To vary or not to vary, that is the question…

In 56 Westbourne Terrace RTM Company Limited v Polturak and Ors [2025] UKUT 88 (LC), the Upper Tribunal provided much needed guidance on the approach to be taken when determining applications for a lease variation under section 35, Landlord and Tenant Act 1987.

Facts

The property in question was a four-storey building comprising of 11 self-contained flats, all held under a long lease (“the Building”). The freehold proprietor of the Building was 56 Westbourne Terrace Freeholders Association Ltd (“the Freehold Company”). Each leaseholder held one share in the Freehold Company. The Building was managed by 56 Westbourne Terrace RTM Co Ltd (“the RTM Company”).

Pursuant to clause 3(13) of the leases, each leaseholder covenanted in the following terms:

“To pay all expenses including solicitors’ costs and surveyors’ fees incurred by The Lessor of and incidental to the preparation and service of notice under Sections 146 and 147 of the Law of Property Act 1925 (or any other notice hereunder) notwithstanding that forfeiture be avoided otherwise than by relief granted by the Court”.

The RTM Company was not entitled to serve a notice under section 146, Law of Property Act 1925 (as a result of sections 96(6)(b) and 100(3) of the Commonhold and Leasehold Reform Act 2002) and so it had no contractual means of recovering legal expenses incurred in recovering service charges. The RTM Company therefore sought to vary the leases of the 11 flats to include (inter alia) provision for the recovery of legal expenses, both as an administration charge and a service charge.

The three leaseholders who opposed the variation were also directors of the Freehold Company.

The First-Tier Tribunal’s Decision

The First-Tier Tribunal refused an application by the RTM Company to vary the leases:

• The FTT concluded that it did not have the power to introduce a new administration charge because the variation would not benefit the leaseholders. Even if it did have jurisdiction, it would not exercise the power because it would allow the RTM Company to recover expenses which the landlord could not have recovered under the terms of the leases.
• The FTT also refused to vary the leases to allow legal expenses to be recovered as a service charge, notwithstanding the fact it considered that it had jurisdiction under section 35(3A), LTA 1987.

Permission to appeal was granted in respect of three grounds, namely that:

• The FTT was wrong to conclude that it did not have jurisdiction to vary the leases to provide for the recovery of legal costs as an administration charge.
• The FTT had failed to take account of relevant considerations and misapplied the law when deciding that it would not have varied the leases to provide for the recovery of legal expenses as an administration charge even if it did have jurisdiction.
• The FTT had failed to take account of relevant considerations and had misapplied the law when refusing to vary the leases to provide for the recovery of legal costs as a service charge.

The Upper Tribunal’s Decision

General

The starting point for the Upper Tribunal was section 35(2), Landlord and Tenant Act 1987 (“LTA 1987”), which specifies the grounds on which a long lease may be varied by the First-Tier Tribunal. Insofar as was relevant to the appeal, it provides that:

“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—

…

(e)the recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that other party or of a number of persons who include that other party;

…”

Section 35, LTA 1987 is subject to sections 38(6) and 38(7), LTA 1987. Whilst section 38(7) was not engaged, section 38(6) was of general application and therefore pertinent to the variation sought. Section 38(6), LTA 1987 provides that:

“A tribunal shall not make an order under this section effecting any variation of a lease if it appears to the tribunal —

(a)that the variation would be likely substantially to prejudice—

(i)any respondent to the application, or

(ii)any person who is not a party to the application,

and that an award under subsection (10) would not afford him adequate compensation, or

(b)that for any other reason it would not be reasonable in the circumstances for the variation to be effected”.

The Upper Tribunal noted that once the grounds under section 35(2), LTA 1987 have been found to exist, the question of whether a variation should be ordered is a matter for the Tribunal’s discretion. This discretion is removed if substantial prejudice would be caused by the variation, and any such prejudice could not adequately be compensated by money or there is any other reason why making the variation would not be reasonable.

If the discretion remains available, it is still theoretically possible for the tribunal to refuse the variation. However, the Upper Tribunal seemed to doubt that the Tribunal would have anything further to consider after applying section 35(2), LTA 1987 and Section 38(6), LTA 1987.

