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Variation of lease terms

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Variation of lease terms

This page deals with these points:
  • Requisite majority required before application
  • The extent of the power under the 1987 Act to vary a lease to provide for a more modern format.
  • The variation of service charge provisions.
  • Date from which the variation takes effect.
  • Compensation where there is prejudice to the tenant.

Consent from requisite majority

Required before application

Simon v St Mildreds Court Residents Association Ltd
[2015] UKUT 508 (LC)

Summary

The requisite consent of a majority of parties to vary a lease in accordance with s37 of the Landlord and Tenant Act 1987 must have been achieved at the date the application is issued.

Facts

The service charge provisions in the leases provided that the service charge shall be apportioned amongst lessees according to rateable values. The problem was that three of the 29 flats did not have a rateable value. On 10 June 2014 the landlord issued an application to vary the terms of the leases proposing that the service charge be paid equally between all lessees. By a letter of the same date (10 June 2014) the landlord invited the lessees to agree or disagree with the application which that day had been issued. Enclosed with the covering explanatory letter was a copy of the application and the proposed new terms of the lease as well as a piece of paper entitled “Agreement” which was to provide the lessees with an opportunity to accept or reject the proposal. A total of 23 lessees consented which, when added to the applicant freeholder, totalled 24 thereby garnering the requisite majority. The FTT was “satisfied on the balance of probability that informed consent to the variation had been given by 26 of the lessees and that none of the points raised affected the validity of the number of consents required to comply with the provisions of the 1987 Act.” One of the lessees appealed to the Upper Tribunal.

Decision on appeal

The Upper Tribunal allowed the Appeal. It held that the consent of at least 75% of the total number of the parties concerned must have been obtained before the application was made because that is what the section says, specifically: “any such application shall only be made if” the requisite majority has approved. (Marshall Dixon v Wellington Close Management Ltd [2012] UKUT 95 (LC) applied).


Extent of power

Gianfrancesco v Haughton
Lands Tribunal, President
LRX/10/2007

Summary

The Leasehold Valuation Tribunal has power under Part IV of the Landlord and Tenant Act 1987 to vary a lease that fails to make satisfactory provisions with respect to one or more of the matters mentioned in s35. However, it will not do so merely because the lease is not in modern form.

Facts

T had a top floor flat in a mid-terrace house and was under an obligation to redecorate and maintain the exterior of the flat. This was difficult at the rear because access the whole of the rear garden was covered by a conservatory that belonged to the ground floor flat, occupied by L. L refused to help beyond allowing the tenant to remove the conservatory roof panels, at her own expense and risk. L sought to impose the obligation on the landlord and to introduce a service charge clause.

Decision

LVT refused to vary the lease terms and that decision was upheld on this appeal. Whether the lease fails to make satisfactory provision is one for the tribunal to judge in all the circumstances of the case. However, "a lease does not fail to make satisfactory provision simply because it could have been better or more explicitly drafted. For instance the need to imply a term is not necessarily, or even probably, an indication that the lease fails to make satisfactory provision for the matter in question." The LVT accepted that the system of covenants contained in the lease were not modern or conventional but they were satisfactory and workable.


Service charges

Contributions unfairly disproportionate

Morgan v Fletcher
[2009] UKUT 186 (LC)

Summary

The service charges due under some of the leases were sixteen times more than that due in respect of the largest flat in the block. Some of the tenants therefore applied to vary the lease under s35 of the Landlord and Tenant Act 1987 to provide for fairer contributions between the lessees. However, the Lands Tribunal held that s35 is not intended to deal with unfairly disproportionate service charge provisions. It only deals with the situation where there are surplus contributions or a shortfall.

Statutory provisions

Any party to a long lease may make an application to the LVT for a lease to be varied on grounds that the lease fails to make satisfactory provision in respect of certain matters listed in s35(2) LTA 1987. Section 35 is in the following terms:
    “(1) Any party to a long lease of a flat may make an application to a [leasehold valuation tribunal] for an order varying the lease in such a manner as is specified in the application.

