Landlord and tenant – Service charges – Apportionment – Appellant lessees in block of flats appealing against decision of First-tier Tribunal concerning reasonableness and payability of service charges – Upper Tribunal reversing decision – Court of Appeal allowing respondent landlords’ appeal – Appellants appealing – Whether wording in leases rendered void by section 27A(6) of Landlord and Tenant Act 1985 – Appeal dismissed
The appellants were the lessees of 39 flats in Southsea, Hampshire in a mixed-use block with a commercial unit on the ground floor and 69 residential units. Each lease set out the tenant’s share of service charges, including insurance, building services and estate services costs and provided for each tenant to pay an identified percentage “or such part as the landlord may otherwise reasonably determine”.
For some years, the respondent landlords had demanded service charges in different proportions from those stated in the lease. An issue arose whether it could do so, subject to the jurisdiction of the First-tier Tribunal (FTT) under section 27A of the Landlord and Tenant Act 1985 Act; or whether the words “or such part as the landlord may otherwise reasonably determine” were rendered void by section 27A(6) in so far as they purported to provide for a determination in a particular manner or on particular evidence of any question which might be the subject of an application under section 27A(1).
The FTT held that the provisions in the leases allowing the landlords to vary the proportion of the service charge payable were valid; and that the re-apportionments were reasonable. The Upper Tribunal set aside the decision of the FTT and substituted its own decision: [2020] UKUT 111 (LC); [2020] PLSCS 68.
The Court of Appeal allowed the respondents’ appeal holding that the effect of section 27A(6) was to transfer the power to vary percentages from the landlord to the FTT. It restored the FTT’s decision: [2021] EWCA Civ 27; [2021] EGLR 13. The appellants appealed.
Held: The appeal was dismissed.
(1) Section 27A provided for a generously worded jurisdiction of the FTT to determine whether a service charge was payable (section 27A(1)) or would be payable if specified costs were incurred (section 27A(3)). Nothing was said expressly about the principles which the FTT was to apply in determining payability. The natural assumption was that the FTT would decide by reference to common law principles of contractual liability, subject to the detailed scheme for statutory control laid down in the preceding provisions of the Landlord and Tenant 1985.
In general, the jurisdiction of the FTT under section 27A(1) to decide whether a service charge demand was payable would extend to the contractual and/or statutory legitimacy of discretionary management decisions but that would not include exercising for itself management decisions that were within the discretion of the landlord, such as deciding what works to carry out. If the landlord’s discretionary decision was unaffected by the statutory regime and fell within the landlord’s contractual powers under the lease, there might at the most be a jurisdiction to review it for rationality: see Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 1 WLR 1661.
(2) Generally speaking, the making of a demand upon a tenant for payment of a service charge in a particular year would have required the landlord first to have made a number of discretionary management decisions. They would include what works to carry out or services to perform, with whom to contract for their provision and at what price, and how to apportion the aggregate costs among the tenants benefited by the works or services.
To some extent the answers to those questions might be prescribed in the relevant leases. But even the most rigid and detailed contractual regime was likely to leave important decisions to the discretion of the landlord, such as whether merely to repair or wholly to replace a defective roof over the building, with major consequences in terms of that year’s service charge. Usually, the conferring of that discretion on the landlord would be implicit, in order to give the lease business efficacy. But sometimes it might be express, as in the power of the landlord to re-apportion, as in the present case.
(3) It was common ground that section 27A(6) was, viewed as a whole, an anti-avoidance provision designed to prevent specified types of contractual provisions designed to oust or limit the jurisdiction of the FTT conferred by the main operative provisions of section 27A.
To allow subsection (6) to enlarge the nature and “type of questions” before the FTT under section 27A(1) and (3) was to put the anti-avoidance cart before the jurisdictional horse. It was not the purpose or effect of section 27A(6) to deprive managerial decision-making by landlords of its ordinary contractual effect, save only to the extent that the contractual provision sought to make the decision of the landlord or other specified person final and binding, so as to oust the ordinary jurisdiction of the FTT to review its contractual and statutory legitimacy: Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); [2014] 3 EGLR 12; [2014] EGILR 38, Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC); [2015] PLSCS 12; [2015] L & TR 19 and Oliver v Sheffield City Council [2017] EWCA Civ 225; [2017] PLSCS 83; [2017] 1 WLR 4473 disapproved.
Those provisions gave the landlord two relevant closely related rights: to trigger a re-allocation of the originally agreed contribution proportions; and 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 which was challenged, and it was not suggested that it fell foul of any part of the statutory regime, apart only from section 27A(6). But that subsection did not avoid the power of the landlord to trigger and conduct that re-apportionment, because the jurisdiction of the FTT to review it for contractual and statutory legitimacy was not impeded.
(4) The original question, whether there should be a re-apportionment and if so in what fractions, was not a “question” for the FTT within the meaning of section 27A(6). The question was whether the re-apportionment had been reasonable which the FTT was able to, and did, answer in ruling on the tenants’ application under section 27A(1). The decision and the reasoning of the FTT would be restored.
Philip Rainey KC, James Sandham and Robert Brown (instructed by Northover Litigation) appeared for the appellants; Simon Allison and Brooke Lyne (instructed by Penningtons Manches Cooper LLP) appeared for the respondents. Justin Bates and Rupert Cohen (written submissions only) (instructed by Property Management Legal Services Ltd) appeared for the intervener.
Eileen O’Grady, barrister
