Correcting leases

Charles Ward explains how the London Borough of Sutton went about correcting more than 100 right-to-buy leases after it was discovered that the service charge percentages were incorrect.

Incorrect service charge percentages in more than one hundred residential leases meant that some leaseholders where paying marginally more than they otherwise should, whilst others were paying substantially less, with the institutional landlord picking up the shortfall.

It was a situation which had existed since the early 1980s, when the leases were first granted. But the situation had now become critical as the landlord was now proposing a comprehensive scheme of refurbishment, the costs of which would be shared would be shared with each of the leaseholders. So it was important that the calculations were correct.

Surprisingly there has never been any industry standard for calculating service charge percentages. It is all a matter of professional judgment. And in this case, assessing the correct percentages meant reinterpreting hand written calculations made more than three decades ago. And until Part IV Landlord and Tenant Act 1987 came into force there was no statutory means of correcting defective leases. Before the 1987 Act the only way to correct a mistake was by obtaining an order for rectification through the courts. But that only applied either where a party had acted fraudulently or whether the document did not give effect to what the parties had intended. But in this case the leases had given effect to what the parties had intended. It was just that the figures didn’t add up.

Where a residential ground lease fails to provide adequately for financial matters such as service charges, Part IV of the 1987 Act provides a statutory mechanism enabling either the landlord or a leaseholder to apply to a Leasehold Valuation Tribunal for an order varying the lease to enable these matters to be addressed. And this is what the London Borough of Sutton did to correct more than 100 right-to-buy leases on its Benhill Estate.

Apart from the logistics of processing a large number of applications in volume, the process went remarkably smoothly. The Tribunal hearing was concluded in a single day and in the Council’s favour. But winning the Order was only the start of another volume process in which, to give effect to the Order, each lease has now to be individually corrected and that correction registered at HM Land Registry.

Another issue which the Tribunal had to consider was whether Sutton Council should be required to compensate any leaseholder whose lease required correction. However the Tribunal saw no grounds for awarding compensation.

Those leaseholders who had previously been undercharged would have already received the benefit of that error and would in future be required to pay what was properly due from them. The minority of leaseholders who had been marginally overcharged would have paid what they had agreed to pay and would now benefit from reduced financial percentages.

The Tribunal decision also means that Sutton can now proceed safely with its proposed refurbishment in the knowledge that all its costs will be properly accounted for.

Charles Ward is a solicitor and head of the London Borough of Sutton’s Property and Contracts Team. Variation of leases is one of the subjects covered in Residential Leaseholders’ Handbook (ISBN 0 7282 0490 8).