Lawbite - Apportioning service charges: what’s reasonable?

The Court of Appeal (England and Wales) has clarified how the First-Tier Tribunal (FTT) should apply its jurisdiction when it is asked to determine the proportion of service charges that may be chargeable to residential leaseholders.

The decision is particularly relevant to landlords, managing agents and tenants of residential or mixed-use property in England and Wales. A significant judgement as the Court of Appeal overturned an existing Upper Tribunal (Lands Chamber) decision in this area.

The Building

Romney House is a mixed-use building in London (the Building) comprised of 168 flats, 4 commercial units and a gym. Since 2013 the gym had been let to a gym operator.

The gym formed part of the common parts of the building and the long-leaseholders of the flats (the Leaseholders) had the right (although not an exclusive one) to use the gym between set times. Their leases also obliged the landlord to maintain the gym as part of the Common Parts, and the Leaseholders to pay a service charge in respect of the Landlord’s costs of maintaining the Building (which included the Common Parts). Importantly, the proportion of the service charge was defined as “such fair proportion as the landlord acting reasonably shall…determine”, i.e. the landlord had a discretion as to the apportionment of service charge between the various tenants subject only to it needing to be reasonable in making its assessment.

The gym lease expressly reserved the Leaseholders’ rights to use the gym. However, the gym operator was not required to pay any service charge.

The service charge challenge

In 2021, the landlord served notices on the Leaseholders indicating its intention to carry out major works to the gym, the cost of which was to be paid for exclusively by the Leaseholders via the service charge.

The Leaseholders contested the service charge on the grounds that it was unreasonable for the landlord to recover 100% of the gym costs from them when they did not have exclusive use of the gym. They applied  to the FTT for a determination under s27A of the Landlord and Tenant Act 1985 (the Act). On being unsuccessful in the FTT they appealed to the Upper Tribunal (UT), which overturned the FTT’s decision and found that the costs allocation was unreasonable. The landlord appealed to the Court of Appeal.

The Court of Appeal’s findings

The main ground of appeal focused on the landlord’s discretion in apportioning the service charge, in particular how the words "acting reasonably" should be construed.

In allowing the appeal the Court of Appeal held that the requirement on the landlord’s part to act reasonably did not require the landlord to reach a decision which is objectively reasonable or fair.  The correct test was whether the landlord’s decision was one that no reasonable landlord could have made.

Applying that test in this case, the landlord’s decision was found to be reasonable because (1) the gym lease preserved the Leaseholders’ rights to use the gym and (2) if the Landlord could not recover costs through services charges, it would spend the minimum on maintaining the gym, which would not be in the Leaseholders’ interest.

Takeaways

• The facts of this case are unusual in that the gym lease did not include provision for the gym operator to pay the service charge. If it had, as is usually the case, then the landlord would have charged a proportion of the costs to the gym operator.
• However, the decision demonstrates that where a landlord is required to act reasonably in applying its discretion as to the apportionment of costs, then that decision needs only be within a reasonable range, and there is no question of the landlord needing to make an objectively fair decision. The landlord’s decision is flawed only if no other landlord, acting reasonably, would have made the decision. 
• Although charging 100% of the costs to the Leaseholders may have been unpalatable, it was reasonable given the alternative – the landlord not being able to recover its costs and therefore choosing to spend the minimum on the gym, to the Leaseholders’ detriment. If the gym lease had include service charge provisions and the landlord had not charged the gym operator, then the court’s decision might have been very different.
• Landlords applying a discretion when allocating service charges should document the reasoning behind their decisions in case they are required to evidence them in an application such as this one
• This case also highlighted the “considerable degree of deference” given to FTT assessments of facts. The FTT is a specialist tribunal and appeals to the UT can only be made on a point of law. The UT must respect a FTT assessment, unless its ultimate decision on appeal contradicts the assessment.