Variation of leases: does an inability to recover costs make a lease unsatisfactory?

Residential leases can be sometimes imperfect, and sometimes unsatisfactory.

Accordingly, the Tribunal holds jurisdiction to vary the terms of leases either where a lease fails to make satisfactory provision, or by majority consent.

Section 35 of the Landlord and Tenant Act 1987 sets out the grounds on which an application may be made to the Tribunal where a lease fails to make satisfactory provision. These grounds include matters relating to:

(a) the repair and maintenance of the flat, building or land;

(b) the insurance of the flat, building or land;

(c) the repair or maintenance of any installations (which are reasonably necessary to ensure that occupiers of the flat enjoy a reasonable standard of accommodation);

(d) the provision or maintenance of any services which are reasonably necessary to ensure that occupiers of the flat enjoy a reasonable standard of accommodation;

(e) the recovery by one party to the lease from another party to it of expenditure incurred (or to be incurred);

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

Section 38 provides that if the grounds are made out, the Tribunal may make an order varying the lease.

What’s important is that an application won’t succeed unless it can be shown that the lease “fails to make satisfactory provision”.  Rather unhelpfully, “satisfactory” is not defined in statute.

In the matter of The Mayor and Burgesses of the London Borough of Camden v Morath [2019] UKUT 0193 (LC), the Upper Tribunal was called upon to consider what “satisfactory” means in the context of the recovery by one party to the lease from another party of expenditure incurred (or to be incurred).

 

The leases in Morath

This case concerns the Brunswick Centre.  Readers of this blog will be familiar with this site in the context of section 20 consultation, and who a superior landlord has to consult with.

The Brunswick Centre is a mixed use development, consisting of residential flats, shops and a cinema. Camden hold the lease over Foundling Court and O’Donnell Court, which consist of 210 and 185 flats respectively.

Under Camden’s lease, it is required to pay to the head lessor 25% of the expenditure incurred by the head lessor in relation to the whole of the Brunswick Centre in the provision of a wide range of services, including repair, maintenance and insurance.

Of the 395 subleases granted by Camden, there are three groups.

The type B and type C leases required the residential leaseholders to pay Camden a proportion of part of what Camden pays towards the head lessor’s expenditure.

The type A leases did not.  The type A leases required each leaseholder to pay Camden a proportionate part of Camden’s expenditure relating to the building only.  There was no provision in the type A leases for Camden to be reimbursed for what it paid to the head lessor, except insofar as the head lessor’s expenditure related to the individual building.

Accordingly, an application was made to the Tribunal to vary 28 of those type A subleases.

 

Decision of the First Tier Tribunal

They accepted that the type A leaseholders *may* derive some benefit from the expenditure on the wider estate.  However, the FTT did not agree that the type A leases failed to make satisfactory provision for the recovery of Camden’s expenditure, commenting “there is nothing inherently “unsatisfactory” in that arrangement”.

The FTT commented that it would make commercial sense to vary the lease, but noted that this would be contrary to the bargain the type A leaseholders were offered.

Accordingly, having found that the provision was “clear and perfectly workable”, the FTT declined to vary the type A leases, notwithstanding that Camden would be left with a shortfall.

 

Appeal to the Upper Tribunal

Camden sought to appeal the FTT’s decision.

Camden argued that as the FTT found the leaseholders derived some benefit from the works and services, that the FTT ought to have found that the test in section 35(2)(e) was satisfied (in other words that the lease failed to make satisfactory provision with respect to the recovery of expenditure incurred by one party to the lease for the other party’s benefit).

The Upper Tribunal considered the recent decision in Triplerose Ltd v Stride. It also considered the earlier decision in Cleary v Lakeside Developments Ltd.

As commented in Morath:

“What I take from those decisions is that the Tribunal will consider whether the wording of the lease as it stands is clear, and whether the term sought to be varied is workable. If it is clear and workable then it is not unsatisfactory…… section 35 does not enable the Tribunal to vary a lease on the basis that it imposes unequal burdens, or is expensive or inconvenient.”

The Upper Tribunal accepted that there was a perceived inequity in the bargain made between the parties. However, the Tribunal found that the provisions here were workable.

Comment was made that no evidence had been submitted which demonstrated that the provisions were not workable, and that there was no suggestion that Camden could not meet its contributions.

Accordingly, the Upper Tribunal did not vary the terms of those type C leases.

 

Commentary

This decision makes clear that a residential lease will not be deemed unsatisfactory simply because there is a service charge shortfall for the building.

A shortfall does not, by definition, mean that the lease terms are unsatisfactory.

Accordingly, section 35 will not come to the rescue of parties where there are drafting errors.

 

 

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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