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Our clerks’ room is open between:

8.30am – 6.30pm

Outside of these hours and in cases of urgency, please contact
Paul Bunting on 07971 843023 or
Darren Madle on 07769 714399.

Clerk contacts

Richard Sheehan

Deputy Senior Clerk

020 7420 9503
Oliver Ventura

First Junior Clerk

020 7420 9505
Aron Hanks

Second Junior Clerk

020 7420 9506
Archie Conners

Third Junior Clerk

020 7420 9507

Our clerks’ room is open between:

8.30am – 6.30pm

Outside of these hours and in cases of urgency, please contact
Paul Bunting on 07971 843023 or
Darren Madle on 07769 714399.

Clerk contacts

Richard Sheehan

Deputy Senior Clerk

020 7420 9503
Oliver Ventura

First Junior Clerk

020 7420 9505
Aron Hanks

Second Junior Clerk

020 7420 9506
Archie Conners

Third Junior Clerk

020 7420 9507

Bradley and Others v Abacus Land 4 Limited

Court

Upper Tribunal (Lands Chamber)

Judgment Date

15 May 2024

Report Citation

[2024] UKUT 120 (LC)

Upper Tribunal (Lands Chamber)
Judge Elizabeth Cooke
15 May 2024
Apportionment; First-tier Tribunal; Jurisdiction; Landlords’ rights; Residential tenancies; Service charges.

Representation

James Sandham (instructed direct professional access) for the appellants.

Tom Morris (instructed by JB Leitch) for the respondents.

Introduction

Service charges

Long leases of flats usually provide for the tenant to bear a proportion of the landlord’s expenditure on the building comprising the flats. Liability for and recovery of such services charges are regulated by ss.18–38, Landlord and Tenant Act 1985, as amended.

Section 27A provides, inter alia, as follows:

“(1) An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to—

  • (a)  the person by whom it is payable,
  • (b)  the person to whom it is payable,
  • (c)  the amount which is payable,
  • (d)  the date at or by which it is payable, and
  • (e)  the manner in which it is payable.

(2) Subsection (1) applies whether or not any payment has been made.

(3) An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to—

  • (a)  the person by whom it would be payable,
  • (b)  the person to whom it would be payable,
  • (c)  the amount which would be payable,
  • (d)  the date at or by which it would be payable, and
  • (e)  the manner in which it would be payable.

 …

(6) An agreement by the tenant of a dwelling … 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 the subject of an application under subsection (1) or (3).”

In England, the appropriate tribunal is the First-tier Tribunal; in Wales, it is the leasehold valuation tribunal: s.38, 1985 Act.

Apportionment

Long leases commonly provide that the proportion of the landlord’s total costs to be paid by the tenant is to be a fair or reasonable proportion of those costs to be determined by the landlord or an independent surveyor. It has been held that Section 27A(6), Landlord and Tenant Act 1985, does not prevent a landlord from exercising a power under a lease to decide the proportion of its costs that a leaseholder is required to pay; a provision in a lease which provides that the landlord’s decision on apportionment is final and binding is void only in so far as it provides that the landlord’s decision is final and binding: Williams and others v Aviva Investors Ground Rent GP Ltd [2023] UKSC 6, para [32], per Lord Briggs (overturning Sheffield CC v Oliver [2017] EWCA Civ 225; [2017] 1 W.L.R. 4473; [2017] H.L.R. 23, Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); [2014] L. & T.R. 30 and, Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC); [2015] L. & T.R. 19).

Where a landlord is contractually obliged to act reasonably, the question for the tribunal is not whether there should be a re-apportionment and, if so, in what fractions; rather, the question for the tribunal was whether the landlord’s re-apportionment has been reasonable:  Aviva, para [33].

The tribunal is entitled to review the contractual legitimacy of the service charges demanded based on the landlord’s apportionment and consider whether there was a breach of the terms of the lease:  Hawk Investment Properties Ltd v Eames and others [2023] UKUT 168 (LC), paras 22-25, 34-35.

Standard of review

In assessing the contractual legitimacy of service charges, the tribunal is required to assess whether the method determined by the landlord was required by the lease. It must review the landlord’s decision and consider whether it has met the contractual requirement.  That must be distinguished from an approach by which the tribunal decides how to exercise the landlord’s discretion for itself:  Hawk, paras 57, 61-62.

