Q & A - Service charges and RTM companies

QUESTION

Dear Sir,

I am a director of a new RTM company. There are 11 flats in the building. Each of the leases of the flats state that the lessees have a 9.9% service charge proportion. This brings the total service charge proportions to 108.9%. Another director feels that this makes the leases defective as the total service charge percentage is over 100%. Under the circumstances, this director is pressing for lease variations for all of the residential leases. I have noticed, however, that just below each residential lease’s service charge proportion it states: ‘Save that any of the said proportion may be subject to variation… in accordance with the provisions in clause 5.14’.

Clause 5.14 in the leases states: ‘…should it become necessary or equitable to do so the management company (acting reasonably) shall recalculate on an equitable basis the percentage figure comprised  in the lessee’s proportion appropriate to all the dwellings and shall then notify the lessees accordingly…’

My questions are these:
Given the fact Clause 5.14 permits us to alter the service charge proportions so that we only collect 100% of the service charge costs, are the leases defective?

If we are able to use Clause 5.14 to alter the service charge proportions of the flats, each lessee would be responsible for a 9.09% proportion, but there is a commercial unit on the ground floor which the freeholder has already demised to his spouse on a 125-year lease at a paltry service charge proportion of 0.01%. This commercial lease does not contain a Clause 5.14. Is there anything we can do to raise the service charge percentage on this unit to bring it in line  with the residential leases?

It seems unfair the residential lessees pay 9.09% and the commercial lessee only pays 0.01% – especially given that having a commercial unit massively increases the insurance costs of the building.

Name withheld

ANSWER

One  possibility is to look at what  rent (if any) is  payable  by the commercial tenant.  Is there  provision for the rent to be reviewed to a market rent? If the commercial  lease entitles the landlord to collect a market rent but the landlord is  not currently doing  so, one solution could  be to  investigate  whether the tenants can collectively enfranchise (ie purchase the freehold to the building). If this were an option, the tenants would acquire the freehold, and  with  it, all the leases. If the  commercial lease provided for a rent review, the new  landlord could set that process in motion and potentially obtain a market  rent.

Scott Goldstein, senior associate at Howard Kennedy LLP