Service Charges don't add up to 100% - What do to?

It is no great secret that many leases are, by any objective view, defective. If for example the computation of service charge in respect of the proportion paid by each lessee does not add up to or is more than 100% - the lease is essentially defective and leaves a scenario where the landlord is either making up the shortfall or recovering more than what has actually been paid out. 
 
There are many reasons why a lease fails to make satisfactory provision for the computation of service charges. This includes poor drafting, or perhaps the lease was drafted before a development was completed. It may even be because part of the building was enfranchised (i.e. the freehold purchased by the tenants) or the freeholder created additional floors or flats at a later date. All are plausible reasons for the service charge not totalling 100%. 
 
In such circumstances it is important the position is rectified. 
 
VARIATION BY CONSENT 
 
The quickest, simplest and arguably the least expensive resolution is variation by consent. This requires the consent from all parties to the lease and can only be achieved if all parties consent willingly. This may not be an easy task in a large block or in a block where there are investor owners. 
 
NO WILLING CONSENT? 
 
What happens if all parties do not consent willingly? In this instance, it may be open to any party to the lease to lodge an application to the First Tier Tribunal (FTT) for the variation of the lease.
 
APPLICATION TO THE FTT TO VARY A LEASE 
 
Any party to the lease may apply to the FTT for its variation if the lease fails to make satisfactory provision for the computation of service charges. The lease to be varied must have been granted for more than 21 years. 
 
GROUNDS TO APPLY 
 
The FTT may only vary a lease if it fails to make satisfactory provision for one or more specified matters. In respect of service charges, the FTT has jurisdiction to deal with an application if the total service charge is more or less than 100%. 
 
PROCEDURAL CONSIDERATION WHEN MAKING AN FTT APPLICATION 
 
An important procedural consideration for these applications is that unlike all other applications to the FTT, when making the lease variation application, the applicant must notify and serve respondents and any other parties that may be affected by the variation. 
 
TEST APPLIED BY THE FTT 
 
The test applied by the Tribunal when faced with a lease variation application is an objective test. The fact that the applicant would wish the lease to be drafted differently is simply not enough to pass the test applied. 
 
ORDERS VARYING A LEASE 
 
If the FTT is satisfied that the grounds for an application for variation of a lease have been made out then they can make an order varying the lease. Though the FTT will make an order for a variation in accordance with that submitted by the applicant, they do have powers to make a variation as they think fit. If the original application was made by an individual leaseholder; it is then open for other parties to the lease to apply to the FTT requesting the order be applied to one or more of the other leases. 
 
HEALTH WARNING
 
 It is important to ensure that any proposed variation is drafted by a suitably qualified person to avoid any unnecessary delays in drafting and re-drafting or to avoid a situation where the lease ends up even more defective than before the application was submitted. 
 
Yashmin Mistry is a Partner at JPC Law 

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