For those of us that attended the Reigate valuers’ forum on Thursday 17th June there was an interesting dialogue concerning the impact of the service charge legislation on valuation for leasehold reform purposes in the post Kelton Court environment.

Whilst it appears that the principle of an enhanced ‘management risk’ associated with flats could give rise to an increase in the appropiate risk premium and hence the deferment rate, those circumstances where this would not be appropriate were also discussed.

The presence of headlease clearly negates some of the ‘management headache’ assciated with this asset class, but what about the situation where the Right to Manage (RTM) has been exercised ?

In this situation the landlord (arguably) has a reduced management burden – although this of course assumes a well-run RTM company. If the landlord has to exercise his powers to compel the company to comply with its obligations this will not be the case.

Similarly, if the RTM company has the right to place the insurance then arguably one of the motivating factors associated with owning a ground rent is also diminished. So the question then arises as to whether the one cancels the other out.

I expect that in practice the particular property will need to be examined to see which of the following factors are present and are likely to be of significance in arguing for a departure from the Sportelli deferment rate of 5% for flats. Briefly, these seem to be:-

1. Whether there is a headlesse in place (with management responsibility).

2. Whether there is a ‘third party’ management company (a party to the leases and with all the flat owners as members) and with the power to set the service charge.

3. Whether the Right to Manage has been exercised.

4. In the case of a small block (usually two flats) whether the leases impose a full repairing obligation on the flat owners (i.e. Where there is no service charge).

I would be interested to know what other practitioners think.

Mark Chick

22.06.2010

There is an interesting interplay between the limited power of the LVT to vary the terms of lease during the renewal of a lease under the 1993 Act and the wider discretion of the LVT to deal with a situation where the service charge provisions in a lease are ‘defective’ in an application made under the Landlord and Tenant Act 1987 (‘the 1987 Act’).

Often the flat owner seeking a lease extension may want (not unreasonably) to tackle any perceived (or indeed actual) injustices in his current lease. What is not always realised by those unfamiliar with this area is that the power of the tribunal to amend or vary lease provisions in a lease renewal is in fact fairly limited.

1993 Act

Section 57 of the 1993 Act permits variations of the lease terms but only where these are ‘necessary’ to remedy a defect. In particular, in a case where there are significant problems – e.g. where the landlord might not be able to recover any service charge, or sums payable for insurance for instance, the tribunal will have discretion to order a change.

In a situation like this can the LVT assist using its jurisdiction under the 1993 Act?

The first thing to note is that the LVT has a very limited discretion to make any substantive changes to the terms of the existing lease. See in particular the Lands Tribunal’s decision in the case of Gordon (Gordon v Church Commissioners LRA/110/2006).

Secondly, in a lease renewal under the 1993 Act the tribunal is only concerned with the terms of one lease – the lease in question – and as such it does not have a power to vary the terms of other leases in the building.

In particular section 57 (2) provides that:-

Where during the continuance of the new lease the landlord will be under any obligation for the provision of services, or for repairs, maintenance or insurance—

(a) the new lease may require payments to be made by the tenant (whether as rent or otherwise) in consideration of those matters or in respect of the cost thereof to the landlord; and

(b) (if the terms of the existing lease do not include any provision for the making of any such payments by the tenant or include provision only for the payment of a fixed amount) the terms of the new lease shall make, as from the term date of the existing lease, such provision as may be just—

(i) for the making by the tenant of payments related to the cost from time to time to the landlord, and

(ii) for the tenant’s liability to make those payments to be enforceable by distress, re-entry or otherwise in like manner as if it were a liability for payment of rent.

So unless the service charge adjustment that is sought can be made by an amendment to the individual lease alone and the applicable test(s) in Section 57 can be met, not much can be done simply by pursuing a lease extension.

1987 Act

Consider the case of a situation in a block where the service charge percentages do not add up to 100%. This may of course be a situation of real injustice and statute provides a remedy in Section 35 of the 1987 Act. This permits the tribunal to make an order varying the lease terms in a building to resolve such a situation.

Section 35(4) of the 1987 Act sets out a test for a situation where a lease fails to make satisfactory provision for the calculation of service charges however, this is limited to a situation where the overall proportions paid by the flat owners either exceeds or is less than the landlord’s total expenditure.

In practice, there are sometimes situations where the service charge proportions are allocated in a way that is perceived to be ‘unfair,’ – for instance the owner of a large flats may pay the same as (or perhaps less) than the owner of a smaller unit. If the overall percentages add up to 100% as the case of Morgan shows, the 1987 Act does not provide a remedy.

Morgan v Fletcher [2009] UKUT 186 (LC)

In this case, 6 out of 8 flat owners made an application to the LVT asking for a variation of their leases on the basis that the service charge percentages under all the leases added up to 116%. Of the two remaining leases one was owned by the landlord. As a result of the application the landlord varied the service charge proportion in the other two leases to bring the total recoverable percentage down to 100%.

The flat owners applied to the LVT on the basis that they considered that the allocation of the percentages between the flats was of itself ‘unfair.’ The LVT adjusted the percentages and the landlord appealed.

The Lands Tribunal considered the provisions of Section 35(4) of the Landlord and Tenant Act 1987 and gave a narrow construction to the circumstances in which an order varying lease provisions can be made. The interpretation of Section 35(4) provided by this case is that only the circumstances set out in that section can give rise to a situation where lease terms can be varied.

In other words, a situation where the service charge proportions seem to be allocated between the flats in a way that was perceived to be ‘unfair’ was not enough in itself to warrant a variation in the lease terms. Particularly if the service charge proportions added up to 100% of the landlord’s total expenditure.

Comment

On policy grounds the decision in Morgan may be a sensible decision – it would of course be impossible to devise a test of what constituted an ‘unfair’ allocation of service charges in a building where the total percentages added up to 100% – although perhaps greater flexibility could have been given.

There are good policy reasons for not wanting to ‘open the floodgates’ to claims based on ‘unfair’ service charge proportions, but in practice this case does nothing to assist those whose fundamental problem is with the size of the service charge percentage allocated to their flat.

There is a reluctance to interfere with the freedom of contract of the original parties to the lease.

The only other way of resolving this sort of issue would therefore seem to be where either lease variations can be agreed between all interested parties or, possibly if the problem arises because of a ‘mistake’ by the parties to the original lease by rectification of this.

If the flat owners buy their freehold with 100% participation (and have all agreed in advance to vary the lease terms once this is done) then this might be another means of addressing the problem.

Mark Chick
25 May 2010