LAW AND LEASE A barrister's blog about residential service charges

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1 Proxima GR Properties Ltd -v- Dr Thomas D McGhee [2014] UKUT 0059 (LC) The Upper Tribunal has tackled some thorny issues this year. This is another such. It finds Martin Rodger QC in reflective mood at the outset as he ponders: How much is it reasonable for a tenant to be asked to pay for consent to underlet a leasehold flat? What is the consequence of a request for an unreasonable sum? Is there any statutory restriction on the fee which a landlord may charge for registering an underlease? It also finds him handing out a freebie answer to the question Is a registration fee a variable administration charge?. The issue is not integral to his decision, but it is always helpful to have his input. Sub-letting: a circumscribed freedom I begin with some general propositions. At common law, the only restrictions on a party assigning or sub-letting a property and the amounts chargeable for either are those contained in the lease. Parliament has had its say in this area however, by way of: Section 19(1) of the Landlord and Tenant Act 1927, and Sections 1 and 3 of the Landlord and Tenant Act Further, section 158 of and Schedule 11 to the Commonhold and Leasehold Reform Act 2002 limits the fee recoverable by the landlord to one which is reasonable. Paragraph 5 of Schedule 11 to the 2002 Act allows for applications to the FTT for a determination of the amount payable, amongst other things.

2 The lease Dr McGhee was the long lessee of a flat in London, E16. Two covenants in the lease gave rise to the dispute. 1. The lessee covenanted Not at any time during the term: [To] underlet the demised premises without the prior written consent of the Manager or its agents (such consent not to be unreasonably withheld or delayed) provided always that such underletting shall be by means of an assured shorthold tenancy agreement or any other form of agreement which does not create any rights of tenancy for the tenant after the term of any such agreement shall have expired. 2. The lessee also promised: To give written notice within 28 days to the Manager (or its agents) of any assignment, transfer, mortgage charge, grant of probate or letters of administration, order of court or other matter disposing of or affecting the demised premises or devolution of, or transfer of title to the same with a certified copy of the instrument effecting any such dealing and also to pay or cause to be paid at the same time to the Manager such reasonable fee appropriate at the time of registration in respect of any such dealing provided always that in the case of a contemporaneous transfer and mortgage the fee shall only be payable on one of such matters. The cost of consent Dr McGhee let out his flat the first time he did so, he did not obtain the consent of Estates and Management Ltd ( E&M ), the managing agents for the block. When this came to the notice of E&M, they informed him of their charges: 95 for a retrospective standard consent under the first covenant, or A flat 330 for consent to subletting for five years, plus A further 95 for dealing with the written notice referred to in the second covenant. Dr McGhee sent E&M a cheque for 95 half the amount sought. He then applied to the LVT under Schedule 11 of the 2002 Act. The LVT s decision The registration fee The LVT determined that it had no jurisdiction to determine the amount of the registration fee, because such fees were not covered by paragraph 1 of Schedule 11 to the 2002 Act.

3 Fee for consent to subletting The LVT determined that no fee was payable for the grant of consent to sub-letting because the lease did not provide for a fee to be payable. It held that section 19(1)(a) of the 1927 Act was only engaged where the lease provided for a fee to be payable. Section 20C The LVT made a section 20C order. The questions on the appeal 1. Did the landlord have a contractual entitlement to request a fee for considering applications for consent to sublet? 2. Was the sum of 95 which Proxima sought to charge a reasonable charge? 3. Was the LVT s order under section 20C one which it was entitled to make? These questions related only to the grant of consent: there was no appeal against the LVT s decision that it had no jurisdiction to determine the amount of the registration fee. Nonetheless, said Martin Rodger QC, as the issue recurs with some regularity I take the opportunity to record that I agree with the conclusion of the LVT, for the reasons it gave. I will briefly explain those reasons in my own words. Registration fees Paragraph 1(1) of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 contains the following: (1) administration charge means an amount payable by a tenant of a dwelling as part of or in addition to the rent which is payable, directly or indirectly (a) for or in connection with the grant of approvals under his lease, or applications for such approvals, (b) for or in connection with the provision of information or documents by or on behalf of the landlord or a person who is party to his lease otherwise than as landlord or tenant, (c) in respect of a failure by the tenant to make a payment by the due date to the landlord or a person who is party to his lease otherwise than as landlord or tenant, or (d) in connection with a breach (or alleged breach) of a covenant or condition in his lease.

