Introduction

A long lease is defined by section 76 Commonhold and Leasehold Reform Act 2002 as including if the lease is granted for a term of years certain exceeding 21 years, whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenant, by re-entry or forfeiture or otherwise, [s.76(2)(a)]. A purchaser of a long lease such as this will normally pay to the freeholder landlord a small amount of ground rent each year and contribute towards maintenance of the building such as decorating and roof repairs (known as “service charges”). In addition, there may be administrative fees due under the lease for dealing with documents, consent for underletting etc. These fees are known as “administration charges”.

Underletting charges by freeholder landlord

Section 19(1) Landlord and Tenant Act 1927 provides as follows:

(1) In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against assigning, under-letting, charging or parting with possession of demised premises or any part thereof without licence or consent, such covenant condition or agreement shall, notwithstanding any express provision to the contrary, be deemed to be subject–

(a) to a proviso to the effect that such licence or consent is not to be unreasonably withheld, but this proviso does not preclude the right of the landlord to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with such licence or consent; …

Therefore, a freeholder landlord may incorporate into a lease a proviso which requires the landlords consent to be obtained should the leaseholder tenant wish to underlet the property. In addition, such a provision may require payment to be made by the tenant. Any consent must not be unreasonably withheld.

Newly erected buildings

Section 19(1)(b) Landlord and Tenant Act 1927 provides that the tenant is not required to obtain consent from the landlord if the lease is for a term greater than forty years, and is made in consideration wholly or partially for the erection, or the substantial improvement, addition or alteration of buildings. As the tenant is not required to obtain consent, no fee may be charged by the landlord.

However, this term does not apply to a lease on a newly built property. This sub-section applies where the lease is in respect of a requirement on a tenant to erect or substantially improve or alter a building.

Under section 19(1)(b) the question in each case is whether the lease was “made in consideration wholly or partially of the erection, or the substantial improvement, addition or alteration of buildings”. The consideration in respect of which the lease was made was the consideration moving from the tenant to the landlord for the grant of the lease. As expressed in the demise, what the tenant gave in Norton and Knight was the premium, in Samnas the premium and the covenants under the lease, and in Flambayor the premium and the rent. What the tenant in each case received for this consideration was the lease, a 125 year term (in Norton a 155-year term) in a building newly erected by the landlord. The fact that the building was newly erected is of no relevance to the application of section 19(1)(b) in these circumstances. What that provision is concerned with, as the written submissions on the part of the appellant point out, is the situation where the tenant is required as the whole or part of the consideration for the lease to erect or substantially improve or add to or alter a building. It would typically be a building lease (defined, it may be noted, in section 205(1)(iii) of the Law of Property Act 1925 as a lease for the purposes of erecting or improving or adding to or repairing a building). The rationale for the provision is that the lessee under the building lease, having carried out the work that formed all or part of the consideration of the lease, should not be inhibited in assigning the lease or creating an underlease. Having created the new or improved building as required by the lease, he should be allowed to assign or underlet without restriction. There would be no reason at all for conferring on a tenant who was not required as part the consideration for the lease to carry out building works carte blanche to underlet simply because the lease was a lease of a new or improved or altered building. [[Paragraph 7 Holding And Management (Solitaire) Ltd v Norton (2012) UKUT 1 (LC)].

Collecting service charges and administration fees

Before a landlord can collect a service charge or administration fee, there are a number of obligations which a freeholder landlord must comply with including the following:

Summary of Rights and Obligations

Section 21B(4) Landlord and Tenant Act 1985 provides that where a demand for service or administration charges is made, such demand must be accompanied by a summary of rights and obligations which is a prescribed form. If a freeholder landlord fails to provide a summary of rights and obligations with any demand for payment, the tenant may withhold payment of the service charge [section 21B(4) Landlord and Tenant Act 1985]. Full information is available on our article – Service Charge, Administration Charge and Ground Rent Demand Notice

Address of the landlord

Section 48 Landlord and Tenant Act 1985 requires a landlord to provide by notice an address in England or Wales at which notices may be served on him by the tenant. Where a landlord fails to provide such an address, any rent or service charge otherwise due from the tenant to the landlord shall be treated for all purposes as not being due from the tenant to the landlord at any time before the landlord does provide such an address.

Once the information is furnished to the tenant, all rent and other sums become due even during the period of non-compliance [Lindsey Trading Properties Inc v Dallhold Estates (UK) Pty Ltd (1995) 70 P. & C.R. 332.]

Section 47 Landlord and Tenant Act 1985 requires that any demand for rent or other sums due under the terms of the tenancy, must contain the name and address of the landlord. This includes therefore if the address is not in England or Wales, the address must nevertheless be provided. If that address is not in England or Wales, then, the landlord must also provide an address in England and Wales at which notices (including notices in proceedings) may be served on the landlord by the tenant [section 47(1)(b)].

