Eastern Pyramid Group Corporation SA & Ors v Spire House RTM Company Limited

This is an appeal from a decision of the First-tier Tribunal to vary a number of leases of flats in Spire House, Lancaster Gate, London W2 on the application of the respondent, Spire House RTM Company Limited. The appellants are the landlord, Eastern Pyramid Group Corporation SA, and two of the leaseholders.

The appellants were represented in the appeal by Mr Justin Bates KC and Mr Jonathan Upton, and the respondent by Mr Philip Rainey KC and Ms Nicola Muir; I am grateful to them all.

Spire House comprises a Victorian church tower with a spire, a block of 23 flats built on the site of the nave of the church, and an enclosed garden. The first appellant (“the landlord”) holds the freehold of the flats, a 999-year lease of the tower and a 125-year lease of the garden. The flats are held on long leases, most granted in the 1980s and 1990s (the first no later than 1984) and one in 2021; the second and third appellants hold long leases of flats 16, 19 and 23.

In June 2019 the respondent (“the RTM company”) served a claim notice in order to acquire the right to manage Spire House pursuant to the Commonhold and Leasehold Reform Act 2002. The landlord and two leaseholders resisted that acquisition, but their case failed in the FTT, the Upper Tribunal and the Court of Appeal (Eastern Pyramid Group Corporation SA v Spire House RTM Company Limited [2021] EWCA Civ 1658), with the result that the respondent acquired the right to manage the property on 9 February 2022.

The tower of Spire House has been in need of repair since at least 2016, and urgent work is now required to protect both the integrity of the block of flats and members of the public due to the risk of falling masonry. Under the terms of the long leases of the flats the landlord is responsible for the repair and maintenance of the property (defined to include the tower); the task now of course falls to the RTM company. The RTM company has obtained from the FTT an order dispensing with the consultation requirements of section 20 of the Landlord and Tenant Act 1985, so that it can recover the cost of initial emergency work to the pinnacles on the tower through the service charge and is consulting regarding further work to the spire.

The cost is obviously going to be significant. The financial implications of that were set out by the FTT, at paragraph 18 of the decision now appealed, as follows:

“The certified accounts for the year ending 24 March 2022 indicated that the sum of £2,350,000 was held in the reserve fund. According to the grounds in support of the application however, after the RTM company acquired the right to manage in February 2022 it discovered that the sum held in the reserve fund account came to just over £110,000. Further the two dissenting leaseholders have not paid any service charges since the right to manage was acquired. According to Ms Carroll’s statement together they are in arrears of £212,881. For the purposes of comparison the total service charge income raised by the freeholder in the year ending 24 March 2022 was £295,458. In the course of its determination in respect of the application for dispensation, the Tribunal noted that total cost of the emergency works to safely remove the three pinnacles was estimated in March 2024 to be in the region of £450,000. According to a Stage 2 notice of intention served in September 2020 by the Second Respondent, i.e. 2 years prior to the Applicant’s acquisition of the right to manage, the estimates it had obtained for the repairs that were then required to the spire and tower ranged from of £1.2 million to £2.3 million.”

Inevitably the cost of the work on the tower will be paid sooner or later by the leaseholders. But it is the “sooner or later” that now poses a problem for the RTM company. The leases enable the landlord to demand a service charge each year to cover its actual expenditure in the previous year, and also to recover an interim service charge payment in advance in respect of anticipated expenditure, but limited to one half of the actual expenditure the previous year. And although the lease does provide for the landlord to require contributions to a reserve fund, they are limited to 30% of the costs incurred in the previous year. The application before the FTT in the present proceedings was for an order varying the leases under section 35 of the Landlord and Tenant Act 1987 to enable the RTM company to remove that limitation on advance payments so that it can recover the cost of the work in advance; alternative variations were suggested including a removal of the cap on contributions to the reserve fund, or to add a new provision to enable the landlord to demand funds on an ad hoc basis. The application was made on the basis that the lease failed to make satisfactory provision for the recovery of service charges to pay for the emergency work in advance, because the RTM company with no assets other than the service charge contributions made by the lessee – could not otherwise do the emergency work but would have to wait years to accumulate enough funding to pay for it.

The landlord, far from being pleased to be off the hook in the face of such a project, opposed the application, as did the second and third appellants. They were unsuccessful in the FTT, which amended the definition of the Interim Maintenance Charge in the lease from this:

“the Interim Maintenance Charge means the sum specified in Paragraph 8 of the Particulars or one half of the Maintenance Charge for the immediately preceding Maintenance Year whichever is the greater”

to this:

“the Interim Maintenance Charge means the sum specified in paragraph 8 of the Particulars or the amount which in the opinion of the lessor or its managing agents or accountants shall from time to time represent a fair and reasonable estimate of one half of the Maintenance Charge for the Maintenance Year in question PROVIDED that if it should appear necessary or appropriate to adjust the Interim Maintenance Charge during the Maintenance Year the Interim Maintenance Charge may be increased or decreased (as the case may be) by the lessor at any time”.

I shall have to look closely at the FTT’s reasoning later. First I turn to the relevant law.

Part IV of the Landlord and Tenant Act 1987 is entitled “Variation of leases”. It provides that leases may be varied by the FTT in response to three different kinds of application.

Section 35 enables an individual who is a party to a long lease to make an application:

“(1)

Any party to a long lease of a flat may make an application to [the FTT] for an order varying the lease in such manner as is specified in the application.

(2)

The grounds on which any such application may be made are that the lease fails to make satisfactory provision with respect to one or more of the following matters, namely—

(a)

the repair or maintenance of—

(i)

the flat in question, or

(ii)

the building containing the flat, or

(iii)

any land or building which is let to the tenant under the lease or in respect of which rights are conferred on him under it;

(b)

the insurance of the building containing the flat or of any such land or building as is mentioned in paragraph (a)(iii);

(c)

the repair or maintenance of any installations (whether they are in the same building as the flat or not) which are reasonably necessary to ensure that occupiers of the flat enjoy a reasonable standard of accommodation;

(d)

the provision or maintenance of any services which are reasonably necessary to ensure that occupiers of the flat enjoy a reasonable standard of accommodation …

(e)

the recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that other party or of a number of persons who include that other party;

(f)

the computation of a service charge payable under the lease;

…

(3A)  For the purposes of subsection (2)(e) the factors for determining, in relation to a service charge payable under a lease, whether the lease makes satisfactory provision include whether it makes provision for an amount to be payable (by way of interest or otherwise) in respect of a failure to pay the service charge by the due date.

