Much has been written (and said – listen to the EG podcast) about the judgment in Criterion Buildings Ltd v McKinsey & Co (Inc) (United Kingdom) and another [2021] EWHC 314 (Ch); [2021] PLSCS 35, which addresses the apportionment of service charge between tenants in a multi-let building. But how does this judgment impact on the decision in Scottish Mutual Assurance plc v Jardine Public Relations Ltd [1999] PLSCS 74, a case which is frequently relied on by tenants when challenging the apportionment of service charge?
The Scottish Mutual decision
The facts of Scottish Mutual are not unusual. The landlord carried out extensive works to the roof of a multi-let building in the final year of the defendant tenant’s term and sought to reclaim a significant proportion of the cost of the works from the tenant. The tenant contested both the reasonableness of the works undertaken and the fairness of the proportion the landlord had demanded.
The case is a favourite of tenants confronted with large service charge demands in the final years of their lease due to the decision that the amounts expended on the roof works were not reasonably and properly expended vis-à-vis the tenant, for a number of reasons, including the length of the unexpired residue of the term. However, tenants also rely on the judge’s (obiter) comment that:
“…the determination of the ‘fair proportion’ to be contributed by the defendant should reflect the shortness of the term and all the other considerations which I have referred to above when concluding that the totality of the expenditure was not ‘reasonably and properly expended or incurred’.
“On this basis a ‘fair proportion’ might, for example, be calculated by reference inter alia to the expected life of the roof (25–30 years…) and to the unexpired period of the term.”
This comment has led leading textbooks to advise that it may be the case that the landlord’s surveyor should take into account the benefit the tenant would derive from the works and the length of the unexpired term of the lease when apportioning service charge. Needless to say, many tenants raise this argument when challenging service charge demands.
The Criterion Buildings decision
In Criterion Buildings, one of the points the judge considered was whether the landlord had fairly apportioned the service charge due between the various tenants in a multi-let building.
The judge held that:
“Reading the lease as a whole… the decision given in the present case to the landlord [ie how the costs incurred by the landlord in providing the services should be apportioned] is subjective rather than objective, albeit subject to rationality and (in a case where it is pleaded) the Braganza implied term (which does not import the objective standard of reasonableness)”.
Unfortunately for the tenant in this case, the court found that they had failed to raise an issue as to the wrongness of the way in which the landlord apportioned the service charge. However, even if the tenant had raised an issue, it is clear that the court would not have approached its analysis of the landlord’s apportionment in the way proposed in Scottish Mutual. That is to say, it would not have carried out its own assessment of what was fair or devise its own apportionment method.
Instead, the court would only intervene where the approach adopted by the landlord was irrational or, where the Braganza duty (Braganza v BP Shipping Ltd [2015] UKSC 17) applied, if the landlord had failed to take the right matters into account or the result reached was so outrageous that no reasonable landlord could reach it. It is worth noting that in this case the tenant had been denied permission to amend its defence to plead for an implied Braganza duty.
Scottish Mutual post-Criterion Buildings
A question that the Criterion Buildings case does not address is what factors a landlord should take into account when a Braganza duty is implied. No doubt the answer to that question will depend on the wording of the individual lease. I anticipate that tenants will seek to control the exercise of the landlord’s discretion by negotiating service charge provisions which list the factors that must be taken into account by the landlord or otherwise fetter the landlord’s discretion. Such provisions could foreseeably address the points raised by the judge in Scottish Mutual.
But what is the position where the lease is silent? A tenant could surely try its luck in arguing that a Braganza duty should require the landlord to consider the length of the unexpired residue of the term and the benefit the tenant would derive from the works when exercising its discretion.
We may see more tenants challenge the reasonableness of the overall costs incurred by the landlord on the works, in addition to challenges relating to the apportionment. In this regard Scottish Mutual is still a helpful authority for tenants that the length of the remaining term should be taken into account by landlords when seeking to recover costs from tenants.
Therefore, while Criterion Buildings is a blow to tenants, there are still arguments to be had on apportionment and arguments relating to the reasonableness of the costs incurred on the works in and of themselves remain.
Chloe Meredith is a senior associate at Ashurst
