FTT decision on assignment of right to collect service charge

The following scenario is familiar to those electing to enfranchise:

A collection of participating leaseholders acquire their freehold via enfranchisement. An investor acquires overriding leases in respect of the non-participating leaseholders. The overriding leases are obviously subject to and with the benefit of the original lease, which the investor becomes the reversioner of. The investor of course is only acting as a ‘sleeping partner’ to the participating leaseholders in a bid to make a profit on their investment in the future, in their capacity as landlord of the non-participating leaseholders. There is of course no intention or wish for the investor to manage the services in the communal areas of the freehold. The overriding lease therefore contains a clause to assign collection of the service charge back to the participating leaseholders to absolve them of the responsibility of dealing with the management of the freehold.

However, what if the non-participating leaseholders seek to challenge the right to assign the service charge? Is it possible to simply assign the right to collect service charges?

This was the question which fell before the FTT in case number LON/00BK/LSC/2013/0608. JB Leitch had to successfully argue for their client that it was possible for such an assignment to take place.

The non-participating leaseholders questioned the ability of the overriding lease to exclude the assignment of the benefit to collect the service charge, which pursuant to Section 141 of the Law of Property Act 1925 must pass on the assignment of the reversion to the investor.

The FTT favoured the participating leaseholders view finding that ‘although Section 141 [of the Law of Property Act 1925] had the effect of a statutory assignment of the right to receive the rents and other sums payable under the [original] lease the benefit of those rights are capable of a further assignment.’ In finding that the service charge clause was capable of being assigned back to the participating leaseholders from the investor, the FTT pointed to Upjohn LJ’s finding in Re: King [1963] Ch 459 where at page 488, it was held that an ‘assignor and assignee can always agree that the benefit of the covenant shall not pass.’

This is obviously an important decision as a finding against the ability to assign the service charge clause would have had repercussions for leaseholders who have elected to enfranchise and actively engage in the management process. The entire infrastructure of the recovery of the service charge would need to be re-worked to accommodate the leaseholders’ inability to recover the service charge from the non-participating leaseholders. The success of the participating leaseholders before the FTT is therefore a welcome relief for those engaged in management in such a context.