The address provided must be the landlords actual address and not the agents address [Beitov Properties Ltd v Elliston Martin [2012] UKUT 133 (LC)] (although presumably the agents address may also be provided as long as it’s clear which is which)

If the demand fails to contain this information, then any part of the amount demanded which consists of a service charge shall be treated for all purposes as not being due from the tenant to the landlord at any time before that information is furnished by the landlord by notice given to the tenant.

As the wording is the same as section 48 for failure to comply, it is respectfully submitted once the information is provided all previous services charges will become due for payment as per Lindsey Trading Properties Inc v Dallhold Estates above.

See this article (coming soon) for more information.

Charges to be “reasonable”

Under paragraph 1(1) of Schedule 11 to the 2002 Act “administration charge” for the purposes of the Schedule is defined as an amount payable by a tenant as part of or in addition to the rent which is payable, directly or indirectly, (inter alia) for or in connection with the grant of approvals under his lease. The charge for consent to the underletting is thus an administration charge, provided that is it reasonable. If it is not reasonable, it would be unreasonable to withhold consent if the charge was not paid; and the charge would not be payable. Under paragraph 1(3) a “variable administration charge” is an administration charge payable by a tenant which is neither specified in his lease nor calculated in accordance with a formula in the lease. If the charge for consent to the underletting is an administration charge it is thus a variable administration charge for the purposes of the Schedule. Paragraph 2 provides that a variable administration charge is payable only to the extent that the amount of the charge is reasonable.

In Holding And Management (Solitaire) Ltd v Norton [2012] UKUT 1 (LC) there were four cases joined together (for short known as “Norton”, “Samnas”, “Flambayor” and “Knight”). The freeholder company was the same throughout.

In “Norton” the respondent holds the subject property for a term of 155 years from 1 December 2004. The Lessee’s covenants included a covenant not to underlet the property without the consent of the Company, such consent not to be unreasonably withheld (paragraph 9(c) of the Third Schedule), and a covenant “To pay all reasonable costs and expenses of the Company (including all solicitor’s and surveyor’s costs and fees) incurred in granting any consent under this Lease” (paragraph 16 of the Third Schedule). The respondent, wishing to underlet the property, sought the consent of the appellant, who sought to charge her a fee of £105 for this (as well as £75 for the preparation of a deed of covenant and £75 for registration of the underletting).

In “Samnas” the respondent holds the subject property for a term of 125 years from 1 January 2006. There is a covenant with the landlord, clause 4.3.2, not to underlet without the landlord’s written consent, such consent not to be unreasonably withheld. Under clause 4.4 the tenant is required within four weeks after any underletting to give notice in writing and deliver to the landlord or its solicitors a certified copy of any instrument of underletting and to pay to the landlord’s solicitors a reasonable fee, not being less than £40, for the registration of any such notice. The respondent, wishing to underlet the property, sought the consent of the appellant, who sought to charge her a fee of £105 for this (as well as £75 for registration of the underletting).

In “Flambayor” the respondent holds the subject property for a term of 125 years from 1 July 2005. There is a covenant, enforceable by the lessor and the management company (paragraph 25.2), not to underlet the demised premises without the prior written consent of the lessor and the management company, such consent not to be unreasonably withheld or delayed. The respondent, wishing to underlet the property, sought the consent of the appellant, who sought to charge her a fee of £135 for this (as well as £75 for registration of the underletting).

In “Knight” the respondent holds the subject property for a term of 125 years from 1 April 1998. Under paragraph 8.2 of Schedule 4 Part II of the lease the tenant covenants with the landlord, the management company and the other tenants or owners of the 39 flats forming part of the estate being developed by the landlord not to underlet the demised premises without the consent in writing of the management company, such consent not to be unreasonably withheld. Under paragraph 8.3 there are notification and other requirements where there is an underletting other than one at a rack rent without charging a premium and for a period not exceeding seven years. The respondent let the property under an assured shorthold tenancy agreement from 28 January 2010 at a rent of £750 per month, and the appellant sought from him a fee of £135 for consent to an underletting and a notice fee of £75.

Section 19(1)(a) provides that the statutory proviso that consent is not to be unreasonably withheld does not preclude the landlord from charging a reasonable sum for his consent and the withholding of consent would not be unreasonable if the lessee refused to pay a reasonable charge for it (see para 9)

The decision on reasonableness of the charges was put on hold whilst the parties provided evidence as to the costs incurred. It is worthy of showing the further decision in full dated 15 February 2012:

