Can your Landlord reapportion the Service Charge as it pleases?

On 8 February 2023, the Supreme Court handed down a judgment on Aviva Investors Ground Rent GP Ltd and another (Respondents) v Williams and others (Appellants) and changed the position between leaseholders and landlords. The Court held that the powers of landlords to reapportion the amount of fixed service charges in residential leases are not limited to section 27A(6) of the Landlord Tenant Act 1985 (“LTA 1985”). The decision narrows the scope of disputes concerning reapportionment of service charges provisioned in residential leases.

Background

The case concerned an application to the First-tier Tribunal Property Chamber (“FTT”) by the individual leaseholders of 38 flats in a mixed-use residential and commercial building.

For a number of years the landlord had exercised its reapportionment power within the leases, which provided that the landlord may demand a fixed service charge percentage “…or such part as the Landlord may otherwise reasonably determine” and demanded percentages different to the fixed percentages. The leaseholders applied to the FTT for a determination that the reapportionment clause was in breach of s.27A(6) of the LTA 1985 and therefore void.

1. 27A(6) of the of the LTA 1985 provides:

“An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void in so far as it purports to provide for a determination—

(a)     in a particular manner, or

(b)     on particular evidence, of any question which may be the subject of an application under subsection (1) or (3).”

The primary function of s.27A(6) of the LTA 1985 is to make void any clauses within a lease that prevent the FTT’s functions.  An example would be where a clause requires that service charge disputes are determined by the landlord’s surveyor whose decision is final and binding, thereby attempting to prevent the matter from being referred to the FTT.

In the first instance, the FTT ruled that the reapportionment clause was not void, as the leaseholders could challenge the reasonableness of the reapportionment. The reapportionment was therefore enforceable, lawful and, the FTT also determined it to be, reasonable.

The leaseholders challenged the decision at the Upper Tribunal (“UT”) who determined that the clause was void, and was, therefore, to be read as though the landlord could charge only the fixed percentage service charge.

The landlord’s appeal to the Court of Appeal upheld the decision of the FTT, i.e. that landlords could reapportion the service charge, as this did not prevent the FTT from determining the reasonableness of the reapportionment.

The Supreme Court’s Decision 

The Supreme Court dismissed the leaseholders’ subsequent appeal and held that the powers of landlords to reapportion service charge was not void  by section 27A(6) of the LTA 1985.

The Supreme Court found that the FTT still had the power to determine the reasonableness of the reapportionment.

It was held that the landlord could:

• reapportion the service charge; and
• decide the new percentage; and

that either of the above required the landlord to act reasonably.  This did not prevent the FTT from considering whether the reapportionment was reasonable under s.27A(6) of the LTA 1985.

Conclusion

 Where a lease allows for reapportionment and provides that the reapportionment must be “fair and reasonable”, that clause will not be deemed void and the landlord retains its entitlement to exercise this power. However, the decision of the Supreme Court does not mean that a landlord has free reign to charge and reapportion service charge as they wish; leaseholders can still challenge the reasonableness of the reapportionment and apply to the FTT for a determination as to whether the reapportionment is in fact fair and reasonable.

How we can help

It is essential for both leaseholders and landlords to seek legal advice on the implications of their service charge clauses.  Axiom DWFM regularly advises both leaseholders and  landlords and should you have an issue or query regarding service charge provisions within your leases, please contact a member of our Dispute Resolution Department.