4 To Martin Rodger QC s mind, a sum payable as a fee for registering a document did not fall within any of these categories because: The lessee s written notice was not a request for an approval; E&M s charge was not a charge for the grant of an approval; Nor was it a charge levied in connection with an application for an approval. This view coincided with the opinions contained in the leading text books: Commercial and Residential Service Charges, Rosenthal & others (2013), paragraph 29-54, and Service Charges and Management, Tanfield Chambers, 3 rd ed., (2013), paragraph Did the landlord have a contractual entitlement to request a fee for considering applications for consent to sublet? What if consent is not obtained? The lessee was obliged to obtain the landlord s consent in writing to sub-letting. If he did not: He was in breach of covenant; His lease was liable to be forfeit; Proxima had not sought to forfeit, but that did not affect the existence of the breach. The role of section 19(1)(a) of the 1927 Act The LVT decided that section 19(1)(a) did not assist [Proxima] because the lease did not specifically refer to payment of a fee. In my judgment the LVT was mistaken in its understanding held Martin Rodger QC. Here is his reasoning: The covenant did not refer to paying a fee for the granting of consent to subletting; But it related to the lessee refraining from subletting without consent; It did not relate to the making of a payment; Where consent to sub-let was sought, the landlord was entitled to impose conditions; The conditions must be reasonable, because otherwise the landlord would be unreasonably withholding consent. Section 1(4) of the Landlord and Tenant Act 1988 provides that imposing an unreasonable condition is a breach of statutory duty; Section 19(1) of the 1927 Act applies in all leases which contain a covenant against sub-letting without licence or consent; The lease echoes section 19(1) in that it provides that consent is not to be unreasonably withheld; The 1927 Act is clear that the proviso that consent is not to be unreasonably withheld allows the landlord to require payment of a reasonable sum in respect of legal and other expenses incurred in connection with a consent.

5 In other words, a landlord will not be taken to have withheld consent to a subletting unreasonably if that consent is made conditional on the payment by the tenant of a reasonable sum to cover the landlord s legal or other expenses. Martin Rodger QC then turned to Holding and Management (Solitaire) Ltd v Norton [2012] UKUT 1 a decision of the former President of the Upper Tribunal, George Bartlett QC on the effect of section 19(1)(a). At paragraph 9, he held that: whilst [section 19(1)] clearly does have [the] effect [of preserving any right conferred by the lease to make a charge] it is not in my judgment restricted in this way. For the reasons given in the previous paragraph the withholding of consent would not be unreasonable if the lessee refused to pay a reasonable charge for it, and section 19(1)(a) make clear that such a charge is not precluded. In the hope, I imagine, that further explanation would save further appeals on the same point, Martin Rodger QC then approached the question from a slightly different angle. Reasonable conditions A reasonable condition for the granting of consent does not constitute an additional obligation on the lessee; If the lessee decides not to comply with the condition, the landlord cannot compel the lessee to do so, whether or not the lesse subsequently sublets; If the lessee does not comply with the condition but equally does not sublet, the condition simply falls away; If the lessee does not comply with the condition but does sublet, s/he is in breach of covenant. The landlord still does not have any power to compel compliance with the condition. Unreasonable conditions The need to obtain consent is subject to the proviso that consent will not be unreasonably withheld; An unreasonable condition for the grant of consent to sub-let releases the lessee from the obligation to obtain consent; The lessee can therefore sub-let without the landlord s approval; Treloar v Bigge (1884) L.R. 9 Ex.151, and F.W. Woolworth & Co. v Lambert [1937] Ch 37 support that reasoning.