Appeals

A party aggrieved by a decision of the appropriate tribunal can appeal—with permission—to the Upper Tribunal, and thereafter to the Court of Appeal: Commonhold and Leasehold Reform Act 2002, ss.175(1) and 176B(1) ; and, s.13(1) , Tribunals, Courts and Enforcement Act 2007, respectively.

Facts

The appellants were leasehold owners of flats in a development owned by the respondent landlord.  Under the terms of each lease, the leaseholders were required to pay a service charge comprising of sums designated as residential, building, parking or otherwise, apportioned according to the landlord’s discretion.

In 2013, the landlord’s predecessor in title granted a lease to a third party (the gym tenant).  The gym lease was for a term of 999 years without a repairing covenant.  Significantly, unlike the residential leases, the gym lease did not require the gym tenant to contribute to the landlord’s maintenance costs.  The respondent’s predecessor and, later, the respondent, therefore apportioned all of gym costs solely to the residential leaseholders under the terms of their leases. 

From 2013 to 2020, the residential leaseholders’ service charges included the entirety of the gym costs.  However, that was not without demure from the residential leaseholders, as those charges were partially offset by a contribution from the landlord reflecting rent received from the gym tenant. The situation escalated after 2020 when the respondent landlord, due to a dispute with the gym tenant that involved refurbishment of the gym and a rent holiday for the gym tenant, indicated its intention to charge the full gym maintenance and refurbishment costs to the residential leaseholders.

The leaseholders applied to the FTT for a determination.  The application raised questions about the interpretation of the lease terms regarding the allocation and apportionment of such costs, the fairness and reasonableness of charging residents for gym costs given the changed circumstances regarding gym access, and the implications of the generous terms of the gym lease.

The FTT’s determination

The FTT held that the respondent had followed a rational process.  Due to the terms of the gym lease, there was no way of the respondent landlord recovering the costs that might otherwise have been paid by the gym tenant and therefore the decision to allocate 100% of the gym maintenance and refurbishment costs to the residents was not one that no reasonable landlord properly directing itself could have reached.

The leaseholders appealed, arguing that the respondent landlord’s decision to allocate the gym costs solely to the residents was unlawful and that the FTT had misapplied the decisions in Braganza v BP Shipping Ltd and another [2015] UKSC 17, Aviva and Hawk.  Central to the appeal was the argument that that the FTT had mistakenly applied the Braganza rationality test, which assesses decision-making process rationality, to a context where the lease explicitly required decisions to be made reasonably, which implied a higher standard of objective fairness (para 97-100, 108).

Held (allowing the appeal):

(1) The FTT had failed to appreciate the crucial distinction between “acting reasonably” and “acting rationally”. The latter expression was contained in the lease and therefore imposed an objective standard of reasonableness, which encompassed considerations of fairness of the outcome, rather than merely rationality in the process adopted (para 106). While the decision to charge residential leaseholders for the full gym costs may have been the outcome of a rational process, it fell short of being objectively reasonable, particularly when use of the gym was not exclusive to the residential leaseholders post-2020 (para 107).

(2) The decision-making process could not be isolated into two separate discretionary decisions.  Properly construed, the designation of costs and the determination of a fair portion thereof were two interconnected decisions, both of which required adherence to the principle of fairness as inherent in the commitment to “act reasonably” (para 98-100, 105).

(3) It was immaterial that the respondent landlord had acquired the freehold subject to the gym lease. It acquired its interest subject to the terms of both species of lease, including the obligation to act reasonably under the terms of the residential leases, which the respondent knew pre-dated the grant of the gym lease.  It was inequitable for the respondent to escape the consequences of the gym lease by transferring them onto the residential leaseholders (para 110-111).

(4) For the years 2013 to 2020, by not disputing them during that period, and despite knowing of them, the leaseholders had agreed to the gym costs within the meaning of s.27A(4)(a) of the 1985 Act: Cain v Islington [2015] UKUT 542 (LC).  That conclusion was grounded in the practical realities of the payments made rather than the technical knowledge of exact amounts (para 113-114).

(5) On the question of how to dispose of the appeal, the limitations on the tribunal’s jurisdiction, and in particular the inability of the tribunal to exercise the landlord’s discretion by substituting its own, meant that the case could not be remitted: Aviva applied.  The costs were not payable by the appellant leaseholders within the meaning of s.27A of the 1985 Act and correct approach was to require the respondent landlord to try again (para 112).

Judgment