Landlord and tenant – Service charges – Apportionment – Section 27A(6) of the Landlord and Tenant Act 1985 – Appellant landlord having power to change method of apportioning service charges – Appellant appealing against decision of First-tier Tribunal (FTT) about validity of decision to change method in exercise of power – Whether method of apportionment in lease inoperable or manifestly inequitable – Whether new method of apportionment just and equitable – Appeal dismissed
The appellant was the freeholder of Heritage Close, a 1970s development in St Albans, comprising commercial units on the ground floor and residential maisonettes above. The residential leases prescribed a method of apportioning the service charge and gave the landlord power to change that apportionment in certain circumstances. The respondents were the lessees of the maisonettes.
The apportionment procedure in the leases was that the landlord’s surveyor was to calculate the apportionment every year before interim service charges were demanded in January for the coming year.
After the abolition of domestic rates in 1990, the service charges were apportioned by a method whereby the landlord calculated that, based on the 1990 rateable values, the residential lessees together were to pay 9.74% of the total service charge, with the commercial lessees paying the balance of 90.26%. That method had been used ever since.
However, towards the end of 2021 the appellant proposed a new method of apportionment and applied to the FTT under section 27A of the Landlord and Tenant Act 1985 to determine the reasonableness and payability of the service charges. The issue in the FTT was the validity of the new apportionment in light of section 27A(6).
The FTT decided that, although the rating system in operation when the lease was granted had been “changed or abrogated” by the abolition of domestic rating, the method of apportionment set out in the lease was neither “inoperable nor manifestly inequitable” (the condition precedent). Accordingly, the method of apportionment operated since 1990 would continue. If that decision was wrong, the FTT went on to decide that the appellant’s proposed new apportionment method was not “just and equitable”. The appellant appealed.
Held: The appeal was dismissed.
(1) The abolition of domestic rating meant that the system in operation when the leases commenced had been changed or abrogated so that the method of apportionment in the lease was inoperable. Accordingly, the decision of the FTT about that condition precedent was set aside and the UT’s decision substituted that the condition precedent had been satisfied.
(2) Section 27A(6) was an anti-avoidance provision, designed to ensure that the jurisdiction of the FTT to determine whether a service charge was payable could not be ousted by terms imposed by a landlord, for example by stating that his own decision was to be final.
It rendered void a provision in a lease for the determination in a particular way of any question which might be the subject of an application under subsection (1) or (3). Under those two subsections, the FTT had jurisdiction to decide whether service charges were payable under the lease, and whether there was any statutory restriction upon their amount. The section did not confer a jurisdiction to scrutinise the landlord’s management decisions.
On an application under section 27A(3) in relation to a prospective service charge, the FTT might well be invited to exercise its jurisdiction before the landlord made the relevant discretionary management decisions, but the jurisdiction would not thereby be enlarged merely because of the timing: Aviva Investors Ground Rent GP Ltd v Williams [2023] UKSC 6; [2023] EGLR 18 applied.
(3) The only part of the contractual provision in the present case that had to be ignored was the provision that the determination of the landlord’s surveyor was to be conclusive. It was clear that the apportionment by the landlord’s surveyor was not rendered void. Instead, the FTT had to determine whether it was contractually legitimate or whether the new apportionment (and demands based on it) breached the terms of the lease. Essentially the dispute was about what the lease required.
In assessing the contractual legitimacy of service charges based on the new apportionment that the appellant proposed, the FTT was required to assess whether the method determined by the landlord’s surveyor was “just and equitable” as required by the lease.
It was difficult to see how the landlord would not be in breach of contract if his new apportionment was not just and equitable; and for the landlord to be able to make a conclusive decision that his new scheme was just and equitable was to nullify the anti-avoidance provision of section 27A(6).
(4) In assessing whether the FTT fell into error in deciding that the new scheme was not a just and equitable apportionment, the UT bore closely in mind that it was not open to the FTT to impose its own conception of what would be the fairest method. Nor did it do so. Moreover, the FTT had conducted a site visit and so was keenly aware of the nature and layout of the property and of the relationship between the residential and commercial parts of the building.
The new scheme had to be “just and equitable” between both parties to the lease, to the appellant as well as to the leaseholder. There was no evidence that the new method would bring any particular benefit to the appellant. To that extent it was relevant that there was no evidence that any of the commercial tenants was having trouble with the current arrangements and so no evidence of rental voids as a result.
Accordingly, the FTT did not fall into error. It gave ample reason for its decision that the new method proposed by the appellant was not “just and equitable” as the lease required: Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); [2014] 3 EGLR 12; [2014] EGILR 38, Sheffield City Council v Oliver [2017] EWCA Civ 25; [2017] PLSCS 83 and Aviva v Williams considered.
(5) The most important factor which swayed the FTT was the failure of the new apportionment method to take account of different levels of use and benefit as between the residential and commercial properties. That would not be contrary to the lease. However, a simple floor area apportionment, which might well be appropriate for a purely residential or purely commercial property, was not obviously fair without some consideration whether the use made of services or the benefit obtained from them was actually proportionate to floor area.
Mark Loveday and Ceri Edmonds (instructed by Darlington Hardcastles Solicitors, of Rickmansworth) appeared for the appellant; Nicholas Grundy KC (instructed by SA Law LLP, of St Albans) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Hawk Investment Properties Ltd v Eames and others