Supreme Court solution to service charge reapportionment

Quick read

Welcome to the second of our RED Alerts of 2023.

Also featuring in this month's update:

Aviva Investors Ground Rent GP Ltd and another v Williams and others [2023] UKSC 6

Summary

The Supreme Court clarified that the jurisdiction of the First-tier Tribunal (the Tribunal) is limited to reviewing whether a landlord has exercised a contractual power to reapportion the amount of service charge payable by leaseholders. Previous decisions which held that a landlord's power to reapportion the amount of service charge was void have been overturned.

The law

Section 27A(6) of the Landlord and Tenant Act 1986 (the Act) states that:

“(6) An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void in so far as it purports to provide for a determination—

(a) in a particular manner, or

(b) on particular evidence,

of any question which may be the subject of an application under subsection (1) or (3).”

In effect, this prevents landlords from contracting out of the Tribunal's jurisdiction to determine who pays service charge, who it is paid to and the date, amount and manner in which it must be paid.

The question that was to be determined was whether this provision precluded landlords from reapportioning the percentage of service charge payable by leaseholders where permitted to do so by the terms of the relevant leases.

The facts

The relevant leases stated that service charge was to be paid either a fixed percentage or "such part as the Landlord may otherwise reasonably determine".

The leaseholders initially applied to the Tribunal for a determination against their landlord, Aviva, because the landlord had been demanding service charges in different proportions from the fixed percentages stated in the leases for many years. The leaseholders argued that the landlord's ability to exercise its discretion to reapportion the percentage of service charge payable was void due to section 27A(6) of the Act.

The decisions

First-tier Tribunal

The Tribunal rejected the argument that the landlord's ability to reapportion the percentage of service charge payable was void. It determined that the landlord's reapportionments were reasonable, in accordance with section 19 of the Act, and were enforceable.

Upper Tribunal

The Upper Tribunal determined that the landlord's ability to reapportion the percentage of service charge payable was void due to section 27A(6) of the Act.

Court of Appeal

The Court of Appeal held that the leases gave the Tribunal the jurisdiction to determine what percentages of service charge to be paid by leaseholders was reasonable ie make the decision in place of the landlord. It restored the Tribunal's decision that the reapportionments were reasonable and enforceable.

Supreme Court

The Supreme Court unanimously dismissed the leaseholders' appeal and overturned the decision by the Court of Appeal. It determined that the purpose of section 27A(6) of the Act is to prevent landlords and tenants from agreeing to contractual mechanisms which would oust the jurisdiction of the Tribunal. On these facts, the Tribunal's jurisdiction had not been ousted because the Tribunal could still determine whether the service charge proportions applied by the landlord were reasonable; on these facts, the Tribunal had determined that they were.

Our comment

This decision will provide long-awaited clarity for landlords of residential premises, who can reapportion the percentage of service charge payable if permitted to do so by the terms of the relevant leases.

This does not give landlords free reign over service charge apportionment because the Tribunal can still determine whether service charge is reasonable pursuant to section 19 of the Act and the landlord will be constrained by the specific wording of the relevant clause; however, it allows landlords a degree of flexibility to manage residential premises properly and effectively so long as it is acting reasonably.