Reapportioning service charge contributions in a mixed-use block

The FTT is regularly asked to consider the fairness of how service charges are apportioned. The issue of apportionment can get even trickier in a mixed-use block, particularly when the residential / commercial balance changes.

Brady Solicitors’ Jonathan Watts reviews a recent case, where the freeholder needed to vary the service charge apportionment after converting some of the commercial units into flats.

Fairman and others v Cinnamon (Plantation Wharf) related to two mixed-use developments that were split close to 50:50 between residential and commercial. The residential units were on the upper floors, and the commercial space on the lower floors. The service charge was allocated to each property on a fixed percentage basis.

Despite the even split in terms of floor space, the commercial leaseholders paid more than 75% of the total service charge costs.

In 2015, the freeholder converted several of the commercial units into flats. New leases were created for the new flats, and the service charge was apportioned on a floor space basis.

This then led to a shortfall in the overall service charge contributions, which had previously been met by the commercial units, and the freeholder sought to reapportion the contributions from the existing residential leaseholders.

The change led to a substantial increase in service charge contributions, and the leaseholders objected.

What grounds did the freeholder have to reapportion the service charges?

The lease contained an express clause that allowed the service charge apportionment to be changed “if in the opinion of the Lessor it should at any time become necessary or reasonable to do so… by reason of any of the premises in the Building or Estate being added to or ceasing to exist… or for any other reasons”.

The freeholder applied to the FTT for a decision, under s27A of the Landlord and Tenant Act. As a quick reminder, s27A allows both freeholders and leaseholders to apply to the Tribunal for a determination as to whether a service charge is payable and, if it is, as to:

  • Who must pay it;
  • The person to whom it is payable;
  • How much should be paid;
  • When it must be paid;
  • How it must be paid.

The FTT determined that the new apportionment based on floor space was reasonable.

The leaseholders’ appeal at the Upper Tribunal was unsuccessful.

The UT found that the FTT was right to introduce the new apportionment based on floor space.

Whereas normally the FTT cannot interfere with how service charges are apportioned, this case was based on an express clause that allowed the apportionments to be varied.

The UT also found that the apportionment based on floor space was consistent with the approach to the existing residential flats as well as being a “common and well-established method of residential service charge apportionment”.

What can we take from this case?

As with the majority of service charge disputes, the facts turn on the lease. In this case, the case gave an express power for the service charge apportionment to be changed.

The residential leaseholders were understandably frustrated at the hike in their service charge demands but the reapportionment was not unlawful.

The case also highlights that a reapportionment based on floor space will generally be viewed as acceptable by the Tribunal.

If you are seeking to review how service charges are apportioned in your development, your first step should be to review your lease(s). For help with interpreting your lease, discussing service charge apportionment or any other legal property management question, please get in touch with our team at Brady Solicitors.

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