Service Charge: Whether Leases Should Be Varied to Allow For a Change in the Computation of Service Charges (Tower Hamlets Community Housing Ltd v Leaseholders of Painter House – 2024)

The Upper Tribunal considers an appeal whereby a landlord seeks to vary residential leases to change the computation of service charge, such that leaseholders become liable for greater apportionments that include expenditure in relation to premises retained by the landlord for its use.

The background

In Tower Hamlets Community Housing Ltd v Leaseholders of Painter House [2024], the appellant landlord was the freehold owner of property comprising two sets of flats with ground floor commercial units, together with external spaces. The landlord, which occupied a commercial unit, applied to the FTT in order to seek variations of 24 long leases, of which the respondents were leaseholders.

22 respondents were required to pay 1/38^th of the costs of insurance, maintenance, repair and decoration of the residential flats and half of the commercial unit, together with costs relating to common parts of the blocks and the external estate. The further 2 respondents, who held long leases of flats 9 and 11, were required to pay ‘a fair proportion’ of such expenditure.

Under s.35 of the Landlord and Tenant Act 1987, applications for variation may be made where the lease fails to make satisfactory provision for the recovery of expenditure incurred, or to vary the computation of service charge.

The landlord sought to amend the 24 leases to the effect that:

1. Leaseholders were to pay an apportionment of 1/24^th in respect of costs relating to the maintenance of their block; and
2. Leaseholders were to pay 1/38^th in respect of costs relating to the maintenance of the estate; or
3. To vary the specified proportion to read “such reasonable proportion of the Total Expenditure as the Lessors shall state is attributable to the Demised Premises”.

The FTT refused these variations save for an amendment that changed ‘Building’ to ‘Block’. The judgment stated that service charge apportionments shared between residential and commercial leaseholders were common, and that proportions included in all leases should be stated as a fraction or percentage. The FTT concluded that provisions contained in the leases were satisfactory and workable. The apportionment for the commercial unit was stated as 14/38 which the FTT ruled was satisfactory. The landlord appealed to the Upper Tribunal.

The decision

The Upper Tribunal dismissed the appeal, upholding the FTT’s decision not to vary the leases.

The UT considered whether:

1. The FTT misconstrued s.35 of the LTA 1987
2. The FTT had correctly ruled that it was unable to determine proportions stated to be a ‘fair proportion’
3. The proportion for the commercial unit was satisfactory
4. The variation requested should be made.

Considering key points:

1. The appellant landlord argued that the FTT’s finding that proportions could only be numerical was wrong.

The UT’s view was that the provision was clear, in that proportions payable by leaseholders either did or did not amount to the incurred expenditure. No provision was made in relation to the nature of the expenditure, or to state that expenditure was to be incurred only for the benefit of the leaseholders.

Agreeing with the landlord, the UT concluded that the FTT had misconstrued s.35 of the LTA 1987. Although the proportion to be paid by two flats could not be calculated under their lease provisions, it was sensible to conclude that 16/38ths of the service charge shared between them both was not a fair proportion, satisfying the requirements of s.35(2)(f). Therefore there was no reason to exclude descriptive proportions such as those contained in the leases and the FTT did have jurisdiction on this point as to whether the leases should be varied.

2. As per (1), the FTT’s finding that it was unable to determine proportions stated to be a ‘fair proportion’ was not correct. The appellant’s argument that a 16/38ths share was unfair was correct, and the appeal succeeded on this point.

3. The appeal failed on this point. The FTT had omitted the commercial unit from its considerations in deciding whether s.35 had been satisfied, and the appellant argued that it should also have omitted this unit when considering whether to vary the leases.

The UT found this to be incorrect. The expenditure incurred in relation to the commercial unit was relevant, and the FTT was right to include it in considering whether to vary the leases.

4. Satisfying the requirements of s.35 did not automatically result in variation of the leases being ordered. The FTT had reached the incorrect conclusion as to whether the requirements of s.35 were met, and did not therefore go on to consider under s.38 whether a variation to the leases should be made.

The landlord had proposed that the leaseholders be responsible for the entirety of the expenditure incurred in insuring, repairing, maintaining and decorating the block, but that it would not do so in reality.

Even if the landlord gave reassurance that it would not make service charge demands which prejudiced the leaseholders, the tribunal could only look at what the landlord was proposing and the UT therefore concluded that it would not exercise its discretion to vary the leases. The landlord sought a variation that would mean the leaseholders were liable for the full costs of maintenance of the ground floor commercial units, but it did not explain, and couldn’t justify, nor explain, why the costs of maintaining its ground floor offices should be the leaseholders’ responsibility. The UT concluded that the leaseholders would be prejudiced, and that the variation proposed was unreasonable. Adjustment of proportions of service charge allocated to the residential and commercial units would be more rational and fairer than the variation proposed.

Advice and action for landlords

This decision concludes that the landlord’s proposed variation would substantially prejudice the leaseholders, making it unreasonable. This is a helpful judgment for landlords and managing agents determining service charge apportionments in mixed-use buildings, particularly where landlords themselves retain part of the premises for their own residential or commercial use.

Although the landlord may have expressed its intention not to enforce the provisions whereby it was entitled to charge leaseholders for the entirety of its costs, the tribunal could only make a decision based on its application.

Landlords and managing agents are advised to ensure that rational and fair apportionments can be presented when an application for a variation to leases is sought, meeting the requirements of the LTA 1987.