A new key Supreme Court service charge decision clarifies that a service charge clause which requires the tenant to pay a fixed percentage service charge or a proportion to be reasonably determined by a landlord, is valid.
The appeal concerned in particular, how section 27A (6) of the Landlord and Tenant Act 1985 should operate and gave landlords the comfort they were seeking.
This has been a long running dispute which essentially raised the question of how far section 27A of the Landlord and Tenant Act 1985 (‘LTA 1985’) can be interpreted.
Brief case facts
The leaseholders of long residential leases in a property in Hampshire were required under their leases to pay service charges towards the maintenance of the building and of the estate. The individual leases required that they paid a specific proportion of the overall costs “or such part as the landlord may reasonably determine”.
The landlords sought to reapportion the service charges by attempting to vary the percentage due from each leaseholder, but a number of the leaseholders then raised an objection to this and issued a claim in the First Tier Tribunal (‘FTT’) stating that the re-apportionment was not reasonable and was void pursuant to section 27A (6) of the LTA 1985.
This section of the LTA provides that an agreement by a tenant “is void in so far as it purports to provide for a determination (a) in a particular manner, or (b) on particular evidence, of any question which may be subject of an application (to the First Tier Tribunal under section 27A)“.
Essentially, it was the exact scope of this provision that was in dispute here.
FTT decision
The FTT rejected the contention that the lease provision was void and held that this lease provision giving the landlord the ability to vary the service charge proportion was not void and in addition that the apportionment was in fact reasonable.
Upper Tribunal decision
The leaseholders subsequently appealed and the Upper Tribunal held that the lease provision was void pursuant to section 27A (6) and so the service percentage could not be varied and they only had to pay what was originally set in the lease.
Court of Appeal decision
The landlord then applied to the Court of Appeal where it was held that the re-apportionment was not void but instead the effect was to transfer the discretion to vary the service charge proportions from them to the FTT. The Court of Appeal restored the decision of the FTT. This was later criticised by the Supreme Court because the resulting outcome would not have been the aim of the legislation.
Supreme Court decision
The leaseholders in turn appealed to the Supreme Court who consequently dismissed the appeal. They ruled that the revised apportionment was valid, restored the FTT’s decision but gave different reasons than the lower courts.
The Supreme Court judgment deals with the actual effect of section 27A (6) of the LTA 1985 which provides controls on the ability of a landlord to determine what service charge is payable by a tenant. It was considered that it is an anti-avoidance provision but was not meant to allow the Tribunal extra jurisdiction. The judgment stated that ‘it was not the purpose or effect of section 27(A) 6 to deprive that form of managerial decision-making by landlords of its ordinary contractual effect, save only to the extent that the contractual provision seeks to make the decisions of the landlord or other specified persons final and binding, so as to oust the ordinary jurisdiction of the FTT to review its contractual and statutory legitimacy’.
The Supreme Court disapproved of the Court of Appeal’s interpretation of Section 27A (6) and the previous case law it was based on as it would have the effect that every discretionary management decision affecting service charge (such as what works to carry out) would be transferred to the FTT. This, added to the fact a landlord would never safely be able to incur costs without first seeking a decision of the FTT as to whether those could be charged to its tenants, could lead to a flood of applications that would overwhelm the Tribunal. As above, this was not the purpose of the legislation.
The Supreme Court further stated that the FTT was still able to review whether the adjustments were reasonable, as was required by the leases and the Tribunal determined that they were reasonable. Therefore, section 27A (6) of the LTA 1985 was not engaged, and the re-apportionments were valid.
The clarity this decision brings will be welcomed by landlords who may now not be so hesitant to reapportion and will be confident that they can keep control over decisions of this nature. Additionally, the decision itself should result in less disputes concerning apportionments being brought in the first place.
For more information, please contact Mark Foxcroft or Neil Lawlor.
