Vary service charge provisions in a lease

Section 35 of the Landlord and Tenant Act 1987 (LTA 1987) (as amended by the Commonhold and Leasehold Reform Act 2002), provides that a party to a long lease may apply to the Leasehold Valuation Tribunal (LVT) to vary the lease on the grounds that the lease fails to make “satisfactory” provision in respect of one of the circumstances specified in section 35(4), LTA 1987.

Section 35(4) of the LTA 1987 states that a lease fails to make “satisfactory” provision in respect of the calculation of the service charge due under a lease, if all the following conditions are satisfied:

• The lease provides that the service charge is to be a proportion of the landlord’s expenditure.

• The other tenants of the building are liable under their leases to pay a proportion of the landlord’s expenditure.

• The combined total of the service charge proportions either exceeds or is less than the landlord’s total expenditure.

The LTA 1987 as originally enacted, did not allow for variation where the combined total of the service charges was less than 100% of the landlord’s expenditure.  This was rectified by the Leasehold Reform, Housing and Urban Development Act 1993.

However, the possibility of a landlord not being able to rely upon the provisions of s35 of the Landlord and Tenant Act 1987 to vary the service charge provisions in a lease was recently highlighted in the case of Triplerose Ltd v Stride [2019] UKUT 99 (LC). Although this case concerned a long residential lease, the finding also has implications for investors and landlords of mixed use commercial properties.

Background

• The building of which the basement flat formed part comprised four flats.
• Pursuant to the terms of its long residential lease dated 17 November 1994, the tenant of a basement flat was only required to contribute towards the cost of external painting of the building.
• The basement flat had its own entrance accessed via steps leading from the common parts at the front of the building. It did not share any of the other common parts of the building.
• The leases of the flats in the building did not contain the same provisions for the payment of service charges.
• The landlord had sought to rely on s35 of the Landlord and Tenant Act 1987 to vary the service charge provisions in the basement flat lease to require the tenant to contribute towards the cost of structural repairs to the building, and the cost of the landlord employing staff or agents.
• The First-tier Tribunal(FTT) held that the lease of the basement flat should be varied so that the tenant was required to pay one quarter of the cost of repair and renewal of the main structure of the building, and the cost of staff and agents employed by the landlord.
• The tenant appealed arguing that even though each tenant of the building had differing contractual obligations in this respect under the terms of their leases, they were not in themselves unsatisfactory as these provisions did not cause problems with interpretation or with their application.
• The tenant also stated the building was in good repair and condition with any shortfall having been covered by the other tenants.

Decision of the Upper Tribunal (Lands Chamber)

The Upper Tribunal allowed an appeal. For the FTT to be satisfied that a lease made unsatisfactory provision in some regard there had to be evidence of an actual problem.  It was not the purpose of s.35 to allow the FTT simply to update old leases or standardise badly drafted leases.  There was no evidence of any actual problem in the present case.  The service charge mechanism was unusual but was not affecting the proper management of the building.  If, contrary to that decision, the lease was unsatisfactory, then compensation would need to be paid in order for any variation to be permitted.  That compensation would be £9,500, calculated as the “harm” suffered by the leaseholder by increasing the service charge provisions, less a discount for the increased capital value that would flow from having a properly ordered lease.

What action should be taken by landlords and investors when contemplating acquiring the freehold of multi-let buildings or when granting their own leases?

Landlords of buildings with leases that contain poorly drafted service charge provisions might not be able to rely on s35 of the Landlord and Tenant Act 1987 to vary the service charge provisions in a lease to ensure each tenant of a building contributes towards to all such costs.  The landlord could be left paying any shortfall.

When acquiring buildings subject to more than one lease, it should not be assumed all the leases are in the same form. Each lease should be checked for inconsistencies and shortfalls. If any are found, the buyer should investigate any potential liability on the part of the landlord before proceeding. A buyer will also need to consider the possibility that a lender might refuse to lend in such a situation.

When setting up new leases for a building it is important to ensure all service charge costs are covered by the payments that the tenants are obliged to make and that no shortfalls occur. It might not be possible to amend the contributions payable by a tenant at a later date.