The Upper Tribunal (UT) has ruled that the terms of a woman’s leases over her flat did not permit the freeholder of the building to demand contributions to a ‘reserve fund’ by way of her service charges.
The woman held a long lease of her flat, consisting of a ground rent lease and a service charge lease. The company that owned the freehold had built up a reserve fund over several years, demanding contributions to it as part of the service charge demands. An application was made to the First-tier Tribunal (FTT) under Section 27A of the Landlord and Tenant Act 1985 for a determination of whether the service charges relating to the reserve fund were payable for the 2018-2025 service charge years. The woman argued that no reserve fund was permitted under the terms of her leases.
The FTT found that there was no specific reference to any such fund in either of the leases, but the freeholder had a wide discretion as to how to manage and administer the development. Although the lease provided for estimating future expenditure, there was no instruction as to balancing payments or credits. It could therefore be argued that some kind of reserve fund was envisaged or permitted by the leases. From the records of the freeholder’s 2017 AGM, which the woman had attended, it appeared that all concerned had implicitly agreed, over time, to a variation of the leases to permit the establishment of a reserve fund, if such a variation was in fact required. The FTT concluded that the leases’ broad repairing obligation implied the power to accumulate reserve funds and that the contributions demanded were reasonable.
Ruling on the woman’s appeal against that decision, the UT noted that neither the FTT nor the freeholder had suggested that a reserve fund was authorised by the leases. The FTT’s suggestion that any repairing obligation amounted to authority to collect a reserve fund was wrong in law. A term can only be implied into a contract where it is necessary to do so. However desirable or useful it might be to have a reserve fund, it was not necessary. Both of the leases worked without it.
The UT found that the woman’s leases had not been varied: a lease made by deed can only be varied by deed, or by order of a court or tribunal. Although the woman had been a director of the freeholder in 2015 and she was not recorded as having objected to the reserve fund at the 2017 AGM, the UT did not consider that she was estopped from complaining about service charge demands raised in 2018 and beyond. Allowing the appeal, the UT concluded that she was not liable for the payments toward the reserve fund for the 2018-2025 service charge years.