(4)

For the purposes of subsection (2)(f) a lease fails to make satisfactory provision with respect to the computation of a service charge payable under it if—

(a)

it provides for any such charge to be a proportion of expenditure incurred, or to be incurred, by or on behalf of the landlord or a superior landlord; and

(b)

other tenants of the landlord are also liable under their leases to pay by way of service charges proportions of any such expenditure; and

(c)

the aggregate of the amounts that would, in any particular case, be payable by reference to the proportions referred to in paragraphs (a) and (b) would either exceed or be less than the whole of any such expenditure.”

Section 36 enables a respondent to a section 35 application to apply for an order varying other leases if the section 35 application succeeds, on the ground (in sub-section (3)) that they all fail to make satisfactory provision in the same way; it is easy to see why that might be necessary when, for example, there is an application to vary just one of a number of identical or similar leases. Section 37 makes provision for an application to be made to vary a number of leases when a majority of lessees consent to the application; on such an application there is no need to invoke one of the grounds in section 35(2), but the applicant must show that “the object to be achieved by the variation cannot be satisfactorily achieved unless all the leases are varied to the same effect.”

Section 38 then provides that if on an application under sections 35, 36 or 37 the FTT is satisfied that the relevant grounds are made out (section 35(2), section 36(3)) or section 37(3) then the FTT may make an order varying the lease. In other words, the grounds in section 35(2) are gateways, and if the applicant passes through one of them then the FTT has a discretion to vary the lease.

Section 38(6) restricts the FTT’s discretion in the following way:

“(6)

[The FTT] shall not make an order under this section effecting any variation of a lease if it appears to [the FTT] —

(a)

that the variation would be likely substantially to prejudice—

(i)

any respondent to the application, or

(ii)

any person who is not a party to the application,

and that an award under subsection (10) would not afford him adequate compensation, or

(b)

that for any other reason it would not be reasonable in the circumstances for the variation to be effected.”

Section 38(10) provides:

“(10)

Where [the FTT] makes an order under this section varying a lease [the FTT] may, if it thinks fit, make an order providing for any party to the lease to pay, to any other party to the lease or to any other person, compensation in respect of any loss or disadvantage that [the FTT] considers he is likely to suffer as a result of the variation.”

It is worth noting that section 38(10) provides for an award of compensation for “any loss or disadvantage”; so compensation may be payable even where it is not suggested that there is a “substantial prejudice” which would, absent adequate compensation, prevent the variation of the lease.

If it decides to exercise its discretion to vary the lease the FTT can make the amendment requested by the applicant or such other variation as it thinks fit (s. 38(4)).

Section 102(1) and paragraph 10 of Schedule 7 to the 2002 Act provide that sections 35 , 36 , 38 and 39 of the 1987 Act have effect as if references to a party to a long lease included the RTM Company. Therefore although it is not a party to a lease, an RTM company may apply to the FTT for a variation of the lease.

The Tribunal, and its predecessor the Lands Tribunal, has made a number of decisions about these provisions, but there are no decisions of the Court of Appeal or above about them. A number of the Tribunal’s decisions have been about applications relying on section 35(2)(f), which is satisfied (sub-section (4) provides) where the service charge provisions do not add up. Ground (f) was described by the Tribunal in Tower Hamlets Community Housing Limited v Leaseholders of Painter House [2024] UKUT 37 (LC) at paragraph 30 as “rather a blunt instrument”, because it is easy to imagine circumstances where the ground is satisfied but it would not be right to vary the lease.

Ground (e) by contrast is more open-textured; there is no further provision defining when it is satisfied, analogous to subsection (4), but instead subsection (3A), added by the Commonhold and Leasehold Reform Act 2002, gives an example of a circumstance when the ground will be satisfied, namely when there is no provision for the payment of interest when service charges are paid late. In 56 Westbourne Terrace RTM Company Limited v Polturak, Davies and others [2025] UKUT 88 (LC) the Tribunal (the Deputy President, Martin Rodger KC) discussed the statutory provisions and the Tribunal’s decisions and considered the meaning of “fails to make satisfactory provision” in section 35(2). He said this:

“112.

In this case, the relevant words of the statute are "the lease fails to make satisfactory provision". The key word is "satisfactory", which the Oxford English Dictionary defines as meaning "adequate, fair, tolerable; sufficient for the needs of a given situation or circumstance". It is a word of approval with middling connotations, and its antonym, unsatisfactory, is also a comparatively moderate rebuke. To say that there has been a failure to make satisfactory provision for something suggests that there is a problem of some sort without giving the impression that the problem is acute. Nor does it give any indication of the nature of the problem. It may be something for which provision has been made, which turns out not to be adequate, or it may be the omission to make any provision at all for a particular contingency which is unsatisfactory.

113.

“Satisfactory" is an ordinary English word with a well understood meaning. It is not necessary or appropriate to substitute some different word, such as "defect" when addressing the ground (e) question. The better course is to identify the provision which has been made in the lease, or which is missing from it, and to consider whether in the circumstances which now exist that amounts to satisfactory provision, in the ordinary understanding of those words.”

The issue in 56 Westbourne Terrace was whether the FTT had been right to refuse to vary the lease in question so as to enable the RTM company to recover from the leaseholder its costs of enforcing the liability to pay the service charge. The lease contained a standard clause enabling the landlord to recover its costs “of and incidental to the preparation and service of” a notice under section 146 of the Law of Property Act 1925; such a notice is a prelude to forfeiture, and an RTM company cannot forfeit. The Deputy President said:

“117.

… In FirstPort Services Ltd v Settlers Court RTM Co Ltd [2022] UKSC 1, at [56] Lord Briggs explained that:

"An RTM company is, because of the statutory provisions which regulate it, not a creature of substance. It is a company limited by guarantee with no share capital and no assets other than the right to enforce the tenant covenants in the leases of the flats in its building, otherwise than by forfeiture."

