Right to Manage Companies and Lease Variation

Right to Manage companies are often tasked with maintaining buildings without the financial tools needed to do so effectively. Nicola Muir explores how lease variation under the Landlord and Tenant Act 1987 can resolve gaps in service charge recovery and enforcement, with guidance from recent Upper Tribunal decisions.

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The trouble with Right to Manage (RTM) companies is that they do not have any money. An RTM is responsible for the upkeep of the building and has a right to enforce tenant covenants but how does it do this if the lease does not provide for the payment of service charges in advance or allow for the recovery of the costs of taking enforcement action? One possible solution is to seek a variation of the lease terms under the Landlord and Tenant Act 1987 (the 1987 Act). Two recent cases confirm that the identity and nature of the person responsible for the maintenance of the property, particularly if it is an RTM Company, are relevant factors in assessing whether a lease fails to make satisfactory provision for the matters set out in s.35 of the 1987 Act.

Background

The right to manage was introduced by the Commonhold and Leasehold Reform Act 2002 (the 2002 Act) and allows leaseholders to take over the management of their building without needing to prove any fault on the part of the landlord. From the date of acquisition, the RTM Company is responsible for performing the “management functions” which are defined as functions in respect of services, repairs, maintenance, improvements and management. The RTM Company’s only source of income is the service charges which it is responsible for collecting. It has no proprietary interest in the building so cannot raise a mortgage nor is it entitled to the rent or to forfeit.

Most leases were not drafted with the RTM legislation in mind so many leave an RTM Company in an impossible position if there is a gap in the lease terms as happened in 56 Westbourne Terrace RTM Co Ltd v Polturak and Davies [2025] UKUT 88 (LC); [2025] H.L.R. 25. Messrs Polturak and Davies were in dispute with the RTM Company and refused to pay their service charges. The only clause in the lease which allowed the landlord to recover the costs of the resulting litigation was a fairly standard provision requiring the tenant to pay “all expenses including solicitors’ costs and surveyors’ fees incurred by the Lessor of and incidental to the preparation and service of a notice under Section 146… of the Law of Property Act 1925… notwithstanding that forfeiture be avoided otherwise than by relief granted by the Court”. The trouble was that an RTM has no right to forfeit so this clause would never bite. The other leaseholders were not prepared to personally fund the litigation.

A similar funding problem arose in Eastern Pyramid Group Corp SA v Spire House RTM Co Ltd [2025] UKUT 292 (LC) where the lease limited the amounts which could be collected by way of interim service charges and towards the reserve fund. As a result, the RTM Company would be unable to collect sufficient funds to pay for urgent works to the crumbling church spire for many years. In both cases, the RTM Company resorted to Pt IV of the 1987 Act and applied for variations of the leases.

Part IV was introduced following the recommendations of the “Report of the Committee of Inquiry on the Management of Privately Owned Blocks of Flats” chaired by Edward Nugee QC. The Report recognised that it was in no-one’s interests for parties to be trapped in leases which did not work as the inevitable result was that buildings would not be properly maintained. The Report concluded that intervention into the sanctity of the parties’ bargain could be justified where leases produced a seriously defective scheme. It envisaged a strict test in the absence of unanimity or majority support. In the event, the Act adopted slightly different language for variations which were not supported by a majority. It did not require the lease to be “defective” or “seriously defective”. Instead, it allowed the appropriate tribunal (the First-tier Tribunal (FTT)) to vary a residential lease if it “fails to make satisfactory provision” for one or more of the matters set out in s.35(2) of the 1987 Act. The grounds are fairly limited. Section 35(2) provides:

“The grounds on which any such application may be made are that the lease fails to make satisfactory provision with respect to one or more of the following matters, namely—

(a) the repair or maintenance of— (i) the flat in question, or

(ii) the building containing the flat, or

(iii) any land or building which is let to the tenant under the lease or in respect of which rights are conferred on him under it;

(b) the insurance of the building containing the flat or of any such land or building as is mentioned in paragraph (a)(iii);

