Residential leases can sometimes fail to include effective provisions in relation to the recovery of costs associated in collecting outstanding service charge arrears for RTM companies. The lack of detail in these scenarios can leave RTM companies in a weak position, with limited options when looking to recover outstanding arrears from leaseholders.
A recent case where an RTM company wished to introduce a costs-recovery clause to a residential lease has reached a verdict which may have a substantial impact on RTM companies’ ability to recover costs associated with the collection of service charge arrears from leaseholders. This will also assist their managing agents in ensuring cash flow is there to deliver effective management of the block.
Case Details and Verdict
The RTM company in 56 Westbourne Terrace ([2025] UKUT 88(LC)) applied for the ability to introduce a costs-recovery clause that will enable the RTM company, to recover from a defaulting leaseholder the costs of enforcement action for service charge arrears. Having had their application to the First Tier Tribunal (FTT) refused, the RTM company then applied to the Upper Tribunal (UT).
Whilst the UT confirmed that the FTT has jurisdiction under the Landlord and Tenant Act 1987 (LTA) to vary a lease, they ultimately came to a different verdict to the FTT for this case. The UT did not use the questions of whether the lease was workable in its current form, or whether the proposed variations altered the original contractual agreement between the relevant parties. Instead, the UT reviewed the case whilst considering whether the lease fails to make ‘satisfactory’ provision for the recovery of service charges if it does not provide for an amount to be payable, by interest or otherwise, in respect of a failure to pay the service charge, as is set out within the LTA. Based upon this and the facts provided within the case, the UT agreed to introduce provision for an administrative charge in relation to the reasonable costs of recovering service charge arrears, and for any shortfall to be recovered through the service charge.
First Tier Tribunal Considerations
During the case the UT also set out the approach and considerations the FTT should make in future applications to vary a lease under section 35 of the LTA. These considerations were:
- Firstly, is the applicant entitled to make the application?
Is the applicant a party to a long lease of a flat (more than 21 years), or an RTM Company who can rely on the provisions within the Commonhold and Leasehold Reform Act 2002.
- Is one of the grounds in the s.35 LTA 1987 made out?
Does the lease fail to make satisfactory provision in relation to one of the six matters within s35 of the LTA, which are repairs, insurance, installations, services, recovery of expenditure and computation of service charges.
- Is the variation the FTT is considering likely to prejudice any person, where such compensation could not be compensated by payment of a sum of money?
As set out within s.38(6)(a) of the LTA, substantial prejudice is not a blocker on it’s on for a lease variation, as long as it can be compensated by a monetary award.
- Is there any other reason why it would not be reasonable to make the change in the circumstances?
- Where the proposed change relates to insurance, the FTT will also need to consider the matters set out in the s.38(7) of the LTA. If the application passes these hurdles, the FTT will retain a discretion as to whether to make the variation, although as the UT noted, the obvious conclusion is that the variation should be affected.
Summary
The verdict of this case may have a substantial impact in the leaseholder property sector, and could be welcome news to managing agents and RTM companies who are regularly dealing with leaseholders who are late or not making their service charge payments. When this is the case, relevant parties may consider applying to alter the lease to enable them to recover legal costs associated with outstanding service charge, if the lease does not already permit doing so.
This case also provides significant guidance on the decision-making process involved when considering a lease variation of this type. It is therefore worthwhile any parties considering this approach to make an honest assessment of their scenario against the considerations detailed in this blog, before seeking expert legal support with their application.
