UK Supreme Court reinstates residential landlords' discretion to apportion service charges
Published on 21st Feb 2023
Unanimous decision limits the role of the First-Tier Tribunal to reviewing contractual and statutory legitimacy
The Supreme Court has handed down its decision in the case of Aviva Investors Ground Rent Ltd and another v Williams and others which considered the First-Tier Tribunal's (FTT) role in intervening in a landlord's "discretionary management decisions" when varying service charge contributions in residential leases.
The Supreme Court , in a unanimous decision, overturning the previous decision of the Court of Appeal, held that the landlord was entitled to reapportion service charge contributions and depart from the fixed percentages included within the residential leases on grant, where the leases allowed for landlord discretion.
This judgment overturns previous decisions of the Supreme Court that had cast doubt over a landlord's ability to re-apportion for fear of the tribunal unravelling their management decisions. It will be welcomed by landlords.
The case concerned a block of 38 flats in Southsea, owned by Aviva Investors. The leases contained a clause that allowed the service charge rate to be set at either a fixed percentage or part (b)"such part as the Landlord may otherwise reasonably determine". For years, Aviva Investors had been demanding service charges on the basis of an apportionment higher than the specified fixed percentages in the leases.
The tenants took the view that the landlord was acting unlawfully, arguing that the re-apportionment provision in part (b) was void under section 27A(6) of the Landlord and Tenant Act 1985, which is an anti-avoidance provision. The tenants argued that part (b) should be removed from the leases as a result and so only the, original, fixed percentages should remain.
Conflicting first instance decisions
At first instance in 2018, the FTT held that the wording of the clause as originally drafted did not oust the tribunal from jurisdiction and that the landlord's power to re-apportion was not voided by section 27A(6) and so was lawful and enforceable. It also concluded that the charges were reasonable.
On appeal from the tenants, this decision was overturned by the Upper Tribunal, which pencilled out part (b) and concluded that, without this section, the lease obliged the tenant to pay the original fixed percentage towards the service charge only. This deleted wording was justified under the "blue pencil test" which provides that if part of a contract is found to be void, the courts have been willing to sever that provision if the remaining contract makes sense.
Court of Appeal disagrees with lower courts
The landlord appealed to the Court of Appeal, which took a middle ground and sought to apply a more nuanced approach to the clause than the lower courts. It determined that it was only the reference to the term landlord in part (b) of the clause that rendered it in breach of section 27A(6). By striking out reference to the landlord in the re-apportionment clause, so it instead read ''or such part as many otherwise reasonably be determined", it became possible for either the landlord or the tenant to refer the question of an alternative reasonable percentage to the FTT if disputed. This interpretation meant the FTT had ultimate discretion to determine the proportions in place of the landlord, but a landlord's management discretion wasn't voided in its entirety.
Supreme Court overturns judgment
The leaseholders appealed to the Supreme Court arguing that the Court of Appeal were wrong to amend only part of the clause as this failed to deal with their argument that the clause in its entirety breached section 27A(6).
In a surprising turn of events given its rulings in previous cases, the Supreme Court restored the decision of the FTT that the clause in its current form did not oust the jurisdiction of the FTT, which had already been able to rule on its reasonableness and so section 27A(6) was not engaged.
The Supreme Court rejected the Court of Appeal's argument that section 27A(6) was designed to allow the FTT to step into the shoes of the landlord with management decisions, as this would be an inappropriate and unmanageable role for the tribunal to take. It would require them to decide a multitude of commercial service charge decisions as opposed to exercising their adversarial supervisory role as intended by Parliament under the Act.
Most notably, the Supreme Court overturned a previous decision of the Court of Appeal in Oliver v Sheffield City Council, which followed the controversial decision of Windermere Marina Village Ltd v Wild, that held that provisions permitting a landlord ultimate discretion as to service charge apportionment (whether or not stated to be final and binding) were void as a result of section 27A(6).
Osborne Clarke comment
The Supreme Court's decision has come as a surprise, mainly as a result of the stance it has taken to the scope of section 27A(6) in previous decisions. However, it was clearly a policy decision to depart from previous reasoning (having not had the chance to thoroughly interrogate the provision in the act in the previous cases, according to Lord Briggs), given the scope for chaos if landlords felt paralysed to make decisions pending a decision from the FTT, which would become overwhelmed with applications.
The decision does not, however, mean that landlords of leases, with only fixed percentages and no built-in discretion for the landlord, will be free to reapportion. In more modern leases where a "fair and reasonable" proportion has to be applied, landlords will still have to evidence their thought process and be able to justify their rationale, should they face a challenge to the contractual and statutory legitimacy of their proposal.
Lauren Gardener, Trainee Solicitor, and Jack De Beetham-Walton, Paralegal, at Osborne Clarke helped prepare this Insight.