On 8 February 2023, the Supreme Court issued a unanimous decision providing clarification on the issue of the re-apportionment of service charges in residential leases. Property litigation partner Ben Robinson acted for the landlords in the case, Aviva Investors Ground Rent, instructing Simon Allison and Brooke Lyne of Landmark Chambers, and successfully defended the appeal.
Here, Ben provides an overview of the case and its implications.
This case concerned the re-apportionment of residential leasehold service charges and centred on the engagement of a lease provision which purported to give the landlord the ability to vary the service charge percentages between leaseholders, subject to that decision being reasonable.
In its decision, the Supreme Court has confirmed the validity of these common lease provisions and clarified the role and jurisdiction of the First-tier Tribunal in determining the apportionment of residential service charges. The First-tier Tribunal’s role was to decide whether the landlord’s decision was within its contractual discretion and whether the outcome was reasonable.
In a decision to be welcomed by landlords and managing agents alike, the Supreme Court has now halted the unintended ‘mission creep’ developed through a chain of authorities Windermere, Gater, and Oliver, which risked placing responsibility for some discretionary management matters on the First-tier Tribunal.
The case concerned a number of flats in a residential and commercial development in Southsea, Hampshire.
The leases in question set out a ‘fixed’ percentage of the service charge payable for each flat, with the wording ‘or such part as the landlord may otherwise reasonably determine’ included after each percentage.
In the present case, the landlord had been demanding service charges on the basis of an apportionment different from the percentages stated in the relevant leases.
The leaseholders argued that the wording ‘or such part as the landlord may otherwise reasonably determine’ was rendered void by section 27A(6) of the Landlord and Tenant Act 1985, a statutory provision implemented to prevent landlords excluding the jurisdiction of the First-tier Tribunal.
The First-tier Tribunal had accepted the landlord’s approach and confirmed that the re-apportionment was reasonable. However, when the Upper Tribunal considered the relevant authorities Windermere, Gater, and Oliver, it agreed with the leaseholders; the wording ‘or such part as the landlord may otherwise reasonably determine’ was void as a result of section 27A(6) and was to be deleted entirely, leaving only the ‘fixed’ percentages.
In December 2021, the Court of Appeal (whilst still being bound by Windermere, Gater, and Oliver) held that the lease provision for re-apportionment was void only to the extent that it was the landlord exercising it. In effect the word ‘landlord’ in the clause was to be replaced by ‘First-tier Tribunal’. The effect of this decision was that either party was permitted to apply to the First-tier Tribunal to have service charge apportionments determined.
In a unanimous judgment given by Lord Briggs, the Supreme Court concluded that the landlord had two contractual rights in which it had to act reasonably:
The role of the First-tier Tribunal in considering the re-apportionment was limited to a review of the contractual discretion mechanism, and whether or not the landlord has acted in breach of the statutory regime.
Lord Briggs accepted that Windermere, Gater, and Oliver were all wrongly decided.
It is now clear that the First Tier Tribunal remains a 'review only' jurisdiction, ensuring that landlords retain an important role when it comes to determining the apportionment of service charges.
Where permitted in the lease, the decision will enable landlords and property managers to make changes to the apportionment of service charges where it is in the interests of good estate management, without the need to refer the issue to the First-tier Tribunal. In other words, the First-tier Tribunal will not be able to substitute in its own reapportionment exercise.
In the long term, this case has now settled this issue and narrowed the scope (and indeed volume) of future disputes regarding re-apportionment of service charges in residential leases.