Such an entity will not be in a position to fund litigation without some external source of funds. That source must necessarily be either the members of the company, or the whole body of leaseholders, or the individual leaseholder whose default gave rise to the need for enforcement. In deciding where such expense would most satisfactorily fall it is relevant to bear in mind that an RTM Company has no interest in the premises themselves; it exists to provide services for the benefit of all leaseholders, not for its own benefit, or that of its members as such. Unlike the landlord, an RTM company has no possibility of achieving a forfeiture windfall. It is relevant also to remember that the consequences of the inability of an RTM Company or a leaseholder-owned landlord to pursue a defaulting leaseholder through litigation, or a lack of alternative funds to make up the shortfall will be felt by all leaseholders collectively. The building may not be maintained as they would like it to be, works may be delayed or cancelled, or they may be asked to make additional contributions beyond their contractual liability.

118.

In all of those circumstances it is not difficult to describe a structure under which the expense of enforcement falls on the members of the company or the whole body of leaseholders as one which fails to make satisfactory provision for the recovery of the costs of services.”

In 56 Westbourne Terrace the Tribunal made the variation requested. In the present appeal it is argued that the Deputy President’s understanding of the meaning of “fails to make satisfactory provision” was incorrect, and that on a correct reading of that phrase the bar is set very high; the appellants also say that the fact that the person trying to recoup its expenditure is an RTM company is not a relevant consideration, again in disagreement with the reasoning in 56 Westbourne Terrace.

The FTT in its decision explained the factual background and the law, and the RTM company’s reasons for seeking a variation. They relied on section 35(2)(e), that the lease failed to make satisfactory provision for “the recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that other party”, because the lease fails to make provision for the respondent to collect the cost of the emergency works by way of interim maintenance charge, the latter being limited to a maximum of half the previous year’s expenditure (as we saw at paragraph 7 above).

The FTT recorded the arguments of the landlord and of the second and third appellants, represented by Mr Upton, that the provisions in the lease about the interim service charge and the reserve fund were not unusual and were satisfactory, that the RTM company had not provided sufficient evidence to show that it could not afford to do the work, and that one of the leaseholders was a high net worth individual who would be able to provide the necessary funding. Mr Upton pointed out that Part IV of the LTA 1987 was intended to implement the recommendations of the Nugee Report 1985 (Report of the Committee of Enquiry on the Management of Privately Owned Blocks of Flats HMSO 1985), whose authors recommended the introduction of a power to vary a lease where it was “seriously defective” – a point which is made again in the appeal.

I have to set out the following paragraphs of the FTT’s decision at length because they are the subject of detailed commentary in the appeal:

“31.

Both counsel referred us to paragraph 16 of the decision of the Upper Tribunal in Mayor and Burgesses of London Borough of Camden v Morath [2019] UKUT 193 set out above, where the Upper Tribunal considered that a provision that is ‘clear and workable’ is unlikely to be unsatisfactory. They both stressed that the tribunal must be careful not to substitute a test of “clear and workable” for the test in s.35(2). However, as the Upper Tribunal went on to explain in that paragraph, the question is whether the bargain as it stands works in practice and must be considered on the basis of the evidence before the Tribunal. …

33.

We have to consider how the machinery of the existing leases works in practice. It is illustrative to take Flat 23 in the year commencing 25 March 2021 as an example, and ignoring for the moment any potential delay in certifying actual costs for the preceding year. The service charge payable in respect of Flat 23 is 6.7% of the total building costs. The total actual maintenance costs for the building for the year ending 24 March 2021 was £393,268. Therefore the total interim maintenance charges which the RTM company could have demanded of the leaseholder of Flat 23 in 2022, excluding any contribution towards the reserves, was £26,345, with 50% of that sum payable on 25 March 2022 and the other 50% payable on 29 September 2022. The total sum which the RTM company could have demanded of all the leaseholders towards the reserve fund in 2022 was £117,980 (i.e. 30% of the actual costs for 2021) The maximum it could have demanded from the leaseholder of Flat 23 towards the reserve fund in 2022 was £7,904.66. This is significantly less than that leaseholder’s liability to contribute towards the cost of the urgent works to the three pinnacles which, assuming a total cost of £450,000, comes to £30,150. Realistically the RTM company could only use the sums which it could have demanded for the reserve fund to pay for urgent works, as most or all of the interim maintenance charge would be needed to pay for the day-to-day expenses of running the building.

34.

In order to repair the tower and spire if the lease is not varied the RTM company will have do one of the following;

(i)

Fund the works itself and claim the cost from the leaseholders as a balancing charge once the certified accounts are available; or

(ii)

Find a contractor who is willing to start the works but defer seeking payment of the bulk of the cost until after the leaseholders pay their balancing charges; or

(iii)

Persuade some or all of the leaseholders to pay in advance notwithstanding the fact that they are under no obligation to do so; or

(iv)

Wait until it has accumulated sufficient money in the reserve fund. Again taking Flat 23 as an example, and using the figures for 2022, it would take 3 to 4 years to build up enough money to carry out the urgent works to the 3 pinnacles, and several years thereafter to build up enough money to complete the repairs to the tower.

35.

In our view there is ample evidence to show that the provisions of the leases are not working in practice; the spire and tower have been in a state of significant disrepair since 2016 and have now deteriorated to the point that the pose a danger to persons in the vicinity of the building. The Second Respondent attempted to carry out the necessary repairs in 2021 by seeking payment of the costs in advance from the leaseholders. However it was unable to raise the funds in this way because some of the leaseholders objected on the grounds that the terms of their leases did not require them to pay the sums demanded. The only works that were carried out by the Second Respondent was to net the spire in 2021. The bulk of the works remained outstanding as at the date the Applicant acquired the right to manage. In our view the ultimate cause of this is not warring factions among the building’s leaseholders or poor management decisions on the part of either the Second Respondent or the RTM company but a consequence of the service charge mechanism the leases themselves which effectively prevents the landlord from seeking advance payment in respect of major works. It may have been the intention of the parties when the leases were entered into that over time the reserve fund would be built up to cater for such eventualities but as this case demonstrates, reserve funds can be depleted. We do not accept that we can properly consider whether any of the leaseholders is in a position to act as a ‘white knight’ and either fund the works or grant the Applicant a short-term loan. The fact that they could is no guarantee that they will and in any event any such leaseholder could dispose of their interest in the building at any time. Furthermore we note that at paragraph 8 of her statement Ms O’Carroll says that the RTM company does not at present have sufficient funds available to it to carry out the emergency works. If the Respondents did not accept the evidence of Ms O’Carroll on this point then in our view they should have sought to challenge it.

