Question 1

Deed of Variation

Accepted Answer

Q: My wife and I are freeholders of a block of nine flats of which we have sold four flats to long leaseholders and rented out the other four flats. I wanted to have a Deed of Variation to allow the long leaseholders to sublet their flats without the restriction of only being allowed to sublet their flats for two years out of three years according to their present leases, and also to amend the necessity of having an audit unless specifically required. I had a Deed of Variation prepared which I have attached for you to see which was signed by only one long leaseholder, but I was unable to get agreement with the other three. I would welcome your advice whether you think that the terms can be deemed reasonable or whether I should make some changes to accommodate them particularly with clause 3(iii) which I think it is because it would be more onerous for them to comply. I will mention that originally all of the flats were let to owner-occupiers but when they sold their flats it was to people who purchased for investment purposes only and therefore none of them live in the building. Because we both live in the building ourselves and we always professionally reference our own tenants, we would like the long leaseholders to do the same as we have had bad experiences with their tenants in the past and therefore we want to have some involvement before they accept any new tenants. This seems to worry our long leaseholders so can you advise us how to approach this in our new Deed of Variation to keep us all happy? FPRA Hon Consultant Nikki Carr replies: Although you haven't specifically asked how to 'force' a variation, reading between the lines it seems to me that you are seeking advice about how to get to that point if you cannot persuade the long-leaseholders to sign the variation you want. I have set out below the powers of the First Tier Tribunal - Property Chamber in the hope it assists you in your ongoing negotiations. My short advice is that, because the variation is not one that is necessary for the leases to 'work', and not one for which you have majority support, you will need to negotiate and make concessions to get to an agreeable point for everyone. I set out some thoughts on this in the final paragraphs below. There are two relevant ways in which the First Tier Tribunal can intervene to 'force' a lease variation. The first is pursuant to section 35 Landlord & Tenant Act 1987 'for cause'. In would be invoked where the lease fails to make satisfactory provision so that a variation is necessary to make the lease 'work'. Whether a lease fails to make satisfactory provision is a question for the Tribunal to judge in all the circumstances of the case. Those circumstances include the nature of the landlord, i.e. where the landlord is a lessee-owned company, a lease which fails to make provision for the recovery of management fees may be unsatisfactory, although the same may not be true of a large commercial landlord. A lease does not fail to make satisfactory provision simply because it could have been better or more explicitly drafted. Nor is it necessarily unsatisfactory if the problem can be remedied by implying a term. Further, there is no rule that a lease is unsatisfactory simply because not all leaseholders are required to contribute to certain costs, particularly if that is the result of the different contractual bargains. Given the variation you seek is not to make the lease 'work' per se, but rather to make it more convenient, I am of the view that the FTT would not be able to assist on this front. The second section that the FTT could be asked to use is section 37 of the same Act. In cases where one lease is defective it will be very common for most or all the other leases of flats also to be defective. In such a case an application for variation of some or all of the relevant leases may be made if, as defined below, a sufficient proportion of the parties to the lease agree. Such an application may be made by the landlord or any of the tenants under the lease. An application may only be made in respect of two or more leases. All the leases must be made with the same landlord though they need not all be in the same building nor need the leases be in identical terms. An application under s.37 is not restricted to the grounds set out in s.35. An application may only be made if it is supported by a minimum number of parties to the various leases involved. Where there are fewer than nine dwellings then all, or all but one, of the parties must agree to the proposed variation. Where there are nine or more dwellings, at least 75 per cent of the parties must consent and no more than 10 per cent may oppose the application. The requisite numbers must be established when the application is made to the Tribunal. Whether a person was opposed to the application when it was issued is an issue which can be determined objectively by the Tribunal. There is no prescribed procedure or method for determining whether someone is opposed. Where someone is a party to more than one lease he or she counts as more than one party. Joint tenants of a lease count as one party. An application may only be made if the object to be achieved by the variation cannot be satisfactorily achieved unless all the leases are varied to the same effect. It follows that the applicant must identify the object or objects sought to be achieved by the variations and lead evidence which will enable the Tribunal to make a finding on that point. Having identified the object or objects, the Tribunal must consider whether it can be achieved without varying all the leases. This is a mixed question of fact and law. The Tribunal must decide whether the proposed variation would achieve the identified object and, if so, whether the leases need to be varied to achieve the same. The Tribunal must not lose sight of the fact, that the jurisdiction is narrow and is not intended to allow a rewriting of the lease merely because that is the will of the majority. The first problem I anticipate in your case is that the lease is not per se defective. The FTT is reluctant to intervene simply because the lease could have been drafted better or more favourably. It stands on the principle that the parties were free to agree to the terms they chose, no matter how unfavourable. Secondly, as the premises consist of nine flats, 75 per cent/under 10 per cent means eight out of nine parties would have to agree. Arguably, this is narrowed further since the long leases are granted in respect of only four of the flats, so all parties would have to agree. Absent agreement, therefore, an application would not get off the ground, and consideration of the reasonableness of the variations themselves would be otiose. It is therefore my advice that you explore ways of engaging the remaining three long leaseholders in a negotiation or mediation over the terms. Initially by letter, you should set out what you wish to achieve and why - particularly emphasising the positives for them - and invite a meeting between the parties for them to explain objections. I have no doubt that sitting down sensibly to talk these issues through will at least narrow the objections. It may be that you are in a position to offer some consideration for the less favourable terms as an incentive. I accept of course that with non-resident landlords, some of whom may well be companies, there is very little incentive for them to agree to terms that would make their own management of the leases more onerous, which is why I suggest some form of compensation. Your suggestion of making some accommodations to them is very sensible. If this did get as far as the FTT and you could get it past the first stage by majority, compensation in money for prejudicial terms is something that the FTT would have to consider. I think it is too early, at this stage, to offer advice on specific clauses not knowing, other than my assumptions above, what the particular objections above are. I suggest as a start engaging in the process above, and thereafter re-contacting the FPRA if negotiations come to a halt. At this very early stage, I advise that the present prospects of achieving what you want through FTT proceedings are slim, but these prospects might improve once the issues are narrowed. Question submitted June 2018

