argument it was argued that the FTT should not proceed to exercise its discretion without considering compensation, but that argument as it stands was no more than a delaying tactic. It amounted to an argument that the FTT must go through the process of quantifying compensation before making an order – which is not what either section 38(6) or section 38(10) require, and was not even what the appellants were asking for. Their case was that they wanted compensation if an order was made; they have never said that they were going to suffer a loss that would prevent the FTT from making an order.

At the hearing, when considering whether to exercise its discretion to vary the lease, the FTT heard what Mr Upton had to say about any prejudice that was going to be suffered by the appellants. He could not suggest any. There was therefore nothing wrong or surprising about it then exercising its discretion to vary the lease. There was no question of section 38(6) preventing it from doing so; that point just did not arise on the appellants’ pleaded and argued case.

Mr Bates KC suggested that the appellants needed a direction from the FTT for expert evidence so that it could obtain the evidence it needed in order to plead substantial prejudice; but that is a mis-characterisation of the relationship between pleadings and evidence. It was not open to the appellants to ask the FTT to pause while they made a fishing expedition to discover some substantial prejudice that had not yet occurred to them. Faced with no pleaded case on the part of the appellants that section 38(6) would stand in the way of the FTT exercising its discretion, and in the absence of any suggestion by counsel for the appellants that they would suffer substantial prejudice if the variation was made, the FTT was perfectly right to proceed.

As I said above (paragraph 16), section 38(10) has a further role to play; the FTT may order compensation for loss or disadvantage suffered as a result of the variation, in cases where there is loss or disadvantage that does not amount to substantial prejudice. In light of the complete absence of information from the appellants as to what sort of disadvantage they might suffer it is perhaps surprising that the FTT has left the door open for them to produce evidence of loss or disadvantage, but so it did, and if the appellants become able to suggest what that loss or disadvantage might be and can produce evidence of it then they still have the opportunity to seek compensation; that hearing has been stayed pending this appeal but the FTT will now no doubt give directions, if so requested, for it to go ahead. But ground 1 in this appeal fails.