36.

Consequently we consider that we have jurisdiction to vary the leases.”

The FTT concluded that the best of the proposed variations was the one amending the definition of the interim maintenance charge, and it ordered a variation to that effect.

The appellants appeal with permission from this Tribunal on four grounds:

Ground 1 is argued only by the second and third appellants. They point to section 38(6) of the 1987 Act which provides that the FTT “shall not” vary the lease if it appears to the FTT that the variation would be likely substantially to prejudice anyone and that an award under section 38(10) would not afford them adequate compensation. The appellants say that the FTT jumped the gun in deciding to exercise its discretion before it had considered whether they would suffer substantial prejudice and whether a payment under section 38(10) could compensate them.

The FTT gave directions on 4 September 2024, stating that at the hearing on 18 November it would consider first jurisdiction and then discretion, and that if it concluded that it had jurisdiction so as to proceed to discretion it would “then consider how to deal with the issue of compensation, giving directions for further submissions/evidence/hearing date as may be necessary.” In its decision of 11 December 2024 the FTT explained that direction as a decision that it would at the hearing consider whether it had jurisdiction to vary the leases “and if so whether it should exercise its discretion to do so, with the issue of compensation being determined at a later date.”

The FTT then went on to consider jurisdiction by looking at the requirements of section 35, and concluded that it had jurisdiction (which is challenged in grounds 2, 3 and 4). It then said:

“36 …The question then is whether we should exercise our discretion and make any of the variations sought by the Applicant. … Mr Upton urged us not to embark on this exercise until the Respondents had the opportunity to establish whether or not they might be prejudiced by any or all of the proposed variations. He could not suggest any mechanism by which the value of either the reversion or of the leasehold of Flats 16, 19 or 23 might be adversely effected by any of the proposed variations.

37.

In our view the best of the three proposed variations is the variation to the interim maintenance charge. …

38.

As the Tribunal has already decided that the issue of compensation will not be considered as part of this determination, we will postpone consideration of the Respondents’ application under section 20C LTA 1985 or Paragraph 5A of Schedule 11 to the CLRA 2002, should it wish to pursue it. Directions for a case management hearing to deal with those applications, the registration of the variation against the relevant leasehold and freehold titles, and the issue of compensation will follow this decision.”

That, say the appellants, is to miss out a stage in the reasoning process; the FTT exercised its discretion before ascertaining whether it could do so under the terms of section 38(6). They point out that in 56 Westbourne Terrace in paragraphs 23 to 41 the Tribunal explained the steps to be taken by a tribunal in deciding whether it had jurisdiction to vary a lease. Mr Bates KC and Mr Upton identified six numbered steps; that is not how the Tribunal put it in 56 Westbourne Terrace and I think it is unnecessary and over-complicated to look at the analysis in that way. The important point is that the FTT cannot exercise its discretion if section 38(6) prevents it from doing so, and therefore before exercising its discretion it has to give consideration to section 38(6).

If this ground of appeal succeeds they say that the FTT’s decision should be set aside and the matter remitted to the FTT for a decision once the first and second appellants have had the opportunity to instruct experts and produce evidence of substantial prejudice.

The respondent’s answer to this ground is simple: the restriction on the FTT’s discretion imposed by section 38(6) was not engaged because it was not part of the appellants’ case that they were likely to suffer substantial prejudice. Substantial prejudice was not pleaded by the appellants.

Specifically, in their statement of case in the FTT the appellants’ case was that the grounds relied on in section 35(2) were not made out; but if the FTT found that they were then the appellants sought “an order that [the RTM company] pays compensation in respect of any loss or disadvantage that they are likely to suffer as a result of these variations.” In other words the appellants relied on section 38(10) if an order varying the leases was made, but it did not suggest that there would be substantial prejudice to them and that therefore such an order could not be made.

The appellants applied in August 2024 to have the jurisdiction issue decided as a preliminary issue. Mr Rainey KC took the Tribunal to the appellants’ application form, where the appellants said:

“[the second and third appellants] (being residential leaseholders in the subject premises) also wish to rely on expert evidence supporting their cases under section 38(10) of the Act (if the Tribunal makes an order varying their leases)”.

That, said Mr Rainey KC, makes it clear that the appellants were not relying on section 38(6); they wanted compensation only if the FTT made the order varying the leases. They did not seek to rely upon substantial prejudice as a reason why the FTT should not make such an order. In a “rider” to that form of application, the appellants said that there were three issues before the FTT, namely jurisdiction, discretion and compensation. Paragraph 4 of that rider referred to section 38(6), but although the effect of the section was set out it was not suggested that substantial prejudice would arise from the variation of the lease.

That document was followed up by a further letter to the FTT arguing that there be a hearing on jurisdiction, and then a hearing on discretion and compensation. In response, the FTT gave its directions of 4 September 2024 (see paragraph 29 above). Following those directions, said Mr Rainey KC, it must have been clear to the appellants that both jurisdiction and discretion would be addressed at the hearing on 18 November 2024 and that therefore if they wished to raise substantial prejudice and to rely on section 38(6) they must make that argument at that hearing.

They did not do so. Mr Upton’s skeleton argument before the FTT mentioned section 38(6), stated that the issue of discretion was “inextricably bound up” with compensation, and asked the FTT to give directions for expert evidence on compensation; but there is still no suggestion that the appellants would suffer substantial prejudice. Indeed, neither at the hearing nor elsewhere did the appellants say what prejudice they would suffer, whether substantial or otherwise, and counsel before the FTT could not think of any loss at all (as the FTT said at its paragraph 36, quoted above at paragraph 30)– and that is hardly surprising, said Mr Rainey KC. As leaseholders they will have to pay for the work on the tower; all that is going to change is that they will have to meet more of that liability in advance than they can be required to under the lease as it stands.

