Who has the final say on service charge apportionment? Supreme Court hands down decision in Aviva Investors Ground Rent GP Limited and another v Williams and others

The Supreme Court decision confirms that the First Tier Tribunal’s role when considering service charge apportionment is limited to reviewing the contractual legitimacy of a landlord’s decision. It means that landlords and managing agents can now be more confident of their rights to make decisions relating to service charge in accordance with the contract.

Summary

The Supreme Court has handed down judgment in an appeal which concerned the interpretation of provisions for calculating the amount of service charge payable under the terms of residential leases and how these provisions interacted with the anti-avoidance provisions under s.27A(6) of the Landlord and Tenant Act 1985.

The decision was the fourth ruling in a landlord and tenant dispute which began when leaseholders of a block of 38 flats in Southsea, Hampshire, objected to the reapportioning of service charge percentages which were significantly more than the charges stated in their leases.

The Supreme Court found, in a unanimous decision, that the landlords were entitled to vary service charge percentages on leaseholders and that the role of the First Tier Tribunal (FTT) in considering apportionment under s27A(6) is limited to review of the contractual legitimacy of the landlord’s reapportionment. The Court held that Section 27A(6) is an anti-avoidance provision which is designed to preserve the jurisdiction of the FTT, not enlarge the jurisdiction or deprive any landlord or managing agent of managerial decisions made in accordance with contractual machinery.

What is the effect of the decision?

The key takeaway here is that the Tribunal must review whether the landlord has made a decision within the reasonable range with regard to service charge apportionment. So long as landlords act rationally and take a reasonable stance on any apportionment exercise, and the Tribunal determine that this is reasonable, the provisions of section 27A(6) of the Landlord and Tenant Act will not be engaged.

Landlords and managing agents can now be more confident that reapportionment exercises carried out in accordance with the contract will only be subject to a review by the FTT to consider if the landlord has acted in a reasonable way. Accordingly, this will narrow the scope for subsequent apportionment disputes and allow Landlords to go about their usual management business without the risk of litigation.

Background

The case concerned a block of 38 flats in Southsea, Hampshire. In this case, the leases provided for the leaseholders to pay a fixed percentage in service charge, but also the provision for the landlord to vary the service charge percentages. The landlord had varied the percentage amount from 0.7135% per leaseholder up to 1.6292%, causing the service charge bill to go up dramatically.

The leaseholders took a view that the landlord was unlawful in increasing the service charge in this way and relied on s27A(6) of the Landlord and Tenant Act 1985. Section 27A(6) provides various controls on a landlord’s ability to determine the service charge payable by tenants and gives the FTT jurisdiction to decide whether a service charge demanded by a landlord is or would be payable.

In the lower courts:

The FTT rejected the tenants’ argument that the discretionary wording in the lease that allowed the landlord to vary the service charge was void. It considered that the landlord’s re-apportionments were reasonable and therefore should be enforced.

The Upper Tribunal (UT) found in favour of the tenants and held that the effect of section 27A(6) was that the entire discretionary wording was void and should be deleted from the lease.

The Court of Appeal (CA) interpreted the lease as if the FTT had discretion to determine the proportions in place of the landlord and as such restored the decision of the FTT.

The Supreme Court dismissed the tenants’ appeal and approved the decision of the FTT. The Supreme Court disagreed with the CA’s interpretation of s 27A(6). Rather, the Supreme Court found that the role of the First Tier Tribunal in considering the reapportionment of residential service charges is limited to a review of the contractual legitimacy of the landlord’s reapportionment and that the FTT is not to determine the apportionment for itself.  A lease clause will only be void to the extent it purports to oust the jurisdiction of the FTT – for example, by making the landlord’s decision final and binding.

Furthermore, the Supreme Court found that the CA’s interpretation would have had the effect of transferring every discretionary management decision that would affect a tenant’s service charge, such as what works to carry out, to the FTT. Significantly, the previous line of cases on this point (Windermere Marina v Wild [2014] UKUT 163 (LC); Gater v Wellington [2014] UKUT 561 (LC) and Oliver v Sheffield CC [2017] EWCA Civ 225) were held by the Supreme Court to be wrongly decided.

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