Reapportionment of service charges

Elizabeth Dwomoh considers an important Supreme Court decision concerning the effect of section 27A(6) of the Landlord and Tenant Act 1985 on reapportionment provisions in long leases Key points The role of the First-tier Tribunal under section 27A(6) of the Landlord and Tenant Act 1985 is limited to a review of the contractual and statutory lawfulness of the service charge demanded Section 27A(6) does not confer jurisdiction on the FTT to determine the apportionment itself or make other such managerial decisions A contractual provision is avoided by section 27A(6) to the extent it purports to oust the jurisdiction of the FTT by making the landlord or another third party’s decision final and binding Windermere Marina Village Ltd v Wild and others [2014] UKUT 163 (LC); [2014] 3 EGLR 12, Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC); [2015] PLSCS 12 and Oliver v Sheffield City Council [2017] EWCA Civ 225; [2017] PLSCS 83 provided authority for the proposition that any provision in a long lease which gave “contractual determinative effect” to a discretionary apportionment or management decision of the landlord in relation to service charges was void by virtue of section 27A(6) of the Landlord and Tenant Act 1985, whether or not it provided expressly for the landlord’s decision to be final and binding.  The Supreme Court in Williams and others v Aviva Investors Ground Rent GP Ltd and another [2023] UKSC 6; [2023] PLSCS 29 has now determined that these lines of authorities were wrongly decided. The statutory provision Pursuant to sections 27A(1) and 27A(3), the First-tier Tribunal has jurisdiction to determine whether a service charge is payable and whether costs incurred for services, repairs, maintenance, improvements, insurance or management of any description are payable and, if so, the amount payable and when and by whom it should be paid. An application cannot be made to the FTT under sections 27A(1) and 27A(3) in respect of costs that have been:  a) agreed or admitted to by the tenant;  b) referred to arbitration; or  c) the subject of determination by the court: section 27A(4). Section 27A(6) expressly voids any agreement by a tenant that provides for a determination of any question that could be the subject of a referral to the FTT under sections 27A(1) and 27A(3). The conundrum Philip Williams and his co-appellants were the long leaseholders of residential flats within a mixed-use development situated in Fratton Way, Southsea, Hampshire. The respondents, Aviva Investors Ground Rent GP Ltd and Aviva Investors Ground Rent Holdco Ltd, were their landlords. The service charge provisions of each of the tenants’ leases provided for the payment of insurance costs, building services costs and estate services costs by a fixed percentage “or such part as the landlord may reasonably determine”. The tenants applied to the FTT under section 27A for a determination of the reasonableness and payability of service charges for the 2018 service charge year. The key issue in dispute was the apportionment of service charges between the flats. The tenants argued that the landlords’ contractual entitlement to determine an apportionment different from that stated in their leases was rendered void by section 27A(6), because it sought to oust the jurisdiction of the FTT. In the alternative, the tenants argued that the reapportionment imposed by the landlords was unreasonable.  Differing decisions The FTT determined that the landlords’ power to reapportion under the contractual provisions of the lease did not prevent the tenants from challenging the reasonableness of the apportionments. Further, the tenants’ challenge in respect of the reasonableness of the reapportionment also failed.  On appeal, the Upper Tribunal (Lands Chamber) found for the tenants. It determined that any provision that purported to allow the landlord to determine the apportionment of the service charges was avoided by section 27A(6). This would be the effect whether or not the landlord’s decision was final and binding. The fixed percentages in the leases were immutable unless the parties agreed otherwise. The landlords appealed. In allowing the appeal in part, the Court of Appeal found that the provision for reapportionment was void to the extent that it could only be exercised by the landlord. Yet, either party to the relevant leases could apply to the FTT for reapportionment under section 27A(1). The finale In a unanimous decision, the Supreme Court upended the traditional orthodoxy. It found that Windermere Marina Villages Ltd, Gater and Oliver were wrongly decided. In so doing, it focused its analysis on the operation and effect of section 27A(6).  The Supreme Court acknowledged that section 27A(6) was an anti-avoidance provision. It did not enlarge the jurisdiction of the FTT. The role of the FTT was limited to a review of the contractual and statutory lawfulness of the service charge demanded, which included reapportionment. The role of the FTT was not to determine the apportionment itself.  A contractual provision would only be void to the extent that it purported to oust the jurisdiction of the FTT by making the landlord or another third party’s decision final and binding. The takeaway The decision of the Supreme Court will provide welcome relief and certainty to landlords and managing agents who carry out such reapportionment exercises and make such discretionary management decisions. As long as the power of the FTT to review the contractual or statutory legitimacy of the same is not ousted, section 27A(6) will not bite.  Elizabeth Dwomoh is a barrister at Lamb Chambers Image © Ranjith Siji/Pixabay