6 Was the 95 which Proxima sought to charge a reasonable charge? The 95 in question is the 95 charged for the grant of consent not the 95 registration fee. The variable administration charge By virtue of paragraph 1(1) of Schedule 11 to the 2002 Act, a charge is an administration charge if it is an amount payable in addition to the rent connection with the grant of an approval under the lease. Pursuant to paragraph 3 of the same Schedule, a charge is a variable administration charge if it is an administration charge payable by a tenant which is neither o specified in his lease, nor o calculated in accordance with a formula specified in his lease. Paragraph 2 provides that a variable administration charge is payable only to the extent that the amount is reasonable. Martin Rodger QC held that the charge for the granting of consent was a variable administration charge. This was not however a case where the Upper Tribunal or indeed the FTT was in a position to substitute its own assessment of what was a reasonable charge if it held that the amount demanded by the landlord was unreasonable. In what for me was rather a light-bulb moment, Martin Rodger QC said: As I have already explained, if a landlord makes the grant of consent to an underletting conditional on the payment of an unreasonable sum, the result is that the tenant ceases to be under an obligation to obtain the landlord s consent to the particular underletting at all. Although paragraph 5(1) of Schedule 11 to the 2002 Act confers jurisdiction on the First-tier tribunal to decide what a reasonable sum would be, that does not alter the contractual position in the event that an unreasonable sum has already been requested. It is not a matter of the landlord being entitled to whatever sum is found by the tribunal to be reasonable, because the covenant on which the landlord s entitlement to ask for any sum will no longer bind the tenant in relation to the current request. It is therefore important to determine whether the sum the appellant requested in this case was reasonable or not.

7 The evidence There are decisions at both Upper Tribunal and LVT/FTT level as to the reasonable amount which a landlord is entitled to charge for the granting of consent to sublet. Martin Rodger QC drew from those decisions one point, that being that each application for consent should be considered on a case by case basis, to ensure that an inflated or unreasonable fee [is] not charged for unobjectionable application. Proxima s evidence disclosed that it effectively applied the same standard fee of 95 per grant of consent, irrespective of the amount of work involved. A correction Section 1(6)(b) of the 1988 Act places squarely on the landlord the burden of proving that a condition for the granting of consent is reasonable. In the context of the evidence required to persuade the Tribunal of the reasonableness of consent fees, Martin Rodger QC ahem, corrected the former President s decision in Bradmoss Ltd [2012] UKUT 3 (LC). In Bradmoss, two hours administrative and one hour s legal work were said to be required to process an application for consent. In that context, a fee of 135 was claimed. George Bartlett QC, the former President, held that there was insufficient evidence to justify a 135 fee, and that a fee of 40 should stand in its place. I would respectfully suggest, said Martin Rodger QC, that, an unreasonable fee having been demanded, the tenant had become entitled to underlet without the need to obtain the landlord s consent at all and therefore without the need for the payment of any fee. The purpose of the covenant A covenant against sub-letting has as its purpose to prevent the landlord finding his/her property occupied, in Martin Rodger QC s words, in an undesirable way or by an undesirable tenant. He invoked high authority in support of this proposition: the Court of Appeal in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 and Ashworth Fraser Ltd v Gloucester City Council [2001] 1 WLR The covenant was not therefore designed to provide a profit stream to the landlord, and should not be applied in that way. The only expenses which the landlord was enttled to recover were the legal and administrative expenses of considering whether to grant consent.

8 Clearing arrears as a condition of consent Martin Rodger QC did not consider it reasonable, when considering an application for permission to sublet as opposed to an application to assign to incur cost in ascertaining the state of the lessee s rent and service charge account. This was because where a lessee is assigning the lease, it is reasonable to grant consent on condition that rent and service charge arrears be cleared, because if the assignment goes ahead, the lessee will no longer be in a landlord/lessee relationship with the landlord. Where consent to sublet is sought, the relationship between lessee and landlord is unchanged if consent is granted and the property is sublet. Second and subsequent sublettings Moving on to renewal tenancies, Martin Rodger QC was clear that he could not envisage a circumstance in which anything other than a modest fee should be charged where an application was made for consent to let the same property to the same tenant on the same terms. He then made what I think is technically a clanger. He observed that: where a tenant is simply permitted to remain in occupation following the expiry of an assured shorthold tenancy, without the grant of a new tenancy, no new underletting would be involved, there would be no need to seek the consent of the landlord and no occasion for any fee to be charged. I will explain why in my observations. The global licence Amongst the options available to Dr McGhee was the payment of 330 for a global licence to sublet for five years without needing to apply for the landlord s consent. Martin Rodger QC invested this fee with a rather different character to the 95 fee for sublettings on a case-by-case basis. The 330 fee was, to his mind, a sum payable by a lessee in order to be released, for five years, from the covenant to seek the landlord s consent. As a release fee, the 330 was not subject to section 19(1) of the 1927 Act, nor the 1988 Act. He was inscrutable on the question of whether it constituted a variable administration fee: it was a question to which the answer was not obvious, and I say nothing about it.