With these factors in mind, the Upper Tribunal (in summary) concluded that:

1. Section 35(2)(e), LTA 1987 will be satisfied where A seeks to recover from B expenditure incurred by A for the benefit of B or a number of persons, including B. It is the original expense that must be for B’s benefit, but it is not necessary that the recovery of that expenditure by A should be for B’s benefit. There was no jurisdictional issue in the proposal to introduce an administration charge as a means of recovering legal expenses. If the grounds under section 35(2) were satisfied (and subject to section 38(6)) a variation could be ordered.
2. The question of whether the provisions of a lease are satisfactory should not be measured by their “clarity and workability”. To do so would involve substituting narrower language for the wording of the statute and does not adequately address the circumstances prescribed by parliament as capable of being less than satisfactory. The FTT erred in that it applied the wrong test i.e. whether the lease was “clear and workable” rather than the statutory question of “satisfactory provision”.
3. The leases were first granted at a time when a leaseholder who failed to pay service or administration charges would be liable for the landlord’s costs of enforcement either as a result of a court order or by the contractual route provided by clause 3(13). As a result of statutory interventions since the leases were granted, the leases now fail to make satisfactory provision for the costs of enforcement.
4. The FTT failed to consider the question of whether the leases made satisfactory provision for the recovery by the Lessor, or the RTM Company of the expenditure incurred or to be incurred by them for the benefit of the individual leaseholder or for the benefit of a number of leaseholders.
5. The FTT applied the decision in Shellpoint Trustees v Barnett by analogy notwithstanding the fact that there were factual differences i.e. in this case, the RTM Company was controlled by the leaseholders, there was evidence that it could not afford to litigate and its case was that without the variation, it would continue to experience difficulty in enforcing its right to collect service charges.

Accordingly, the Upper Tribunal set aside the FTT’s decisions and re-made it. In doing so, the Upper Tribunal stated that:

1. The leases were unsatisfactory in that they did not provide the RTM Company with recourse to the service charge account to meet the costs of proceedings to recover those service charges. There were, therefore, grounds for variation.
2. Variations which make individuals liable for the consequences of their own default, or which enable the costs of enforcement to be met initially from the service charge, are not likely substantially to prejudice the general body of leaseholders. Further, any administration charge or service charge which makes provision for the costs of enforcement would be challengeable in the usual way. Any financial burden on the leaseholders would be shared proportionately.
3. The variation would facilitate effective management by the RTM Company and would therefore confer a benefit rather than be a cause of prejudice.
4. Any prejudice to the respondents, arising from the variation vis-à-vis the costs of the existing proceedings, was managed through ensuring that the new administration charge referred to costs incurred after the date of the judgment and the service charge provision referred to fees incurred after the date of the application.

Comment

The Upper Tribunal provided helpful guidance on the six-stage process to be followed in determining whether a provision in a lease should be varied; namely, the Tribunal should consider: (1) whether there are grounds under section 35(2) for making the variation; (2) whether the variation would substantially prejudice any person; (3) if so, whether money would be adequate compensation for that prejudice; (4) whether for any other reason, it would not be reasonable in the circumstances for the variation to be effected; (5) whether any variation should take effect retrospectively, or only from the date of the application or decision; and (6) whether compensation should be paid to any person in respect of any loss or disadvantage they are likely to suffer as a result of the variation.

Significantly, the Upper Tribunal’s decision entails that the notion of “satisfactory provision” was not to be determined by looking at the position at the time the lease was entered to. The Upper Tribunal looked at the question of “satisfactory provision” in the context of legislative developments which have changed the manner in which service charges may come to be recovered. Whilst the Tribunal was able to connect this with the fact that the original intention of the parties was for the costs of enforcement to be recoverable, it is clear that “satisfactory” under section 35(2) is measured by the point at which an application is made and not any earlier point in time.

The Tribunal also emphasised the unique position of an RTM Company which would have no share capital and no assets other than right to enforce the tenant covenants. An RTM company also has no means of achieving a forfeiture windfall. The variation provided the RTM Company with a more effective form of recourse.

Article by Priya Gopal