Service charge shortfalls
I am the lessee of a one-bedroom flat in a four-block development comprising a total of 80 one- and two-bedroom flats. Under the lease I am obliged to pay a service charge contribution representing 1/80th of the landlord’s costs of maintaining and managing the development, with the lessees of other flats obliged to make similar contributions. Three years ago the lessees of one of the blocks acquired the freehold of their block, since then the landlord has only been able to recover 80% of its costs from lessees within the remaining blocks. It is now threatening to make an application to vary the terms of the leases to increase the contribution of the remaining lessees so that it can recover its shortfall in contributions from previous years and going forward. Can it do so? If the amount is to be varied, can I ask that the tribunal order that the lessees of two-bedroom flats pay a larger contribution than those of one-bedroom flats?
Your landlord is entitled to make an application under section 35(2)(f) of the Landlord and Tenant Act 1987 (“the 1987 Act”) on the basis that the leases fail to make satisfactory provision in relation to the computation of service charges. The tribunal will have power not only to alter the contributions so that they are brought up to 100% of the landlord’s expenditure, but also, it would appear, to vary the basis of contribution as between lessees where the existing scheme does not operate fairly. If the tribunal makes an order in the landlord’s favour, it is entitled to order that the variation of the leases be backdated to the date when the defect in the lease arose.
Both landlords and lessees of flats within a residential estate can easily find themselves in a position where the service charge provisions of their leases do not work as they should. This could be the result of poor drafting in the first place, or a change of circumstances, such as creation of additional flats within the estate or the loss of flats through leasehold enfranchisement.
The First-Tier Tribunal (Property Chamber) (“the tribunal”) has powers under the 1987 Act to vary long residential leases of flats in certain specific circumstances. There are two main types of application: the first, under section 35(1), allows any party to a lease to applyfor a variation in circumstances where thelease fails to make satisfactory provision inrelation to one of a set number of grounds;the second, under section 37(1), applies incases where variations are sought to twoor more such leases to achieve an objective(whether or not to remedy a defect inthe existing provisions) which cannot beachieved without all such leases being varied, and is supported by at least 75% of the affected lessees.
Computation of the service charge
One of the most common grounds on which an application for variation is sought is in respect of the computation of the service charge due under a lease. A lease fails to make satisfactory provision under section 35(2)(f) of the 1987 Act 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) the 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 referreto in paragraphs (a) and (b) would either exceed or be less than the whole of anysuch expenditure.”
Accordingly, a tribunal has jurisdiction to make an order where the servicecharge proportions add up to less than or more than 100%. But if the aggregate proportions amount to 100% it has no jurisdiction to intervene simply because the proportions appear to be unfair as between lessees: see Morgan and another v Fletcher and others  UKUT 186 (LC);  PLSCS 14.
Ambit of discretionary powers
Section 38 sets out the parameters within which the tribunal may make orders in response to applications brought under section 35. The tribunal is entitled to make either the order specified in the application or such variation as it thinks fit, giving it a wide discretion. But it may not make an order which would be likely to substantially to prejudice any person (whether or not a party) if such party could not be adequately compensated by an award under section 38(10), or where,for any other reason, it would not be reasonable.
Although there is no freestanding power to order a variation to the proportions of lessees’ service charge contributions where their aggregate total is 100%, if the total is more or less than 100% the tribunal’s discretionary power under section 38 is not limited simply to adjusting the contributions pro rata to make them total 100%, it appears that it may also alter the basis of contribution where the existing scheme operates unfairly as between lessees. So in Brickfield Properties v Botten  2 EGLR 70, the scheme of contribution was altered from one based on old rateable values to one based on floor area of the respective flats. Any variation may be ordered to have retrospective effect, as confirmed by the tribunal in Brickfield. It is a matter for the discretion of the tribunal whether or not the variation should be backdated, and in Brickfield it was appropriate so to order where the defect had resulted in an unintended windfall to the respondent.
The power to make a compensatoryaward under section 38(10) is also discretionary. It is unlikely in circumstances where lessees have been paying less than 100% of the service charge that compensation will be awarded to take account of an adjustment to remedy such defect. In Brickfield, the tribunal took the view that to award compensation in these circumstances would nullify the benefit of the variation altogether.
This article first appeared in Estates Gazette on May 28th 2016
News & Insights
Leases and licences: Sizing up the available options
Lauren Fraser and Jacqueline Lean answer queries on the right of forfeiture.
Managing risk in property management companies – corporate governance and considerations for directors
We take a closer look at the guide launched by the Companies House highlighting key considerations for flat management company directors.
Property Patter: What can the property world expect from Parliament and the courts in 2021?
Our team look at what’s ahead in the world of property law