Freehold Managers (Nominees) Ltd v (1) Martina Piatti, (2) Polo Piatti [2012] UKUT 241 (LC)

The lease of the flat in this case included the following covenants:

“(17) Not to transfer assign underlet or part with possession of the demised premises or any part thereof without the written consent of the lessor such consent however not to be unreasonably withheld in the case of a respectable and responsible person.

“(18) That the lessee will within three calendar months next after any absolute transfer assignment charge or devolution or his interest under this present lease in the demised premises or any part thereof give notice in writing of such transfer assignment charge or devolution to the lessor or its Solicitor and produce to him the instrument of such transfer assignment charge or devolution and pay to him the fee of three pounds fifteen pence for the registration of such notice.”

The Piattis bought the flat in question as a buy-to-let investment, and, at the material time, had let it on a series of assured shorthold tenancies. The landlord, (some three years after) discovering the sub-letting, wrote to the Piattis enclosing an application form and leaflet of sub-letting guidelines: it was content to consider an application for permission to sublet, but required payment before doing so. A two tier package of consents was offered, at a cost of either £400 or £260, which included a £95 registration fee.

The Piattis duly completed the application form and sent payment – of £3.50, which was the amount that they considered to be payable under the lease. The landlord declined to grant the consent, and an application was made to the LVT under Schedule 11 to the Commonhold and Leasehold Reform Act 2002.

Paragraph 5 of Schedule 11 is couched in similar terms to s.27A of the Landlord and Tenant Act 1985, but applies to variable administration charges rather than service charges. Variable administration charges are defined in paragraph 1 of Part I of Schedule 11 to the 2002 Act. They are payable only to the extent that they are reasonable: the test as to their payability is therefore different to the test as regards service charges, where costs must be reasonably incurred and reasonable in amount (see s.19 of the 1985 Act).

It was common ground in this case that, if the landlord was entitled to charge for its consent to sub-letting, that charge fell within the meaning of variable administration charge.

Having considered the lease and s.19 of the Landlord and Tenant Act 1927, the LVT concluded that section 19(1) of the 1927 Act did not create a right to charge a fee where one did not exist in the lease and, accordingly, the landlord was not entitled to require payment by the Piattis.

Section 19(1)(a) of the Landlord and Tenant Act 1925 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 with/out 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.”

The landlord appealed, arguing that it was entitled to charge for the grant of consent.

HHJ Huskinson allowed the appeal, and held that the landlord was entitled to charge a reasonable amount for the costs incurred by it in consenting to the subletting. He cited Holding and Management (Solitaire) Limited v Norton [2012] UKUT 1 (LC) (which was also applied in paragraph 6 of the President’s decision in Bradmoss v Stubbs [2012] UKUT 3 (LC)):

a)      It is not right to say that section 19(1)(a) confers on the landlord the right to make a charge: the proviso (that consent is not to be unreasonably withheld) does not prevent the landlord from requiring payment of a reasonable sum in respect of any legal or other expenses incurred in connection with such consent;

b)      It is correct that the effect of s.19(1)(a) is to preserve any right conferred by the lease to make a charge, but s.19(1)(a) is not limited only to situations where the lease expressly confers a right to make a charge;

c)      Where a lease entitles the landlord to withhold his consent to an underletting, provided that he does not do so unreasonably, if it is not unreasonable for the landlord to seek a payment for the costs that it incurs in consenting to such an underletting, it will not be unreasonable for it to withhold consent if such payment is not made.

The Piattis’ liability to pay having been resolved, HHJ Huskinson then considered the reasonableness of the sum sought by the landlord. He made some helpful observations, which, although factually applicable only to the Piattis’ case, evidenced his view that charges for consents to sub-lettings should be reflective of the work involved:

a)      Where all that is being sought is permission to grant a further sub tenancy on effectively the same terms to X, a reasonable administration charge for the grant of such a consent would in a normal case be much less than £165, which was the amount which the landlord was seeking in this case, having removed the registration fee of £95 from its £260 starting point;

b)      A fee of £35 might be reasonable for consent to a renewal of the tenancy, i.e. the £130 mentioned in the landlord’s sub-letting guidelines as the fee for annual renewals (including notice of registration fee) with the registration fee element of £95 being deducted: under the lease, the charge for registration was fixed at £3.15;

c)      However, a lessee might seek to argue that a smaller amount should be payable, and a lessor a higher amount, because there had been some particular matter that had had to be considered in relation to the proposed renewal, for example a history of complaints requiring consideration whether the existing subtenant remained a respectable and responsible person.

On the facts of this case, HHJ Huskinson held that £165 was a reasonable amount for the landlord to charge. He emphasised however, that his decision had been reached upon the particular facts of the case, and that nothing in it should be taken as confirming the reasonableness of the charges set out in the landlord’s leaflet of sub-letting guidelines.

The two previous Upper Tribunal decisions on s.19(1)(a) of the Landlord and Tenant Act 1927 pre-date my blog: this decision brings all three together, and addresses an issue which, on a case by case basis, may not involve a large sum, but which, I imagine, would otherwise have the potential, over time, to make a noticeable dent in a landlord’s costs of management.

Reviewing that last sentence, I realise that I have just typed the last five or so words of the definition of service charge in s.18(1)(a) of the Landlord and Tenant Act 1985. Are therefore the costs of considering the grant of consent for a sub-letting equally accurately described as a service charge? The more I think about it, the finer I find the distinction between a service charge and an administration charge.