Leases come in all shapes and sizes and, it is not uncommon to see a wide variety of ways in which the apportionment of service charges between leaseholders in a block is calculated. For example a number of leases will contain a fixed percentage of the apportionment or an apportionment of 1/32nd, but it is also not uncommon for leases to include a clause along the lines of ‘a fair proportion as the landlord acting reasonably shall from time to time determine’. When the later clause exists, what is a fair and reasonable apportionment? Can this be determined by the First-Tier Tribunal (FTT)?
These questions were largely answered in the case of Bradley and Another -v- Abacus Land IV Ltd.
Bradley and Another -v- Abacus Land IV Ltd Case Background
This case involved two leaseholders from a block of 168 residential flats, which were all within one block and contained four commercial units and a gym.
The facts in this case were somewhat unusual in that the Respondent in this case was the freehold owner of the block and, landlord. In 2013, the landlord granted a lease over the gym to a Mr White and the gym was therefore held under a separate lease.
The residential leases within the block contained a service charge apportionment clause similar to the one previously mentioned. Additionally, the residential leases also provided that the leaseholders could use the facilities at the block as the landlord may choose to provide. Such facilities included the gym.
The Gym
The residential leaseholders, prior to 2013 had exclusive use of the gym. The lease granted to Mr White for the gym in 2013 permitted Mr White to make the gym available to users who did not live in the development on the basis that the residential leaseholders were not precluded from making use and accessing the gym themselves.
The lease for the gym did provide for the payment of an annual rent by Mr White but did not surprisingly include a service charge for the costs of the maintenance of the gym.
A year after the lease was granted to Mr White for the gym, the freeholder and the residential leaseholders of the block agreed that the rent paid by Mr White for the use of the gym would be used to contribute to the costs of maintaining the gym. The intention was that this would effectively subsidise the service charge that would otherwise have been payable by the leaseholders for the gym. This agreement remained in place and went unchallenged for approximately 5 years. However, in 2019, the freeholder and Mr White became involved in a dispute regarding Mr White’s obligations under the gym lease to repair and maintain the gym.
The dispute was resolved by the freeholder agreeing with Mr White to refurbish the gym and also to not take any rent from Mr White for a period of 3 years.
As a result of the agreement between Mr White and the freeholder, there was a dispute that the rent that had previously been used by the freeholder to subsidise the service charge for the gym was now not available, which meant that the freeholder reverted to the service charge provisions within the residential leases, meaning that the leaseholders again had to contribute fully to the costs of the maintenance of the gym.
FTT Proceedings
The leaseholders took the decision to make an application to the FTT in relation to Section 27A of the Landlord and Tenant Act 1985, for a determination that the recovery of the service charge costs in relation to the repair and maintenance of the gym was not fair and reasonable. The period of challenge spanned the years 2013 (commencing when the gym lease was originally entered into) to 2021 when the settlement with Mr White had been breached with the freeholder.
In addition to challenging the reasonableness of the service charges as set out above, the leaseholders asked the FTT to determine what would be a fair and reasonable apportionment in respect of the service charges attributable to the gym maintenance.
In the first instance, the FTT held that it did not have jurisdiction to determine the charges from 2013 to 2020 on the basis that the leaseholders had paid the charges without raising any objections. In essence, the tribunal determined that the leaseholders had agreed and admitted that the service charges were due and payable. The tribunal further determined that the apportionment during this period had been agreed by the residential leaseholders.
The tribunal further determined that any charges incurred from 2020 onwards, that the freeholder was entitled under the terms of the residential leases to recover all of the service charge costs in relation to the gym from the leaseholders. The tribunal’s position was that the freeholder’s decision in respect of the service charge apportionment was “not a decision of the type where it could be said that no reasonable landlord in a similar position could have ever made it”.
The leaseholders filed an appeal.
The Appeal
The Upper Tribunal (UT) heard the appeal of this matter and agreed with the position of the FTT in relation to the charges for 2013 to 2020. It was confirmed by the UT that as the leaseholders had not raised a dispute in relation to the payment of these charges they had for the purposes of Section 27A(4) LTA 1985 admitted that those sums were due.
The second issue that was considered in the appeal was that of the service charge apportionment in respect of the gym charges. On this occasion the UT did not uphold the determination of the FTT. The UT held that the decision in relation to how the costs of the gym service charges should be apportioned should be “objectively reasonable”.
The UT applied the test of objective reasonableness and based on this, the UT determined that it is unfair to charge the leaseholders the full service charge in respect of the repair and maintenance of the gym and as such, it is not objectively reasonable that the residential leaseholders had to pay for all of the gym costs after 2020.
Conclusion
This is an interesting case in so far as it confirms the tribunal’s stance in respect of determinations on what would be a fair or reasonable proportion of service charge. This case confirmed that the tribunal is not responsible for such a determination, but only needs to consider if any apportionment that has been decided by the freeholder is within the range of what could be considered fair or reasonable.
If faced with a challenge in relation to service charge apportionment clauses where the leases simply stated they need to be a fair and reasonable apportionment, it is important to consider why any decision in relation to the apportionment has been made and, if such a decision can be justified as being within the range of options that could be considered fair and reasonable.
This does highlight that there may be a range of possible apportionments that are available to a freeholder and provided that the freeholder can justify the decision that they have come to and, that the decision is within the range of reasonable options then the tribunal, in applying the objective reasonableness test are likely to find in the freeholder’s favour.