I agree with the respondent. If the second and third appellants had argued that the FTT could not vary the leases because they were going to suffer substantial prejudice as a result and that that prejudice could not be compensated by an award of compensation under section 38(10) then the FTT would have had to make a decision on that argument before deciding to vary the leases. As discussed above, section 38(6) limits the FTT’s discretion and therefore consideration of an argument about substantial prejudice is part of the FTT’s consideration of discretion. I do not see that the directions given on 4 September 2024 by the FTT (paragraph 29 above) ran contrary to that. Where section 38(6) is in issue, compensation does not have to be quantified; the FTT simply has to decide whether there will be any substantial prejudice that cannot be compensated, and if there is none then it can proceed to vary the lease, leaving the quantification of compensation for a further hearing. But in the present case when the FTT gave its direction on 4 September 2024 there was nothing in the appellants’ pleading or in the application for a split determination to suggest to the FTT that the appellants thought they would suffer substantial prejudice and so there is no explicit mention of a consideration of section 38(6) in those directions.

I can see that in correspondence with the FTT and in Mr Upton’s skeleton argument it was argued that the FTT should not proceed to exercise its discretion without considering compensation, but that argument as it stands was no more than a delaying tactic. It amounted to an argument that the FTT must go through the process of quantifying compensation before making an order – which is not what either section 38(6) or section 38(10) require, and was not even what the appellants were asking for. Their case was that they wanted compensation if an order was made; they have never said that they were going to suffer a loss that would prevent the FTT from making an order.

At the hearing, when considering whether to exercise its discretion to vary the lease, the FTT heard what Mr Upton had to say about any prejudice that was going to be suffered by the appellants. He could not suggest any. There was therefore nothing wrong or surprising about it then exercising its discretion to vary the lease. There was no question of section 38(6) preventing it from doing so; that point just did not arise on the appellants’ pleaded and argued case.

Mr Bates KC suggested that the appellants needed a direction from the FTT for expert evidence so that it could obtain the evidence it needed in order to plead substantial prejudice; but that is a mis-characterisation of the relationship between pleadings and evidence. It was not open to the appellants to ask the FTT to pause while they made a fishing expedition to discover some substantial prejudice that had not yet occurred to them. Faced with no pleaded case on the part of the appellants that section 38(6) would stand in the way of the FTT exercising its discretion, and in the absence of any suggestion by counsel for the appellants that they would suffer substantial prejudice if the variation was made, the FTT was perfectly right to proceed.

As I said above (paragraph 16), section 38(10) has a further role to play; the FTT may order compensation for loss or disadvantage suffered as a result of the variation, in cases where there is loss or disadvantage that does not amount to substantial prejudice. In light of the complete absence of information from the appellants as to what sort of disadvantage they might suffer it is perhaps surprising that the FTT has left the door open for them to produce evidence of loss or disadvantage, but so it did, and if the appellants become able to suggest what that loss or disadvantage might be and can produce evidence of it then they still have the opportunity to seek compensation; that hearing has been stayed pending this appeal but the FTT will now no doubt give directions, if so requested, for it to go ahead. But ground 1 in this appeal fails.

Grounds 2 and 3 together are at the heart of the appeal. Ground 2 is that the FTT was wrong in principle to find that the lease failed to make satisfactory provision as required in section 35(2)(e); the appellants take issue with the analysis in 56 Westbourne Terrace and argue that a lease cannot be varied under section 35 unless it is seriously defective. Ground 3 requires the Tribunal to consider what factors are relevant when considering whether a lease fails to make satisfactory provision as required by section 35, because the appellants argue that the identity and financial circumstances of the respondent as an RTM company cannot be relevant to the decision. I take the two grounds together and look at the parties’ arguments in turn.

As we saw above, the Tribunal in 56 Westbourne Terrace regarded “satisfactory” as a term of approval with “middling connotations”, and “unsatisfactory” as “a comparatively mild rebuke”. The Deputy President said: “To say that there has been a failure to make satisfactory provision for something suggests that there is a problem of some sort without giving the impression that the problem is acute.” The appellants disagree.

It is not in dispute that the words of a statute are to be given their ordinary and natural meaning in their context. Mr Bates KC added that sources such as Law Commission reports, reports of Royal Commissions and advisory committees and Government White Papers may disclose the background to a statute and the mischief it was supposed to be addressing, enabling a purposive interpretation of a statutory provision. In Kostal UK Ltd v Dunkley [2021] UKSC 47 Lord Leggatt explained at [30]: “The modern case law…has emphasised the central importance of identifying the purpose of the legislation and interpreting the relevant language in the light of that purpose.”

Mr Bates KC had three reasons for disagreeing with the Tribunal’s construction of “satisfactory” and its antonym in 56 Westbourne Terrace. First, he disagreed about the natural meaning of the words. The Oxford English Dictionary defines “satisfactory” as “adequate, fair, tolerable; sufficient for the needs of a given situation or circumstance.” That he said, was a simple or low threshold; something is satisfactory if it is good enough. But the antonym “unsatisfactory” is not a mild rebuke; it must mean that something is intolerable, unfair, or insufficient. And that is a high threshold to overcome. Moreover, the law does not generally interfere with bargains; parties are free to agree what they wish and the law does not require perfection, best practice or fairness. A provision will only be unsatisfactory if it falls outside a broad range of satisfactory provisions; only, Mr Bates KC argued, if it gives rise to a defective lease.

Second, Mr Bates KC pointed out that the 1987 Act in enabling the FTT to vary a lease has been described as “a radical piece of legislation which in a number of respects impinged upon the contractual rights of landlords” (Maunder Taylor v Blaquiere [2002] EWCA Civ 1633, Aldous LJ at paragraph 35). Accordingly, one would expect any power to re-write the parties’ bargain to be justified only on substantial grounds.

Third, that the grounds are intended to be substantial can be seen from the Report of the Committee of Inquiry on the Management of Privately Owned Blocks of Flats, chaired by Edward Nugee QC (“the Nugee Report”), whose recommendations prompted the enactment of the 1987 Act. The committee was tasked with examining evidence of problems for landlords and tenants arising from the management of blocks of flats and making recommendations as to how they might be solved. The report explained at its paragraph 6.12:

“If, as can happen, the leases of the flats in a block have been so drafted that the landlord is not entitled to recover from his tenants in aggregate the whole of his expenditure on services, he has to bear the deficiency himself. On the other hand, if, as is not uncommon, the leases provide for the tenants to pay the cost of services, but impose no obligation on the landlord to provide those services, the tenants may have no ready means of ensuring that essential repairs are carried out even though they, or most of them, are willing to pay for the work. A defective or inconsistent set of leases in a block can be improved at present only if all parties agree. We consider in paragraphs 7.6. l to 7.6.13 a procedure for varying defective leases where such unanimous agreement cannot be obtained.”