    (2) The grounds on which any such application may be made are that the lease fails to make satisfactory provision with respect to one or more of the following matters, namely –


      (f) the computation of a service charge payable under the lease…


    (4) For the purposes of subsection (2)(f) a lease fails to make satisfactory provision with respect to the computation of a service charge payable under it if –

      (a) it provides for any such charge to be a proportion of expenditure incurred, or to be incurred, by or on behalf of the landlord or a superior landlord; and
      (b) other tenants of the landlord are also liable under their leases to pay by way of service charges proportions of any such expenditure; and
      (c) the aggregate of the amounts that would, in any particular case, be payable by reference to the proportions referred to in paragraphs (a) and (b) would either exceed or be less than the whole of any such expenditure.”
Issue in the case

The issue was whether the conditions in s35(4) were exhaustive i.e. the only circumstances in which the requisite grounds for an application would be made out. The editors of Woodfall suggested that it should and that “if” in subsection (4) should be interpreted as “only if”.

Tenant's argument

The tenants submitted that the conditions in subsection (4) were not exhaustive and were intended to provide a remedy for obvious unfairness in the proportions in which the service charge is payable. An example was given of a developer who converts a building into two flats and lets them on the basis that the lessees pay a service charge of 50 per cent each. The developer could then build an extension to house a third flat and then sell or let that flat on the basis that the maintenance of the building is met by the two original lessees, thereby gaining a more valuable flat.

Decision

HHJ Jarman QC held that the section was sufficiently ambiguous to allow reference to Hansard under the principles in Pepper v Hart. Having made such a reference he stated:
    “The assistance which is so derived in my judgment is that the authors of the report and the promoters of the then bill had in mind two situations which it was intended to avoid. The first is that the aggregate of service charges payable in respect of a block of flats amounts to more than 100 per cent of expenditure, thus giving the lessor a surplus over monies expended. The second situation is where the aggregate is less than 100 per cent, thus producing a shortfall. That is a situation which fails to promote the proper maintenance of the block.

    Each of those situations is avoided if the service charges payable aggregate to 100 per cent. The view may be taken that it is also desirable, or just as desirable, to avoid a situation where the contributions are unfairly disproportionate such as in the example cited by the respondents or indeed the facts of the present case. But in my judgment that is a mischief of a different nature to that contemplated by the report and the promoters of these provisions."
Accordingly he held that the conditions in s35 (4) were exhaustive and that the only grounds for an application were when the service charges payable did not aggregate to 100%.


Date from which variation takes effect

Brickfield Properties Limited v Botten
[2013] UKUT 0133 (LC)

Summary

The LVT has jurisdiction to order a variation of leases to take effect from a date prior to the LVT’s decision and prior to the application to vary.

Facts

The freeholder of 56 flats contained in seven blocks had granted long leases with a covenant to repair and maintain the buildings and a covenant by the lessees to contribute towards the service charge. Qualifying tenants in one of the blocks exercised their right to collective enfranchisement of their block. As a consequence, the total expenditure incurred by the freeholder in maintaining the remaining six blocks of flats was less than it would have been if the freeholder had been obliged to continue to maintain seven blocks rather than six. Thus, the total expenditure by the freeholder, which was capable of being recovered through the service charge provisions, decreased. A further consequence concerned the relevant proportions paid by each of the lessees in the remaining six blocks. If the proportions for each of these flats were added together they now added up to less than 100%.

The freeholder subsequently granted a headlessee to the appellant. In consequence, the rights and obligations of the freeholder under the various long leases of the flats became vested in the appellant. After attempts to agree variations with the lessees failed, the appellant applied to the LVT seeking variations of the relevant leases with effect from the date of the transfer pursuant to the collective enfranchisement (“the Transfer Date”) so as to re-establish the 100% total for the proportionate contributions to the service charge expense.