9 The reasonableness of E&M s fee 95 was a fee higher than Martin Rodger QC considered reasonable for the two tasks which a landlord would need to carry out on receipt of a routine application for consent, they being: To check that the terms of the proposed subletting are in accordance with the terms of the lessee s lease, and To issue a written consent to the subletting. The suggestions in the [landlord s] evidence that the average application consumes six hours and requires the involvement of lawyers strike me as fanciful, he hurrumphed. He noted however that LVT panels had determined that higher fees were reasonable and emphasised that he did not question the reasonableness of those higher figures in some cases. Turning finally to the fee claimed of Dr McGhee, which accounted for: A retrospective consent, and A request from the lessee to explain the fee, Martin Rodger QC declared himself satisfied that Dr McGhee s application to E&M was not routine, and that the 95 demanded was, in those circumstances, a reasonable fee. The section 20C decision The LVT made a section 20C order on the basis that the fee was not recoverable under the lease. Having reversed the LVT s decision that point, Martin Rodger QC reversed the LVT s section 20C order and declined to make a section 20C order on the appeal. Observations Readers who are long in the Law and Lease tooth may have a distinct impressionion of having been here before. We have, in Freehold Managers Nominees Ltd v Martina Piatti, Polo Piatti [2012] UKUT 231 (LC). In this case however, Martin Rodger QC looks at the question in more detail which is why this post is considerably longer than Freehold Managers Nominees Ltd.

10 It is also true that my posts have grown in length over the past two years. I excuse its length by relying on the anecdote which does the rounds of the Bar, in which Counsel s opening words to the court are: Your Honour, I trust that you have received my skeleton argument. I must apologise: I did not have time to make it shorter. That said, a nutshell knowledge of a case is just that a shell without the reasoning. Beware! Many are the cases where a lessee feels that the landlord is charging an unfair fee for granting an approval. A decision not to pay the fee but to press on can have significant consequences. If a landlord decides to instigate forfeiture action, the legal costs, if it is determined that the fee was not unreasonable, can spiral. For the lessee, a cautious and enquiring approach is in all probability therefore advisable before taking action which may constitute a breach of covenant. For the landlord, written records of work done, time spent and the hourly rate charged will give credibility to a fee which may at first glance appear high. The technical clanger I took my courage in both hands in suggesting that Martin Rodger QC made a technical clanger when he made the following observation: where a tenant is simply permitted to remain in occupation following the expiry of an assured shorthold tenancy, without the grant of a new tenancy, no new underletting would be involved, there would be no need to seek the consent of the landlord and no occasion for any fee to be charged. Those familiar with claims for possession of assured shorthold tenancies following service of a notice pursuant to section 21 of the Housing Act 1988 will be painfully familiar with the Court of Appeal s judgment in Superstrike Ltd v Rodrigues [2013] EWCA Civ 669. In very short summary, Superstrike Ltd granted a lease to Mr Rodrigues in January 2007 for a fixed term of one year. In April 2007, the tenancy deposit scheme in the Housing Act 2004 came into force: it required landlords to protect deposits paid by tenants of assured shorthold tenancies. Mr Rodrigues s fixed term came to an end in January By virtue of section 5 of the Housing Act 1988, a periodic tenancy came into being.

11 The problem for Superstrike Ltd was that arising of a new tenancy imposed on it the obligation to protect Mr Rodrigues s deposit by virtue of section 213 of the Housing Act It did not. It was accordingly not entitled to serve a notice under section 21 of the Housing Act 1988, nor, plainly, to seek a possession order on the back of it. Technically therefore, I am not certain that Martin Rodger QC was correct to say that a tenant remains in occupation without the grant of a new tenancy after the expiry of the fixed term. That said, it strikes me that it would be difficult for a landlord to justify a fee for approving the new tenancy if, on the ground, there was no real change in the parties relationships?