inresidence
poorly drafted leases grounds (s.35(2)(e & f)) are that the lease fails to make satisfactory provision in respect of the recovery of expenditure incurred by the landlord for the benefit of the flat owner three flat owners would have to inject capital or loan it to the freehold company to meet the shortfall occasioned when works other than exterior decoration were undertaken.
company potentially constituting the necessary evidence. This seems odd, as there must come a point where that will be the case and the landlord company has no financial strength, so it would become insolvent as soon as such works are required. Of course that wouldn’t be in the interests of the flat owner “benefiting” from the “defect” in the lease as the building would then fall into disrepair and so the value of their interest would be adversely affected along with saleability. It was not determinative that it may be difficult to decide whether a particular item of expenditure falls within the external painting clause or not. It then went on to consider the question of prejudice and compensation, even though it wasn’t strictly necessary in view of the first part of the decision. The flat owner’s value determined compensation by using “a range of methods in the absence of direct comparables”. The average of those was taken and then a one-third allowance made for the increase in value of the lease that would flow from the variation being made, producing a compensation figure of £9,500 in circumstances where the surveyor estimated the service charge saving to be around £750 per annum flowing from the flat owner not having to contribute towards anything beyond external painting. Conclusion The ability to vary a flat lease is limited; it is unlikely to be enough that the landlord is left in a shortfall situation as a result of apparently poor drafting of the lease. This case demonstrates the importance for ground rent investors and enfranchising flat owners alike to review the terms of the flat leases prior to acquiring the freehold. Flat owners seeking to benefit from such apparent errors in drafting will need to think twice before seeking to hold out for that benefit as it may adversely affect their ability to sell or remortgage the property as a buyer, and by extension their lender, will be concerned that the landlord may become insolvent as a consequence of the shortfall.
(either alone or amongst others) or as regards the computation of service charge payable under the lease. As regards the computation ground, this will be made out where the aggregate of the service charge shares fall short of meeting the total expenditure laid out by the landlord. The tribunal is prevented from exercising its discretion if the variation sought would be likely substantially to prejudice the respondent (in this case the flat owner) and that an award of compensation (under sub-section (10)) would not be adequate. Case law Authorities cited at the same level included Cleray v Lakeside Developments Limited [2011] UK UT 264(LC) which concerns a tribunal decision that certain leases in a block fail to make satisfactory provision for the recovery of management fees in circumstances where two out of the six flats were liable to contribute in this regard. Managing agents were engaged in practice and so all leaseholders received the benefits but weren’t obliged to contribute accordingly. In that case, the upper tribunal had little sympathy for the landlord’s shortfall on the basis that the lease contractual arrangements had been freely entered into between the parties when the flat was first sold off in that way. Further in that case, there had been recent lease modification and the landlord hadn’t taken the opportunity to add an obligation to this effect then from which it concluded that if it was so unsatisfactory to the landlord it would have ensured such a provision was included then. So it found nothing “unsatisfactory” about the different arrangements between the six flat leases. It did, however, acknowledge a first-tier tribunal decision with circumstances where the financial position of the landlord might make the absence of a flat owner’s obligation to pay for a certain item unsatisfactory i.e. if there was a RTM company with no other source of income. There was no difference on the facts with this case to those circumstances as the upper
Compensation It also questioned the first-tier tribunal’s finding that no compensation should be paid, its reasoning that “no proper evidence” had been advanced by the flat owners to show that the new obligation would result in the diminution in value of their leases or the extent of that. The upper tribunal’s comment in passing in this regard is useful as it stated that the compensation is not just to be based on diminution in value of the parties’ interest in the property. The relevant sub-section talks of “any loss or disadvantage that the tribunal considers he is likely to suffer as a result of the variation”. In this case the upper tribunal went on to find that had the variation been supported then compensation would have been payable after netting off the increase in value of the lease that would flow from “remove[ing] this detrimental effect” which somewhat contradicts their conclusion that the lease was not “unsatisfactory” in this regard. In another decision of the upper tribunal (Fairburn v Etal Court Maintenance Limited [2015] UK UT 639(LC) the circumstances of the landlord were described as being irrelevant for the purpose of deciding whether a particular term was “satisfactory”. Outcome Ultimately, the upper tribunal in this case decided that the fact that different flat owners made different contributions didn’t make the absence of an obligation to contribute towards given items of service charge expenditure unsatisfactory in this lease. It accepted that as the landlord is a lessee- owned company then in light of the above Cleray and Shellpoint decision there might be circumstances where the lack of adequate contributions from this flat owner could render the lease unsatisfactory. But it wasn’t prepared to find that at this stage as no evidence to that effect had been adduced. It gave the example of the building requiring a major structural repair beyond the means of the members of the landlord
Mark Vinall, Partner at Winckworth Sherwood
19 ISSUE 102
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