Author
Saleem Fazal

Saleem Fazal

Partner

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Author
Saleem Fazal

Saleem Fazal

Partner

Read More

13 April 2021

RED alert - Spring 2021 – 1 of 6 Insights

Service charges: the landlord always knows what's fair

  • Briefing

Criterion Buildings Ltd v McKinsey & Company Inc (United Kingdom), McKinsey & Company Inc [2021] EWHC 216 (Ch), 11 February 2021)

Summary 

The High Court was asked to decide on the meaning of "a fair proportion" in the context of a tenant's liability to pay service charge pursuant to its lease. The Judge decided that it was for the landlord to determine this and not a question for the court to decide unless the apportionment was not "rational".

The facts

McKinsey occupied part of the high-profile Criterion building in Piccadilly Circus from March 1993 until September 2018, pursuant to a lease (subsequently extended but not relevant for these purposes). Other tenants affected by the service charge apportionment included Lilywhites and the Criterion Theatre and restaurant.

There were in fact many other issues raised in relation to the service charge liability but the apportionment issue is of the most interest. The lease contained the usual service charge provisions and required McKinsey to pay "to the Landlord the due proportion of the service charge." In turn, due proportion was defined as:

  • “the due proportion” shall mean a fair proportion to be determined from time to time by the Landlord or the Landlord’s Surveyors taking into account the use made of and the benefit received from the services and expenses and each of them and for the avoidance of doubt different proportions may be applied to different services or items of service charge expenditure (including if appropriate the attribution of the whole of the cost of any service or item of service charge expenditure to the Tenant) and the Landlord shall (having regard to the terms of this Lease and the principles of good estate management) adjust the due proportion to make fair allowances for differences in the services provided or supplied to or enjoyable by any Lettable Unit. (our emphasis)

McKinsey argued that the amounts charged by Criterion as landlord were not "fair" and so did not constitute the “due proportion". It appears that McKinsey considered that the approach taken by the landlord favoured another tenant (the Criterion Theatre and Restaurant) at their expense.

Criterion acquired the landlord's interest in 2015. Prior to that, the landlord had operated a system of apportionment which involved six separate schedules. In 2014, that system was simplified by a two-schedule system which Criterion adopted and utilised throughout McKinsey's lease. It appears that this system was based on floor areas of the various tenants.

There was, however, a difference in the way the theatre's space was assessed. The judge found that this was probably because it only fully occupied the space at the lowest level and its use of the remaining space was partial given the nature of a theatre layout. For that reason, the floor areas appeared to favour the theatre when comparing it to the volume of the space demised.

Criterion argued that the question of apportionment was a purely subjective decision and it was for the landlord to determine. However, Criterion accepted that the determination had to be "rational".

In response, McKinsey submitted that “a fair proportion” was an objective standard even though it fell to be determined by the landlord. They said that this led to a more commercially acceptable outcome and the court was entitled to determine the point if there was a dispute.

The decision

McKinsey needed to establish from the facts that the apportionment was not "fair" before Criterion was required to justify it on any basis. On the facts, the Judge did not consider that McKinsey had done so. The methodology adopted by Criterion and its predecessors was consistent and appears to have taken into account the unique layout of the theatre. 

The judge also made it clear that this was a subjective decision by the landlord as the lease required the landlord to determine the question of what is a “fair” proportion, taking into account the use made and benefit received by the tenant concerned. Where the landlord did not have an "axe to grind", it is not for the court to determine as it made no financial difference to the landlord how it is done. If this approach was not taken, a tenant could simply reject the decision as “unfair” which would not be workable. 

Our comments

The outcome is perhaps not surprising given the service charge had been apportioned on the same basis for 25 years and the methodology reviewed at least twice in that period. It is also a unique case given that a theatre was part of the building. However, the decision does seem to confer significant power onto landlords who might see a commercial benefit in favouring certain tenants. Having said that, it might then be possible for the affected tenants to argue that the apportionment was not "rational".

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