Question 2

Deed of Variation

Accepted Answer

Q: My wife and I are freeholders of a block of nine flats of which we have sold four flats to long leaseholders and rented out the other four flats. I wanted to have a Deed of Variation to allow the long leaseholders to sublet their flats without the restriction of only being allowed to sublet their flats for two years out of three years according to their present leases, and also to amend the necessity of having an audit unless specifically required. I had a Deed of Variation prepared which I have attached for you to see which was signed by only one long leaseholder, but I was unable to get agreement with the other three. I would welcome your advice whether you think that the terms can be deemed reasonable or whether I should make some changes to accommodate them particularly with clause 3(iii) which I think it is because it would be more onerous for them to comply. I will mention that originally all of the flats were let to owner-occupiers but when they sold their flats it was to people who purchased for investment purposes only and therefore none of them live in the building. Because we both live in the building ourselves and we always professionally reference our own tenants, we would like the long leaseholders to do the same as we have had bad experiences with their tenants in the past and therefore we want to have some involvement before they accept any new tenants. This seems to worry our long leaseholders so can you advise us how to approach this in our new Deed of Variation to keep us all happy? FPRA Hon Consultant Nikki Carr replies: Although you haven't specifically asked how to 'force' a variation, reading between the lines it seems to me that you are seeking advice about how to get to that point if you cannot persuade the long-leaseholders to sign the variation you want. I have set out below the powers of the First Tier Tribunal - Property Chamber in the hope it assists you in your ongoing negotiations. My short advice is that, because the variation is not one that is necessary for the leases to 'work', and not one for which you have majority support, you will need to negotiate and make concessions to get to an agreeable point for everyone. I set out some thoughts on this in the final paragraphs below. There are two relevant ways in which the First Tier Tribunal can intervene to 'force' a lease variation. The first is pursuant to section 35 Landlord & Tenant Act 1987 'for cause'. In would be invoked where the lease fails to make satisfactory provision so that a variation is necessary to make the lease 'work'. Whether a lease fails to make satisfactory provision is a question for the Tribunal to judge in all the circumstances of the case. Those circumstances include the nature of the landlord, i.e. where the landlord is a lessee-owned company, a lease which fails to make provision for the recovery of management fees may be unsatisfactory, although the same may not be true of a large commercial landlord. A lease does not fail to make satisfactory provision simply because it could have been better or more explicitly drafted. Nor is it necessarily unsatisfactory if the problem can be remedied by implying a term. Further, there is no rule that a lease is unsatisfactory simply because not all leaseholders are required to contribute to certain costs, particularly if that is the result of the different contractual bargains. Given the variation you seek is not to make the lease 'work' per se, but rather to make it more convenient, I am of the view that the FTT would not be able to assist on this front. The second section that the FTT could be asked to use is section 37 of the same Act. In cases where one lease is defective it will be very common for most or all the other leases of flats also to be defective. In such a case an application for variation of some or all of the relevant leases may be made if, as defined below, a sufficient proportion of the parties to the lease agree. Such an application may be made by the landlord or any of the tenants under the lease. An application may only be made in respect of two or more leases. All the leases must be made with the same landlord though they need not all