(c) the repair or maintenance of any installations (whether they are in the same building as the flat or not) which are reasonably necessary to ensure that occupiers of the flat enjoy a reasonable standard of accommodation;

(d) the provision or maintenance of any services which are reasonably necessary to ensure that occupiers of the flat enjoy a reasonable standard of accommodation …

(e) the recovery by one party to the lease from another party to it of expenditure incurred or to be incurred by him, or on his behalf, for the benefit of that other party or of a number of persons who include that other party;

(f) the computation of a service charge payable under the lease …” Sections 35(3A) and

(4) elaborate on these provisions:

“(3A) For the purposes of subsection (2)(e) the factors for determining, in relation to a service charge payable under a lease, whether the lease makes satisfactory provision include whether it makes provision for an amount to be payable (by way of interest or otherwise) in respect of a failure to pay the service charge by the due date.

(4) For the purposes of subsection (2)(f) a lease fails to make satisfactory provision with respect to the computation of a service charge payable under it if—

(a) it provides for any such charge to be a proportion of expenditure incurred, or to be incurred, by or on behalf of the landlord or a superior landlord; and

(b) other tenants of the landlord are also liable under their leases to pay by way of service charges proportions of any such expenditure; and

(c) the aggregate of the amounts that would, in any particular case, be payable by reference to the proportions referred to in paragraphs (a) and (b) would either exceed or be less than the whole of any such expenditure”.

Each of these grinds is often referred to as the “gateway” to a variation. Once the “gateway” has been passed through, the tribunal has a discretion as to whether make the proposed 12 variation or some other variation which is considers more suitable: s.38. However, the tribunal may not exercise its discretion to make the variation order if it appears to the tribunal that the variation “is likely substantially to prejudice” the respondent or anyone else who is not a party to the application unless a payment of compensation would afford him adequate compensation”: s.38(6). Even if the discretion is exercised, the tribunal can award compensation under s.38(10) which provides:

“(10) Where [the FTT] makes an order under this section varying a lease [the FTT] may, if it thinks fit, make an order providing for any party to the lease to pay, to any other party to the lease or to any other person, compensation in respect of any loss or disadvantage that [the FTT] considers he is likely to suffer as a result of the variation”.

The 2002 Act entitles an RTM Company to apply for a variation under the 1987 Act. Both the 56 Westbourne Terrace and the Spire House cases concerned ground(e) as bolstered by s.35(3A). In both cases, the fact that the applicant was an RTM Company was a significant factor in the need for the variation.

The tribunal’s approach

The tribunal has traditionally been somewhat reluctant to vary leases and has limited variations to those strictly necessary to remedy the unsatisfactory provision. Section 35 does not give the tribunal carte blanche to produce a fairer lease. Various attempts have been made to define what is meant by “satisfactory provision” with a leaning towards a requirement that the lease is “clear and workable”: see, for example, London Borough of Camden LBC v Morath [2019] UKUT 193 (LC); [2020] L. & T.R. 4. However, in 56 Westbourne Terrace, the Deputy President, Martin Rodger KC, went back to basics saying, at [112]:

“The key word is ‘satisfactory’, which the Oxford English Dictionary defines as meaning ‘adequate, fair, tolerable; sufficient for the needs of a given situation or circumstance’. It is a word of approval with middling connotations, and its antonym, unsatisfactory, is also a comparatively moderate rebuke. To say that there has been a failure to make satisfactory provision for something suggests that there is a problem of some sort without giving the impression that the problem is acute. Nor does it give any indication of the nature of the problem. It may be something for which provision has been made, which turns out not to be adequate, or it may be the omission to make any provision at all for a particular contingency which is unsatisfactory”.

And at [113], he stated:

“’Satisfactory’ is an ordinary English word with a well understood meaning. It is not necessary or appropriate to substitute some different word, such as ‘defect’ when addressing the ground (e) question. The better course is to identify the provision which has been made in the lease, or which is missing from it, and to consider whether in the circumstances which now exist that amounts to satisfactory provision, in the ordinary understanding of those words”.

