Decisions following the Supreme Court ruling in Aviva may create uncertainty that needs to be resolved.
Readers may be familiar with Williams and others v Aviva Investors Ground Rent GP Ltd and another [2023] UKSC 6; [2023] EGLR 18), concerning service charge apportionments. Many leases provide for the landlord or the landlord’s surveyor to determine or vary the proportion of the service charge to be paid by each unit in a block, rather than providing for a fixed percentage. Such clauses are frequently caveated with phrases that seek to restrict the landlord to a fair or reasonable apportionment. Prior to Aviva, the orthodox understanding was that clauses permitting the landlord to make the determination were void (because they were contrary to section 27A(6) of the Landlord and Tenant Act 1985) and it was for the First-tier Tribunal or court to determine what was, for example, fair (see Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); [2014] 3 EGLR 12). In practice, landlords would often make (or purport to make) the determination in the first instance and then leaseholders might challenge that apportionment at the FTT.
The decision in Aviva
Aviva concerned a clause that provided for a fixed apportionment or such other apportionment as the landlord might reasonably determine. The Upper Tribunal (Lands Chamber) held that the variation provision was void, leaving only the fixed percentages, the Court of Appeal held that the effect of section 27A(6) was that either the landlord or the tenant could propose an apportionment which could then either be agreed or determined by the FTT. The Supreme Court held that the provision in the lease, allowing the landlord (and only the landlord) to vary the apportionment was not voided by section 27A(6) – such a provision is void only insofar as it purported to make the landlord’s determination final. If the landlord’s discretionary decision fell within the landlord’s contractual powers under the lease, then there is at most a power to review for rationality (see Braganza v BP Shipping Ltd [2015] UKSC 17).
Post Aviva
In Hawk Investment Properties Ltd v Eames and others [2023] UKUT 168 (LC); [2023] PLSCS 129, the apportionment was to be “calculated by some… just and equitable method to be conclusively determined by the landlord’s surveyor”. The Upper Tribunal held that the word “conclusively” was void and that the FTT had been right to conclude that the landlord’s proposed (new) apportionment was not “just and equitable”. The Upper Tribunal held that, as the proposed new method was not, in its view, “just and equitable”, the FTT had been entitled to reject it.
In Braganza v Riverside Group Ltd [2023] UKUT 243 (LC); [2023] PLSCS 166 (determined on written representations likely to have been made pre-Hawk) the apportionment was to be determined as either a fixed amount or “if in the reasonable opinion of the surveyor it shall at any time become necessary or equitable to do so he may increase or decrease the [apportionment]”. The leaseholder ultimately argued that the apportionment was not “rational or accurate”. The Upper Tribunal held:
“It follows that, after Aviva, the FTT’s only task when a leaseholder challenges a discretionary apportionment made by a landlord or its surveyor will be to consider whether the apportionment was ‘rational’, in the sense that it was made in good faith and not arbitrarily or capriciously, and was arrived at taking into consideration all relevant matters and disregarding irrelevant matters. Unless for one of those reasons the decision was not one which any reasonable landlord could make, the FTT must apply it, and may not substitute an alternative apportionment of its own.”
The Upper Tribunal then went on to determine that the landlord’s decision was rational and reasonable. Riverside does not cite Hawk.
There is at least a possibility that Riverside and Hawk reveal a different approach. In Hawk the landlord’s apportionment was rejected because it did not, in the view of the Upper Tribunal, comply with the landlord’s contractual duty to adopt a “just and equitable” method. The Upper Tribunal did not limit itself to simply reviewing whether the landlord had acted rationally in adopting the method it had. It appears to have simply considered this a determination as to whether the contract had been complied with, but it does not take much imagination to see how, in leases that impose requirements of fairness or equity, such an approach reopens a significant role for the FTT as an arbiter of what is fair or equitable.
In Riverside, the Upper Tribunal simply reviewed whether the landlord’s decision was rational, then concluded that it met the contractual requirement of being reasonable.
The decisions may be reconcilable on the basis that, in Riverside, the apportionment was only challenged on the basis of rationality and accuracy. The Upper Tribunal’s comments in Riverside about how the exercise of a discretion may be challenged might then be said to bite only when the case gets that far, ie once the FTT is satisfied that (other) contractual hurdles have been met. The covenant in Hawk was different to that in Riverside and the Upper Tribunal in Hawk considered that it imposed more fetters on the landlord than rationality.
There is, however, at least a tonal difference between Riverside and Hawk. It might be asked that, if contractual reasonableness is rationality (the definition of reasonableness in a contractual sense being the question referred to the Supreme Court in Braganza v BP Shipping), then why would the FTT’s role, or the outcome of a case, be radically different in a case where the apportionment was required to be contractually reasonable to one where it was required to be fair? Putting it differently – did the draftsperson really think the words meant something radically different and, if they didn’t, did parliament really intend a different role for the tribunal depending on fine distinctions in lease terminology? The inverse argument might be that most leases are different and that the desire of modern managers to have rules or principles that can be applied across a portfolio often run aground on the diverse wording of leases.
The Upper Tribunal does not bind itself, although it should follow its own decisions unless convinced they are wrong. But those working in the field of residential property will be aware that the Upper Tribunal departs from its own decisions fairly frequently. Until a settled line of decisions emerges, or a higher court produces authority binding on it, then this may remain a difficult area for landlords or leaseholders to obtain certainty.
Richard Granby is a barrister at Tanfield Chambers