Paragraph 7.6 of the report is headed “Variation of Defective Leases.” It sets out three situations in which a defective or unsatisfactory lease might be varied: (1) where all parties agree; (2) where the landlord and a majority of lessees agree; and (3) where a party to the lease identifies a “major defect” to one or more of the leases. As to the third category, “We consider such intervention to be justified where the combined effect of the obligations imposed by the leases on the landlord and the lessees produces a seriously defectivescheme, and the defects have a direct bearing on the upkeep and fitness for habitation of the flats in the block” (paragraph 7.6.9).” The emphasis is added by Mr Bates KC. The committee at paragraph 8.45 recommended a new procedure “Where the landlord or one or more of the lessees identifies a major defect in one or more of the leases in a block…”. And that recommendation is made under the heading “Variation of unsatisfactory leases”, so that “unsatisfactory” must be taken to mean “having a major defect”.

Accordingly, Mr Bates KC argued, the committee recommended the procedure that was enacted in sections 35 of the 1987 Act only in limited circumstances where the lease was “seriously defective.” That indicates, he said, that Parliament intended the power to vary the lease to be exercised sparingly and only where the circumstances were sufficiently serious to justify interfering with the parties’ bargain.

Mr Bates KC pointed out that the committee at para 7.6.9 suggested that where a lease was varied to add an obligation for a landlord to carry out work, there should also be provision for the recovery of on account payments. That, he said, indicates that provision for an on account payment was envisaged only as a quid pro quo when a landlord took on additional obligations, and such a variation should not be made in any other circumstances.

In the grounds of appeal (drafted before the Tribunal’s decision in 56 Westbourne Terrace) the appellants also relied on the Tribunal’s observation in London Borough of Camden v Morath, to which as we have seen the FTT also referred (paragraph 25 above).

The appellants’ position is that there is nothing “unsatisfactory” about the current lease. The costs of the proposed works can be recovered, just not in a way that would be convenient for the RTM company. But that is not enough. As a matter of law, this lease is not unsatisfactory in its intended sense of seriously defective and it was not open to the FTT to reach any other conclusion.

Furthermore, say the appellants (moving on to ground 3), a change in the identity of one of the parties, and in particular the fact that the person responsible for the work on the tower is now an RTM company, cannot be a reason why the lease fails to make satisfactory provision. As a matter of fact the appellants do not believe that the respondent cannot afford to do the emergency work, see ground 4; but leaving that aside, even if it cannot, that is not a relevant consideration. It is as irrelevant as are the financial circumstances of a tenant to a decision whether service charges were reasonably incurred (Waaler v Hounslow London Borough Council [2015] UKUT 17 (LC) at paragraph 45); similarly, where a landlord wants a dispensation from the consultation requirements for major works, the financial consequences to the landlord of failure to get a dispensation are irrelevant (Daejan Investments Limited v Benson [2013] UKSC 14 at paragraph 51).

Moreover it cannot be the case that the lease was satisfactory for years and then suddenly became unsatisfactory because the identity of the landlord has changed. There is a conceptual difference between a change of circumstances resulting from a deliberate choice (here, the respondent’s choice to acquire the right to manage) and a change that none of the parties could control such as the introduction of new legislation.

Mr Bates KC referred to the consultation paper that preceded the introduction of the right to manage by the Commonhold and Leasehold Reform Act 2002 (Commonhold and Leasehold Reform, Draft Bill and Consultation Paper (Cm 4843), August 2000). This, he said, supports the appellants’ case. The paper stressed that the right to manage does not change the terms of the lease; section 3 paragraph 11 reads:

“11.

Except where specifically provided to the contrary, RTM is not intended to override any aspect of the lease, other than to transfer relevant functions or responsibilities to the managing body. Nor should RTM affect the ownership of any interest in the building. Any long lease in the block will remain an agreement between the leaseholder and the landlord, albeit with the managing body carrying out most of the landlord’s functions.”

At paragraph 68 the paper went on to say:

“The RTM company would be required to carry out the management functions for the premises in accordance with the terms of the leases of the property. That would mean, for example, that where there is a positive requirement to do something under a lease, such as redecoration of common areas once every five years, that would become an obligation upon the company. Similarly, the company would not be able to step outside the terms of the lease – for example, if the lease did not provide for certain expenditure to be recoverable, the company would not be able to recover it from the leaseholder.”

Mr Bates KC acknowledged that the 1987 Act was amended to enable an RTM company to use the provisions of section 35; but it is not intended to be in a different or better position from the landlord.

Section 4.2 of the consultation paper asked a number of questions about possible amendments to the 1987 Act, introduced at paragraph 2 with the words “The management provisions of a lease can frequently be defective in a number of ways” – a further indication, said Mr Bates KC, that the thinking in the Nugee Report is encapsulated in the legislation. It asked some consultation questions about the need to set out more clearly what should or should not constitute “satisfactory provision”, and made a proposal which was enacted as section 35(3A). It also made the following proposal:

“14.

Where leases do not provide for advance payment of service charges, a landlord (or an RTM company) will often have to pay for works in advance and then collect the service charge monies. This will mean that the landlord or the company will be out of pocket and may result in the necessary repair works not being done because of cash flow problems. We therefore intend that where a lease fails to provide for the payment and collection of service charges in advance of works (whether repairs or maintenance) being carried out, that should constitute a ground for variation.”

That proposal did not result in an amendment to the 1987 Act. We do not know why; the consultation responses were not published. But Mr Bates KC argued that fact that the proposal was not enacted indicates that it was not the intention that such variations should be made. The variation made by the FTT was just such a variation and was improper.

