Where the service charge provisions don’t add up to 100% - What to do?
1st July 2022
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1st July 2022
In this Legal Update, we look at an issue concerning the variation of residential long leases previously covered by my colleague here in 2018. More specifically, we will be discussing what options are available to a landlord, management company or leaseholder when faced with a situation whereby the service charge apportionments across a managed development do not collectively amount to 100% and what the consequences may be if, or when, any shortfall in contributions cannot be remedied.
It is often the case across developments that the parties are wholly unaware of circumstances where the leases do not provide for 100% recovery of service charges. The issues are generally identified when management passes between agents and the incumbent agent undertakes a lease review or, when lawyers are instructed to recover arrears and an assessment of the case takes place.
However, it is not uncommon for the parties to a lease to be aware of such an issue and an informal “workaround” is implemented either unilaterally, or with no proper agreement. Whilst this approach is all well and good whilst it works, it is in practice an unenforceable ‘fudge’ that will not prevent the true position from coming to light or needing to be remedied.
As set out previously, there are three ways in which a residential long lease can be varied:
Variation by agreement;
Section 35 of the Landlord and Tenant Act 1987 (“the Act”) - where the lease fails to make satisfactory provision;
Section 37 of the Act - majority agreement.
The manner in which a variation is sought to be invoked, will much depend upon the factual circumstances of any particular case. For example, a lessee-owned company in a block of 5 flats, would more than likely achieve a variation by agreement as opposed to a large residential estate with numerous blocks, due to the practicalities of gaining 100% support.
However, where, as we are discussing here, a lease fails to provide sufficient service charge apportionments, the variation sought will likely be invoked via an application to the First-Tier Tribunal under Section 35 of the Act. It is unlikely that a party receiving the benefit of a defective lease, because they are paying less, will voluntarily agree to a variation or form part of a majority as required under Section 37.
The above said, a majority agreement under Section 37 is more likely to be achieved if the leaseholders are collectively paying more than 100% - a clear basis for applying for a variation!
For the purposes of this update, we shall focus upon the more common application under Section 35.
An application under Section 35 can be made on the ground that the lease fails to make satisfactory provision in respect of one or more specific matters covered under that section. One such matter is that the computation of the service charge under the lease fails to make satisfactory provision where the total service charge recovery is more or less than 100% - this is the only circumstance upon which this ground arises. It should be noted here that no variation will be made to a lease, no matter how unfair an apportionment may be, in circumstances where the leases provide for 100% of the recovery. The Tribunal will not help a party to a bad bargain!
When considering the requirements of a satisfactory provision, the Tribunal will have regard to all of the circumstances of the case. For example, where the landlord is a lessee-owned company, and if there is an issue with the service charge computation, their circumstances may be considered differently as against those of a large institutional landlord.
Each application will turn upon its own facts but it should not be assumed that the variation will be granted simply because the lease could have been better or more explicitly drafted.
Provided that the Tribunal is satisfied that the grounds for the variation of a lease can be made out, an order may be made in the terms sought within the application, or in other terms imposed by the Tribunal. It is possible where a variation has been awarded, that it can take effect retrospectively.
There are a number of certain circumstances where the Tribunal cannot award the making of a variation. These include where a party is substantially prejudiced and they cannot be financially compensated or where it would be unreasonable for the Tribunal to make an order at all.
The practical effect of a landlord or management company being unable to recover 100% of the service charges can be devastating. A lessee-owned landlord or residents’ management company would potentially face insolvency because, due to the failings in the lease drafting, they would not be able to recover the full extent of the service charge expenditure incurred. The dissolution of the party responsible for undertaking the management functions under a lease can be most prejudicial to any owner of a property in that development. On balance, it is unlikely a variation would be refused in these circumstances but it is not beyond possibility.
However, in circumstances where the landlord is a corporate or professional entity, or where a professional management company is embedded within the lease, any shortfall arising in the service charge recovery due to poor drafting might not be addressed by the Tribunal under s.35. In such circumstances that shortfall will fall to the landlord/management company to cover, a potentially very costly issue indeed, especially, where any major works project expenditure is to be incurred.
Applications to the Tribunal to vary a lease under either of s.35/s.37 are not always straightforward. Upon noting an issue concerning the computation of the service charge apportionments, or any other matter, legal advice should be sought in order to consider the most appropriate means of resolution.
For more information, please feel free to contact a member of the team on 01435 897297 or firstname.lastname@example.org.
This legal update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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