Variation of leases under the Landlord & Tenant Act 1987

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How far can the Tribunal go in varying “unfair” leases under the Landlord and Tenant Act 1987?

Sometimes leases just aren’t fair.  This may be because of a drafting error, a change of circumstances or because leaseholders are required to pay for facilities which they don’t need to use.  In the context of a service charge dispute, leaseholders often argue not only that the landlord’s expenditure is unreasonably high but that their share of it is not “fair”.  The service charge proportions may not reflect the square footage of the flat in relation to the building or perhaps the tenant is required to contribute to the upkeep of a lift when he lives on the ground floor and is never likely to use it.

As lawyers, our response to complaints of “unfairness” in leases is usually that, unfortunate as the results may be, the rights and obligations of the parties are governed by the wording of the lease.  If the lease says the tenant has to pay 20% of the service charge that is the share he has to pay even though his flat occupies only 5% of the building.  If the lease requires the leaseholder to contribute to the cost of lift maintenance, that is the end of the matter.  That is what the tenant signed up for.

It is often suggested that one way round any perceived “unfairness” is to apply for a variation of the lease under the Landlord and Tenant Act 1987.   This Act is intended to allow defective leases to be cured.  But will it really help?

Where a majority of the leaseholders agree to the proposed variation, the Tribunal has a discretionary power to make any variation under s. 37 of the Act.  However, if there are less than 9 leases all or all but one of the parties must consent and if there are more than 8 leases, 75% of the parties must consent and not more than 10% must not object to the proposed variation.  As most variations have winners and losers, this degree of consensus is hard to achieve.

If majority agreement cannot be obtained, the lessee must rely on the FTT’s powers under s. 35 of the Act to vary defective leases.  These powers are actually very limited.  The FTT can only vary leases which fail to make “satisfactory provision” for one of the matters set out in s. 35 (2).  These matters include a failure to make satisfactory provision for the repair and maintenance of the flat or the building; for the insurance of the building or for the provision of any services which are reasonably necessary to ensure that occupiers of the flat enjoy a reasonable standard of accommodation.  Although s. 35 also allows a variation to be ordered where the lease fails to make satisfactory provision for the computation of a service charge, the Act sets out when such provision is deemed to be unsatisfactory.  An unfair split of the service charges may not be enough.

Sections 35(2)(f) and s. 35(4) of the Act provide that the Tribunal can re-calculate the shares of the expenditure due from each leaseholder only if the aggregate of the services charges does not add up to 100%.     If the service charges do add up to 100%, the Tribunal has no jurisdiction to vary on this ground even though the apportionment has been done in an unsatisfactory manner.

So, for example, in the case of  Morgan v Fletcher [2009] UKUT 186 (LC),, the Upper Tribunal found that it had no jurisdiction to vary the leases where the landlord had reduced the service charge proportion payable in respect of its own flat and that of one other lessee to almost nil in order to bring the aggregate service charge down from 116% to 100%.  This means that if the landlord adds an additional unit to the block the Tribunal has no jurisdiction under s. 35 (2) (f) to order that unit to bear a proportion of the service charge expenditure.

Of course, if the lease provides for the lessee to pay “a fair and reasonable proportion of the service charge”, the tenant might be saved by the FTT’s powers under s. 27A of the Landlord and Tenant Act 1985 to determine what is payable as a matter of construction of the lease. Otherwise, if the total of the service charges for the block adds up to 100%, the tenant is stuck with the unfair split.

What about the lift example?  Again, the fact that the tenant derives no benefit from the lift does not fall within one of the prescribed grounds for varying a lease in s. 35 (2).

What if though the service charge does not add up to 100% so that there is power to vary? Can the FTT re-write the lease to allow for the fact that 50% of the tenants do not use the communal boiler?

A version of this argument was advanced in the case of Re 416 & 418 Manchester Road, LVT, 2nd October 2012, LON/00BG/LVL/2012/0002&0012. An application had been made by the RTM company managing the block to vary the leases on the grounds that the service charges did not add up to 100%.   Some of the ground floor tenants made a cross application for a further variation whereby they would no longer have to contribute to the cost of maintaining the lifts (amongst other things).  These tenants had been told prior to buying their flats that they would not have to pay for lift maintenance but, unfortunately for them, this had not been reflected in the final lease documentation. The tenants argued that as one of the grounds for varying was satisfied, the Tribunal could rectify the other drafting error at the same time.

The Orders which the Tribunal can made are set out in s. 38 of the Act which provides that, if the Tribunal is satisfied that one of the grounds in s. 35 (2) is made out, it may make an order varying the leases “as the tribunal thinks fit”.  These are very wide words and the Act gives no guidance as to how they should be construed.  On a literal reading, the Tribunal could have carte-blanche to order wholesale variations creating a more modern and fair lease.

In 416 and 418 Manchester Road, the Tribunal found that its jurisdiction was  limited to ordering variations which were necessary to remedy the prescribed defect.  However, it is possible to imagine leases which are so defective that extensive amendment would be necessary to make them workable at all.

In the recent case of Brickfield Properties Ltd v Botten [2013] UKUT 0133 (LC) the Upper Tribunal found that s. 38 is wide enough to allow variations to  be made with retrospective effect.  HHJ Huskinson said:

“The purpose of section 35 is to enable a party to apply to the LVT for a variation of the lease in circumstances where the lease fails to make satisfactory provision with respect to certain matters.  In other words the purpose is to cure a defect in the lease.  It is possible that the drafting of a particular lease plus the circumstances which arise in that particular case combine together to produce a situation where it is foreseen that at some future date there will arise a defect in the lease, which is not presently apparent.  However in my view it is much more likely that the relevant defect arises first and has existed for a time before a party recognises the existence of the defect and seeks to do something about it.  Certain of the variations contemplated under section 35(2) are variations which it would not be helpful or effective to back date – the purpose is to deal with the future, such as to make satisfactory provision regarding the repair or maintenance of certain property.  However as regards paragraph (f) of section 35(2), if a landlord is entitled from a certain date to recover less than (or perhaps more than) 100% of the expenses of providing the services etc, then this inappropriate level of recovery is the defect.  The purpose of the statute is to cure the defect.  There is nothing in the statute to indicate an intention to leave the defect in place for an indeterminate period until the date of an application to the LVT or perhaps until the date of the decision of the LVT – i.e. there is nothing in the statute indicating an intention only to cure the defect prospectively from one of these later dates rather than to deal with the defect from the time that it arises.”

Just how far the Tribunal can go in making such variations as it “thinks fit” is by no means clear.  The fact that Parliament has expressly laid down specific grounds on which an application to vary under s. 35 of the Landlord and Tenant Act 1987 can be made suggests that the variations ordered should be limited to those necessary to remedy the defects listed in s. 35(2). The decision in Brickfield opens the door for the re-calculation of service charge accounts long closed and the creation of liabilities retrospectively in defective leases. It remains to be seen how far the Tribunal can go in varying defective leases but the words of s. 38 are certainly wide enough to provide scope for pushing the boundaries yet further.