Court clarifies law on service charges as tenants lose appeal

The Supreme Court has dismissed an appeal by tenants against rises in service charges and clarified how the law should be applied under the Landlord and Tenant Act 1985 (the Act). 

Natalie Tatton Solicitor in our dispute team reports on this recent case.

The tenants occupied residential units within a block of flats.

Under the terms of each lease, the tenants were required to pay a service charge (comprising a share of insurance, building services and estate services costs). Each tenant’s share of the various costs was set as a fixed percentage or “such part as the landlord may otherwise reasonably determine”.

A dispute arose after the landlord demanded service charges on the basis of an apportionment which was different from the numerically stated percentages in the relevant leases.

The tenants claimed that the landlord’s contractual entitlement to determine an apportionment other than that numerically stated in the leases was rendered void by s.27A(6), 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] “. 

They also claimed that the re-apportionment imposed by the landlord was unreasonable.

The First Tier Tribunal (FTT) held that the landlord’s contractual power to re-apportion was not voided by s.27A(6) because it did not purport to prevent the leaseholders from challenging its reasonableness in the FTT. It also held that the re-apportionments were reasonable.

The case went all the way to the Supreme Court, which upheld those decisions.

It held that a landlord’s discretionary management decisions were not “questions which may be the subject of an application” under the Act.

Furthermore, a transfer of the landlord’s discretionary management powers relating to service charges to the FTT would produce the most bizarre and surely unintended results.

If s.27A(6) first rendered void and then transferred to the FTT the landlord’s discretionary management powers, a landlord would never safely be able to incur relevant costs without first making an application to the FTT for clearance of proposed service charges.

The FTT would be likely to become overwhelmed with prospective applications.

In this particular case, the relevant provisions in the leases gave the landlord the right to trigger a re-allocation of the originally agreed contribution proportions and the right to decide what the revised apportionment should be.

In both respects the landlord was contractually obliged to act reasonably.

The FTT decided that the landlord had acted reasonably in making the re-apportionment.

The question of whether there should be a re-apportionment and if so in what fractions, was not a “question” for the FTT within the meaning of s.27A(6).

The question for the FTT was whether the re-apportionment had been reasonable, and that question the FTT was able to, and did, answer in ruling on the tenants’ application.

If you would like more information about the issues raised in this article or any aspect of commercial property law please contact Natalie on 01228 516666 or click here to send her an email.