In summary, the appellants argue that the lease can be varied only if it is seriously defective, in line with the Nugee Report and contrary to what was said in 56 Westbourne Terrace. In fact the lease is not defective or unsatisfactory; there is nothing unusual about its provisions; indeed, it provides for advance payments and for a reserve fund, although it does not go as far as the respondent would like. The provisions of the lease are a consequence of the bargain the parties made, and of course can cause cash-flow difficulties for some landlords, but the lease is not defective for that reason. The RTM company’s financial circumstances are not relevant in determining whether the lease fails to make satisfactory provision; and that the terms of the Consultation Paper that preceded the 2002 Act support their position. Had Parliament wanted the tribunal to take the landlord’s or an RTM company’s financial circumstances into account it would have said so, but it did not take the opportunity to do so.

For the respondent, Mr Rainey KC agreed that the Nugee Report is admissible, but pointed out that it is quite remote from the legislation itself. It is not a White Paper or a Law Commission report, it has no bill attached, and being published in 1985 was not contemporaneous with the legislation. So it is a weak guide to the construction of the 1987 Act. In any event, in Mr Rainey KC’s view the words “defective” and “unsatisfactory” are used interchangeably in the report, along with “gaps”, “inadequacies”, “ambiguities” and so on.

However, said Mr Rainey KC, if it is the case that “seriously defective” is the test the Nugee Report had in mind, and if that is a higher threshold than “fails to make satisfactory provision”, then the appellants’ argument is doomed to failure; the statutory test is the one to be applied. And while the common law does place a heavy emphasis on the sanctity of the parties’ bargain, the point of the 1987 Act was to get past that emphasis and enable satisfactory provision to be made where the parties’ bargain failed to do so. As the Nugee Report itself said, such statutory intervention is not unprecedented, section 84 of the Law of Property Act 1925 (the power to discharge or modify restrictive covenants) being a conspicuous precedent.

The Nugee Report was written 17 years before the right to manage was enacted. It cannot have been Parliament’s intention in 2002 to create a scheme for leaseholders to acquire the right to manage, only to have the RTM company’s ability to carry out necessary maintenance frustrated by provisions in the lease that will not work for a company that is necessarily (because of the way the statute sets it up) under-capitalised. It has no assets to sell or to offer security for a loan. It cannot sell lease extensions, nor get a windfall from a forfeiture. It simply cannot operate unless it is put in funds.

As to the idea that the lease cannot be found to have made satisfactory provision for years, only to become suddenly unsatisfactory when the identity of the landlord changes, Mr Rainey KC argued that that is to put it the wrong way round. The lease was always unsatisfactory, in that the provision for advance payments was ill-conceived because it was too limited, but that is only revealed when the person responsible for maintenance is an RTM company without resources instead of a landlord who has the means to meet its obligations subject to later reimbursement.

Mr Rainey KC pointed out that the words “clear and workable” in Camden v Morath are not a statutory test. But in any event this lease is not workable in the present circumstances. Decisions about the reasonableness of service charges and dispensation, where the financial circumstances of the parties are irrelevant, are not on point. Other decisions of the Tribunal about section 35 make it very clear that the financial situation of an RTM company is a relevant consideration. The “failure to make satisfactory provision” has to be proved by evidence; there are cases such as Camden v Morath where the arrangement works and there is no evidence of a problem. But if provision is not made for this respondent to be put in funds to do the work the tower will fall down – which is precisely the sort of problem that the 1987 Act was intended to prevent.

As to the 2000 Consultation Paper, it can hardly be a guide to the interpretation of the 1987 Act; and the reference to defective leases in its narrative can tell us nothing about the meaning of “fails to make satisfactory provision.” The reason why the proposal at paragraph 14 of section 4.2 of the paper (see paragraph 60 above) was not enacted may well have been because it was unnecessary; there is nothing to prevent such an amendment being made on the basis of the existing provisions.

In my judgment the Nugee Report did indeed envisage a strict test for the variation of a lease in the absence of unanimity or majority support; the committee felt that such a step should be taken only if the lease was “seriously defective”, and that is quite a strong term. But that is not the test Parliament enacted. The statutory test is whether the lease “fails to make satisfactory provision” for the matters set out in section 35(2)(a) to (f). The Nugee Report cannot be used to read down the statute.

Nor can the Consultation Paper that preceded the 2002 Act be of any assistance in construing a statute enacted 25 years earlier. The reference to “defective” leases in section 4.2 has no significance.

As to the meaning of “fails to make satisfactory provision” I respectfully agree with the Deputy President’s analysis in 56 Westbourne Terrace, and in particular with paragraphs 112 and 113 of that decision, set out at paragraph 20 above.

In the end neither party laid great weight on Camden v Morath; as the Deputy President said in 56 Westbourne Terrace, the Tribunal’s observation in that case should not be regarded as an exhaustive test, nor as a shorthand or a substitute for what the statute says. Camden v Morath was one of a series of cases (including Cleary v Lakeside Developments Ltd [2011] UKUT 264 (LC) and Triplerose Ltd v Stride [2019] UKUT 99 (LC)) where the lease provided for the tenant to make contributions that were in some way unequal to those made by others; there was no evidence that that arrangement was causing any practical problems and therefore it could not be said that it failed to make satisfactory provision. As the Deputy President said in 56 Westbourne Terrace at his paragraph 72, “Unequal contributions are not enough, but other factors, including an absence of alternative sources of funds to enable A to meet its responsibilities, may combine to undermine the workability of a provision and to render unsatisfactory that which was previously satisfactory.”

The provision under consideration in the present appeal, while clear, is certainly not workable for the respondent because it is an RTM company. It is not that it is, as the appellant puts it, inconvenient; it is unworkable because it cannot (the FTT found as a fact) fund the emergency work.

Ground 2 fails. The words of the statute are not the words of the Nugee Report; Parliament chose a different test. And there can be no doubt that there was jurisdiction to amend this lease in accordance with the statutory provision. The reasons for that can be seen when we look at ground 3.

As to ground 3, I agree entirely with the respondent’s arguments. It is a consistent theme of the Tribunal’s decisions that the identity and nature of the person responsible for the maintenance of the property – in particular if it is an RTM company – is a relevant and significant factor in assessing whether a lease fails to make satisfactory provision as required in section 35. And it is indeed the case that a lease that made satisfactory provision for the recovery of expenditure for many years may be found not to do so because of a change of circumstances. The fact that that change was chosen by the persons concerned – for example, an RTM company legitimately acquiring the right to manage – does not make the provision satisfactory.

