Trusts for particular purposes: flat management companies - scope of S42 Landlord and Tenant Act 1987
The LTA 1987 applies only to England and Wales. Section 42 LTA 1987 applies where the tenants of two or more dwellings are required under the terms of their lease to contribute to the same costs by the payment of service charges (as defined in Section (18)(1) LTA 1985). Such sums paid, or the investments representing those sums, or income accruing thereon, are held by the ‘payee’ on trust to defray any expenses incurred in connection with service charge expenditure. Subject to such payments of service charge expenditure the funds are held on trust for the tenants for the time being. The ‘payee’ can be the landlord or any other person to whom the service charges are payable by the tenants under the terms of the lease. Section (18)(1) LTA 1985 states that ‘service charge’ means - ‘an amount payable by a tenant of a dwelling as part of or in addition to rent
- which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management, and
- the whole or part of which varies or may vary according to the relevant costs’.
The ‘relevant costs’ are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charges are payable (Section (18(2) LTA 1985).
If the landlord is an ‘exempt landlord’ (as defined in Section 58(1) LTA 1987) then Section 42 LTA 1987 does not apply. (See below.)
Therefore for Section 42 LTA 1987 to apply
- the landlord must not be an ‘exempt landlord’, and
- tenants of two or more dwellings,
- under the terms of the lease,
- must be required to contribute directly or indirectly for repairs, maintenance, etc., and
- those charges, or part of them, must be variable.
If any of those elements are missing then Section 42 LTA 1987 does not apply.