Matt Ashley predicated that things could get messy after the Windermere decision last June: indeed, a recent case has now taken it to the next level.
Following Windermere, we know that an agreement in a lease of a dwelling that the apportionment of service charge will be determined by a third party, whose decision shall be final and binding, is void (by virtue of s27A(6) of the LTA 1985).
This concept has now been applied where there is an intermediate landlord between the residential owner occupier and the freeholder. This has allowed residential subtenants to challenge the service charge paid by the intermediate landlord to the freeholder, despite there being no contractual relationship between the subtenants and the freeholder. Furthermore, an agreement that a third party will determine the service charge proportions is likely to be void, whether expressed to be final and binding or not.
In the case of Gater v Wellington residential subtenants in a mixed use development were obliged to pay a fixed proportion of the service charge sum payable by their immediate landlord to the freeholder. The sum payable by their immediate landlord to the freeholder was a fair amount determined by the freeholder’s surveyor “taking into account the relevant floor areas within the building or other reasonable factors”. The subtenants disagreed with the proportion of service charge allocated to their immediate landlord (for which they were picking up part of the tab). Despite there being no contractual relationship between the residential subtenants and the freeholder, the Upper Tribunal found that the residential tenants were entitled to ask the First Tier Tribunal to review the apportionment in the intermediate lease.
More than ever, in developments where there is or may be a residential element, you should take extra care to ensure that you have appropriate mechanisms for service charge apportionments.