So in Cleary v Lakeside Developments Ltd [2011] UKUT 264 (LC) the FTT had varied four leases in a block of six to provide for them to contribute towards the cost of employing a managing agent, where two other leases in that block made that provision. The Tribunal (the President, George Bartlett) allowed the appeal from that decision, and said at paragraph 72:

“… there may be circumstances where the financial position of the lessor may make the absence of a lessee's covenant to pay for the cost of management unsatisfactory. This could be the case, for instance, where there was an RTM company with no other source of income. But evidence would be needed to show that there was a particular need in the circumstances of the case."

That was the basis of the Deputy President’s decision in 56 Westbourne Terrace, where the RTM company needed a provision that the landlord had not needed in order to manage the property.

The intention of section 35 is to resolve practical problems and to ensure that maintenance gets done and is paid for; it would be perverse if the fact that the respondent is an RTM company meant that its practical difficulties were irrelevant so that it could not make use of the legislation.

Nothing in the 2000 consultation paper casts doubt on that. And as to the fact that the proposal at paragraph 14 of that section was not enacted, I agree that in all probability it was not enacted because by the time the amendments to the 1987 Act came to be drafted it was appreciated that it was not needed.

In summary, the FTT’s finding cannot be criticised; the restriction of the interim maintenance charge to half the previous year’s expenditure meant that the lease failed to make satisfactory provision for the recovery by the respondent of expenditure to be incurred by it in carrying out the emergency work on the tower for the benefit of the lessees, because it meant that the respondent could not afford to do the work.

Ground 4 arises for consideration only if the other grounds fail, as indeed they have done. This ground is that it was not open to the FTT, on the evidence before it, to find that the leases failed to make satisfactory provision, for three reasons.

The first is that the FTT was wrong to infer at its paragraph 35 that the reason the urgent works to the spire had been delayed was the service charge mechanism, and to rely on that to justify its finding that the provisions of the lease were unsatisfactory. In fact, say the appellants, the landlord was ready and able to do the work, obtained the dispensation from the consultation requirements under section 20ZA of the Landlord and Tenant Act 1985, and would have proceeded had it not been prevented from doing so by the RTM company, which threatened an injunction if the landlord proceeded with the work while the claim to acquire the right to manage was pending. The respondents say that there was no evidence that the landlord was ready to do the work, although it did serve invalid service charge demands seeking the whole cost in advance from the leaseholders. In any event, said Mr Rainey KC, the FTT had no need of evidence as to what could or might have been done; its judgment was based on the lease itself and its unsatisfactory provisions.

In my judgment this ground of appeal cannot succeed. The respondent is now responsible for the emergency works; as discussed above, the lease provisions for the interim maintenance charge are and always were unsatisfactory and the respondent as an RTM company does not have the independent resources to buy its way around those provisions. What the landlord has done or might have done is not relevant to the judgment the FTT correctly made on the basis of the statutory criteria; even if it could have been shown that the landlord as a matter of fact stood ready to do the work, with the resources to do so in its pocket, that would have made no difference to the FTT’s decision.

Second, it is said that the respondent failed to discharge the evidential burden of proving that the existing provisions of the lease were not workable. It said it could not afford to carry out the emergency works but had not shown that that was the case. In particular it had entered into a contract for the works, but no copy was provided; there was no evidence that the respondent could not have found a contractor who would wait for payment, there were no bank statements, there was no evidence that it could not raise finance. Its only evidence was that of MsCarroll, an employee of the respondent’s managing agent; as the FTT explained (in its paragraph 35, set out above at paragraph 25) her evidence was that the respondent could not afford to fund the works; the appellants did not formally challenge that evidence because they had no positive case with which to contradict it, but they made it clear that they did not accept it.

Mr Bates KC pointed to the FTT’s paragraph 34 and suggested that it was for the respondent to show that none of those options was open to it.

I regard this point as unrealistic for two reasons. First, Ms Carroll’s evidence was unchallenged; the appellants did not require her to attend for cross-examination. The fact that the appellants did not agree with it is neither here nor there; they provided no basis on which her evidence could be rejected. It was in any event credible; RTM companies do not have funds beyond what is paid to them in service charges. As we saw above this is well-known: see in particular the dicta of Lord Briggs in FirstPort Services Ltd v Settlers Court RTM Co Ltd [2022] UKSC 1 (set out at paragraph 21 above).

Second, the options set out in the FTT’s paragraph 34 were, as Mr Rainey KC observed, set out in order to show that the respondent had no realistic options. It could not fund the works itself; contractors do not take payment on trust; there is no reason to presume upon the generosity of a minority of leaseholders to fund the works without any certainty of reimbursement; waiting for the reserve fund to build up the funds will take too long.

There is no substance in this second point.

Third, it is argued that if (contrary to the appellant’s submissions) the financial circumstances of the respondent as an RTM company are relevant then so are those of the person with control of the respondent. He is said to be a Mr Hamad Khalifa Abdulla Al-Attiyah, whose wealth it is said could be inferred from his ownership of eight flats in the property and who in any case can be seen by searching the internet to be “an ultra-high net worth individual”. He could have funded the emergency work and the rest of the work could have waited for funds to be raised through the lease as it stands.

For the respondent it is pointed out that in Gianfrancesco v Haughton (2008) the Lands Tribunal (the President, George Bartlett) said:

“Although it is right that the question of satisfactory provision should be determined in all the circumstances, the weight to be given to particular matters may need careful consideration. What the landlord or the tenant says that he is willing to do in addition to his obligations may have some relevance as to how, in practice, the provision in question is likely to operate. But it would normally be wrong, it seems to me, to base a decision on such an expression of willingness since the person in question could change his attitude or be replaced as landlord or tenant by another person differently disposed.”

Accordingly it is said that the financial status of Mr Al-Attiyah is irrelevant, and I agree. It may or may not be the case that an individual member of the respondent could fund the works. There is nothing to require him to do so. There is nothing to require him not to sell his flat and forfeit his membership. The financial status of a member of the respondent company was as irrelevant to the consideration of the respondent’s application as would be the financial status any shareholder of a corporate landlord if it was the landlord who sought a variation.

Accordingly, the three points made on this ground all fail.

The appeal fails on all four grounds and the variation made by the FTT takes effect.