be in the same building nor need the leases be in identical terms. An application under s.37 is not restricted to the grounds set out in s.35. An application may only be made if it is supported by a minimum number of parties to the various leases involved. Where there are fewer than nine dwellings then all, or all but one, of the parties must agree to the proposed variation. Where there are nine or more dwellings, at least 75 per cent of the parties must consent and no more than 10 per cent may oppose the application. The requisite numbers must be established when the application is made to the Tribunal. Whether a person was opposed to the application when it was issued is an issue which can be determined objectively by the Tribunal. There is no prescribed procedure or method for determining whether someone is opposed. Where someone is a party to more than one lease he or she counts as more than one party. Joint tenants of a lease count as one party. An application may only be made if the object to be achieved by the variation cannot be satisfactorily achieved unless all the leases are varied to the same effect. It follows that the applicant must identify the object or objects sought to be achieved by the variations and lead evidence which will enable the Tribunal to make a finding on that point. Having identified the object or objects, the Tribunal must consider whether it can be achieved without varying all the leases. This is a mixed question of fact and law. The Tribunal must decide whether the proposed variation would achieve the identified object and, if so, whether the leases need to be varied to achieve the same. The Tribunal must not lose sight of the fact, that the jurisdiction is narrow and is not intended to allow a rewriting of the lease merely because that is the will of the majority. The first problem I anticipate in your case is that the lease is not per se defective. The FTT is reluctant to intervene simply because the lease could have been drafted better or more favourably. It stands on the principle that the parties were free to agree to the terms they chose, no matter how unfavourable. Secondly, as the premises consist of nine flats, 75 per cent/under 10 per cent means eight out of nine parties would have to agree. Arguably, this is narrowed further since the long leases are granted in respect of only four of the flats, so all parties would have to agree. Absent agreement, therefore, an application would not get off the ground, and consideration of the reasonableness of the variations themselves would be otiose. It is therefore my advice that you explore ways of engaging the remaining three long leaseholders in a negotiation or mediation over the terms. Initially by letter, you should set out what you wish to achieve and why - particularly emphasising the positives for them - and invite a meeting between the parties for them to explain objections. I have no doubt that sitting down sensibly to talk these issues through will at least narrow the objections. It may be that you are in a position to offer some consideration for the less favourable terms as an incentive. I accept of course that with non-resident landlords, some of whom may well be companies, there is very little incentive for them to agree to terms that would make their own management of the leases more onerous, which is why I suggest some form of compensation. Your suggestion of making some accommodations to them is very sensible. If this did get as far as the FTT and you could get it past the first stage by majority, compensation in money for prejudicial terms is something that the FTT would have to consider. I think it is too early, at this stage, to offer advice on specific clauses not knowing, other than my assumptions above, what the particular objections above are. I suggest as a start engaging in the process above, and thereafter re-contacting the FPRA if negotiations come to a halt. At this very early stage, I advise that the present prospects of achieving what you want through FTT proceedings are slim, but these prospects might improve once the issues are narrowed. Question submitted June 2018

Deed of Variation

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