In 56 Westbourne Terrace, the Upper Tribunal ordered the variation sought by the RTM Company so as to allow the RTM Company to recover its costs of enforcing the liability to pay service charge from the recalcitrant leaseholder. The Upper Tribunal (UT) recognised that an RTM Co. is not a creature of substance and will not be able to fund litigation without some Right to Manage Companies and Lease Variation external source of funds. Martin Rodger KC helpfully set out a number of relevant questions which arise in a variation claim and provide a useful framework:

(1) Are there any grounds under s.35(2) for making the variation?

(2) would the variation substantially prejudice any person?

(3) if so, would money be adequate compensation for that prejudice?

(4) is there any other reason why it would not be reasonable in the circumstances for the variation to be effected?

(5) should the variation take effect retrospectively? and

(6) should compensation be paid in respect of any loss or disadvantage likely to be suffered as a result of the variation.

In Spire House, the building included a Victorian church spire in urgent need of repair at an estimated cost of over £1.5 million. The leases capped the amount which could be demanded towards the reserve fund at one third of the previous year’s expenditure and the interim charges at one half of the previous year’s expenditure. In practical terms, this meant that it would take many years to collect the funds, and it was likely that the spire would collapse in the meantime. The FTT had no hesitation in ordering a variation of the amount which could be demanded by way of interim charges.

The landlord and two associated leaseholders appealed. They argued that the lease needed to be “seriously defective” to warrant variation and that the identity and financial circumstances of the respondent as an RTM could not be a relevant factor in the decision. There was, they argued, nothing “unsatisfactory” about the current lease. The costs of the proposed works could be recovered—just not in a way which was convenient to the RTM Company. The appellants argued that a change in the identity of the entity responsible for the works could not render a lease which had been hitherto satisfactory unsatisfactory.

Judge Elizabeth Cooke in the UT disagreed. She accepted that the words of the statute trump the language of the Nugee Report, referred to earlier, and any judicial gloss placed on the meaning of “satisfactory provision” by tribunals in earlier cases. The phrase “seriously defective” does not appear in the Act and Martin Rodger KC’s construction of “satisfactory” as a word of “middling connotations” was to be preferred. Leases which did not allow the RTM Company to fund emergency work were clearly not satisfactory or, indeed, workable and the Tribunal, therefore, had jurisdiction to vary the leases. She also accepted that the ill-conceived limitations on what could be demanded by way of advance payments had not become unsatisfactory because of the acquisition of the right to manage but had always been so. As to the relevance of the identity and nature of the person responsible for the maintenance of the property, Judge Cooke said:

“75. … it is indeed the case that a lease that made satisfactory provision for the recovery of expenditure for many years may be found not to do so because of a change of circumstances. The fact that that change was chosen by the persons concerned—for example, an RTM company legitimately acquiring the right to manage—does not make the provision satisfactory…

78. The intention of section 35 is to resolve practical problems and to ensure that maintenance gets done and is paid for; it would be perverse if the fact that the respondent is an RTM company meant that its practical difficulties were irrelevant so that it could not make use of the legislation”.

Conclusion

These cases illustrate the tribunal’s practical approach to the question of whether leases should be varied. The reality is that works have to be paid for and most contractors will not embark on works without assurances as to funding. It may well be that an unsatisfactory provision in a lease will be masked if the landlord is, say, one of the wealthy estates. But an RTM Company (or, indeed, any impecunious landlord) will be unable to execute works without being able to demand the cost of doing so in advance or bringing proceedings against non-payers. These decisions are not, in principle, limited to RTMs but it will always be necessary to provide evidence as to why a lease fails to make satisfactory provision for one of the gateway matters. Then and, only then, can the tribunal determine whether it is appropriate to vary the leases and, if so, in what manner.

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This article first appeared in Landlord & Tenant Review (2026), Volume 30, Issue 1 and is reproduced here with the permission of the publisher, Thomson Reuters.