Further Decision

  1. I have now received submissions on the reasonableness of the administration charge sought for consent to the underlettings. Submissions have been made on behalf of the landlords in each case and by or on behalf of the respondents Mrs Norton, Dr Rudnay and Mr Hill.
  2. It is pointed out that the £105 sought in Norton and Samnas was for advance consent and the £135 sought in Flambayor and Knight was for consent where no application had been made by the lessee with consent being granted retrospectively. It is said that in each case an application for consent is processed by the appellant’s agents. The procedure adopted is claimed to be extensive: the agents will undertake a perusal of a copy of the under-lease to ensure that the appropriate covenants are contained within it. Once completed, the full details of the under-lease will be entered by the agents in their records and will pas the appropriate information to the property managers, who need a complete current record of the occupants of all the flats.
  3. In each case, it is said, the work comprises: (i) seeking legal advice from in-house lawyers in connection with the drafting of all documents; (ii) perusing each lease and determining the requirements for consent under it; (iii) requesting the proposed tenancy documents, examining them, and ascertaining appropriate requirements; (iv) engaging in correspondence, email communications and dealing with telephone queries; (v) the execution of documents, such as the recording of all information, utilisation of IT infrastructure and lease storage and retrieval. After the grant of consent all documents are scanned onto the appellants’ database. In each case the work involved is undertaken by trained administrators under the supervision of qualified legal staff. It is not possible, when so many applications have to be processed, to set either an hourly rate or a charge out rate. It is estimated, however, that an administrator will spend approximately two hours dealing with the application and the legal department about one
    hour.
  4. Mrs Norton said that she had never contested the fee for the preparation of a deed of covenant and had reached agreement with the appellant prior to the LVT hearing that the fee for registration should be limited to £30 plus VAT. She took issue with the charge for consent, however. All that was necessary to ensure compliance with the covenants in the lease was for the underlessee to enter into a deed of covenant, as required by paragraph 9(d) of the Third Schedule to the lease to observe and perform the covenants and conditions in the lease. The lease specifically precluded the insertion of covenants other than this where the underletting was a shorthold tenancy. There was thus no need for the lease to be perused, nor was there any need for the appellant even to see a copy of the tenancy agreement, since it was sufficient that the deed of covenant had been entered into. For the same reason there was no need for a review of the documentation by the legal department. Mrs Norton suggested that the consent
    aspect of the process, consisting of reviewing the deed of covenant and issuing a consent letter should take between ten and twenty minutes. In its statement of case to the LVT the appellant had suggested a fee of £150 for three hours work. At the same rate the fee for ten or twenty minutes’ work would be £8.33 or £16.67, and even if it was held necessary to review the tenancy agreement, an additional 55 minutes at the appellant’s suggested rate would add £45.83 to the fee.
  5. Dr Rudnay said that under her lease the only obligation was to give notice within four weeks of the underletting. It could not be seriously suggested that the landlord would obtain his own references on a tenant already in occupation under a shorthold tenancy agreement. Her letting agents, Stepping Stones of Banbury were an experienced firm of repute and integrity, who introduced the tenant, obtained references and managed the necessary finances. The landlord had no advance knowledge of the tenant’s identity or the agreed terms. There could be no purpose, nor any benefit to the landlord, in carrying out an expert’s scrutiny of a familiar standard form assured tenancy agreement drafted by lawyers for a reputable agent. In the circumstances of her lease her estimate of the justifiable administration costs for such a tenancy was just over £50 excluding VAT.
  6. Mr Hill said that in his original correspondence with Flambayor he made an offer of £40 for the granting of consent, but this was declined. The way in which payment was sought for the granting of consent was inequitable. The lease, whilst stating that consent must be obtained, set out no criteria for the type of tenant that would be acceptable, and the consent was a mere formality.
  7. The appellants seek to justify the consent fee in terms that apply to all consents, and they do so by setting out (see paragraph 13 above) a list of work that, it is claimed, their agents do. It looks to me to be a list of all the things that could conceivably be done in connection with the grant of consent rather than the things that would need to be done in a typical case or that were in fact done in the cases under consideration. I agree with Mrs Norton that in relation to
    her shorthold tenancy agreement there was no need for the lease to be perused and that, in view of the covenant, there was no need for the tenancy agreement to be examined or for the documentation to be reviewed by the legal department. I am wholly unpersuaded by the appellant’s assertion that it would have been necessary for an administrator to spend approximately two hours dealing with the application and the legal department about one hour.
    In the absence of any information on the part of the appellant as to what was actually done, by 10 whom and how long it took, I am not satisfied that a fee of £105 for the grant of consent in addition to fees for the covenant was justified or that consent could reasonably have been refused in the event that Mrs Norton had refused to pay it. The same goes in relation to Dr Rudnay. Doing the best I can on what is before me, I conclude that a fee greater than £40 plus VAT could not be justified, and I determine that this amount is payable. In relation to the other two cases a fee of £135 was sought – higher than the £105 because, it was said, the consent was a retrospective one. The appellants have done nothing to show that in these two cases extra costs were incurred. I therefore determine that the amount payable in each case is £40 plus VAT. 

Retrospective Consent

In a case where the tenant had sub-let for a period of time without consent, it was held that a charge of £165.00 was reasonable [Freehold Managers (Nominees) Ltd v Piatti [2012] UKUT 241 (LC)]

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