Issues

The issues were:
  • Did LVT have jurisdiction to order a variation of leases to take effect from a date prior to the LVT’s decision and prior to the application to vary; and
  • If so, whether such jurisdiction should be exercised in the instant case?
First Instance

The LVT ordered a variation of the leases but ordered such variations to have effect from the date of the decision, not the Transfer Date as sought in the application. It did not expressly consider whether it had jurisdiction to order that the variation was to be effective from the Transfer Date, but appears to have concluded that it did have jurisdiction to do so. The LVT decided it should not exercise its discretion because of the delay in making the application and having regard to the contra proferentum rule. The case was appealed to the Upper Tribunal (Lands Chamber).

Decision on Appeal

The Tribunal allowed the appeal. The LVT did have jurisdiction to order a variation of leases to take effect from a date prior to the LVT’s decision and prior to the application to vary. There was no justification for refusing to order the variation to take effect from the Transfer Date.

Comment

This is the first known decision of the Upper Tribunal on this issue. It affirms what many LVT’s have considered the position to be.


Compensation

Prejudice required - none found

Thirlaway v Masculet
[2012] UKUT 302

Summary

The Upper Tribunal upheld the LVT’s decision to amend a lease and refused to award compensation on the basis that there was no prejudice to the tenant.

Facts

The case concerned a house divided into three flats. The tenants of the three flats were also the shareholders in a company, which owned the freehold. The application was made by two of the three tenants and the freeholder. The third tenant (T) opposed the application. The majority sought variation of the lease of each flat to include provisions allowing recovery of:
  • Expenses incurred in managing the property and conducting the landlord’s business.
  • Costs of any LVT or third party dispute or adjudication.
  • Expenses incurred in acquiring sufficient Directors and Officers insurance.
  • Costs from any breach by the tenant.
  • Interest on any sum due.
The application was made under s37 of the Landlord and Tenant Act 1987. All of the variations sought were granted by the LVT without any award of compensation.

T appealed that decision. He argued that each of the first three variations above would result in him paying greater sums to his freeholder than had otherwise been the case and he would therefore be prejudiced.

Decision

The Upper Tribunal (N.J. Rose FRICS) dismissed the appeal. The Tribunal pointed out that if the landlord sought to make excessive charges T would be protected by s19 of the Landlord and Tenant Act 1985. The Tribunal held there was no prejudice and refused to award compensation. Mr Rose at para 28:
    “I turn to the issue of prejudice. The appellant contends that the proposed variations would mean that he would become liable to contribute towards costs which [the freehold company] has incurred in excessive amounts and without the necessary funds. I am not persuaded by that objection. If a service charge is demanded which is excessive, the appellant will be protected by s19 of the Landlord and Tenant Act 1985, which provides that relevant costs shall be taken into account in determining the amount of a service charge payable only to the extent that they are reasonably incurred and, where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard. It follows that if excessive sums are spent by [the freehold company], whether as a result of directors’ incompetence or otherwise, or if the directors fail to explain when asked why particular items of expenditure were incurred, the excess will not be recoverable from the leaseholders.”
As to whether there might be any other reason why it would be unreasonable for the variation to be effected, Mr Rose said at para 29:
    “On the proposal to add [the freehold company’s] costs of managing the property and conducting its business to the service charge, the appellant accepts that the absence of such a provision in the existing leases means that such costs may not be recoverable. He suggests, however, that it is not the lessees' concern whether the freeholder has sufficient resources to meet the costs in question. That argument is rather surprising. Each of the leaseholders has an obvious interest in ensuring that the building is properly managed. The appellant himself refers to alleged failures by the freeholder to comply with its repairing obligations under the lease. In the absence of adequate funds the freeholder will be unable to comply with its obligations, to the detriment of all leaseholders. In my judgment the reasonableness of the proposed variation is manifest.”
Comment

There are numerous leases that are deficient because they do not provide adequately for the recovery of management costs and/or for the costs of taking legal action against a tenant. The absence of such a clause tends to depress the value of the freehold. A landlord could negotiate with the tenants to remedy the lease but such negotiations could be ruined by one tenant holding out. Section 37 provides a remedy in such a situation and the threshold to justify a variation under s37 is deliberately low. The decision to vary the leases in the context of this case is, therefore, not surprising. In previous decisions the LVT has held that the benefit of adding a management charge, namely ensuring proper management of the property, outweighs the additional cost to the tenant.


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