Long residential leases stated each flat’s percentage share of service costs but allowed the landlord to make reasonable changes. When the landlord increased some shares, the tenants said the power itself was void. The Supreme Court distinguished the landlord’s decision about how to divide the costs from the tribunal’s power to decide whether the resulting charges were lawful.
The leases and the dispute
The dispute concerned residential leases in Southsea. The leases set out initial shares for insurance, building services and estate services, while permitting a reasonable re-apportionment. Over a long lease the number or configuration of units might change, making a fixed division unsuitable.
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The respondent landlords demanded service charges on a different apportionment. So far as the appellants were concerned, their shares were higher. They argued that section 27A(6) of the Landlord and Tenant Act 1985 made the landlords’ power to depart from the stated percentages void. Alternatively, they said the re-apportionment was unreasonable.
Section 27A(6)
Section 27A, added by the Commonhold and Leasehold Reform Act 2002, allows an application to the appropriate tribunal to decide whether a service charge is payable, or would be payable if specified costs were incurred, and if so by whom, to whom, in what amount, when and how. In England that tribunal is the First-tier Tribunal (Property Chamber), a specialist tribunal whose limited costs regime does not expose tenants who litigate reasonably to their landlord’s costs.
Subsection (6) makes an agreement by the tenant of a dwelling void, other than a post-dispute arbitration agreement, so far as it purports to provide for a determination in a particular manner, or on particular evidence, of any question which may be the subject of such an application. Lord Briggs, with whom Lord Reed, Lord Kitchin, Lord Sales and Lord Richards agreed, treated this as an anti-avoidance provision. It is aimed at terms that oust or limit the tribunal, not at every management choice left to the landlord.
The wider Act already controls recovery. Section 19, in particular, limits relevant costs to costs reasonably incurred, and only for services or works of a reasonable standard. Section 27A does not state separate principles of payability. The tribunal therefore decides by reference to the contract, subject to those statutory controls. It reviews the legitimacy of the landlord’s decision. It does not make that decision itself.
Three answers below
The First-tier Tribunal held that the clause survived and that the landlords had exercised it reasonably. The Upper Tribunal held that the re-apportionment provision was void. The Court of Appeal preserved a role for re-allocation but treated the tribunal as the body which would determine the revised shares.
Each court followed Oliver v Sheffield City Council, which had followed Windermere Marina Village Ltd v Wild and Gater v Wellington Real Estate Ltd. In Oliver, the Court of Appeal held that a term giving contractually determinative effect to a landlord’s discretionary decision about service charges was avoided by section 27A(6), whether or not the lease said the decision was final and binding. The landlords challenged that approach. Lord Briggs, who had given the leading judgment in Oliver, said that only five years had passed, but that this case might fairly be regarded as having tested the principle to destruction.
Why the power survived
The landlords submitted that if every contractual power to decide the amount of a service charge were void, many leases would leave nobody but the tribunal to fix the charge, even without a dispute. Lewison LJ, applying Oliver, had described the function as transferred from the landlord to the First-tier Tribunal. That would turn a dispute-resolution body into a routine administrator of countless leases.
Lord Briggs held that the decisive question was what the tribunal was empowered to decide under section 27A(1) or (3). Choosing what work to commission, when to incur costs or how to exercise a contractual discretion is a management function. The tribunal can examine whether the resulting charge is payable and whether the landlord complied with contractual and statutory limits. Those powers do not make the tribunal the original manager.
The other reading, he held, produced unintended results. If the tribunal could substitute its own discretionary decision, a landlord could not safely incur costs without prior clearance, because one tenant might obtain a different answer. Landlords can manage the risk that a demand will be held unlawful. They cannot manage a freedom to decide the management question afresh. Advance applications would be likely to overwhelm the tribunal, and agreement from every tenant would be impracticable, especially where their interests in the shares conflict. Implied powers would be caught as well as express ones. There was no reason to single out apportionment: whether to repair or replace a roof is equally a management decision, and it may affect that year’s charge more.
The Upper Tribunal’s solution would freeze the initial shares after removing the power to revise them. The Court of Appeal’s solution would allow a tribunal to substitute its own division. Neither preserved the allocation of responsibility in the lease. The statutory purpose was served by preserving the tenant’s right to challenge the reasonableness and legality of the landlord’s decision.
The clause in this case
The leases gave the landlords two related rights: to trigger a re-allocation, and to decide the revised shares. Both had to be exercised reasonably. The First-tier Tribunal had found that the landlords had acted reasonably, and it was not suggested that the re-apportionment otherwise breached the statutory regime. Subsection (6) did not strike down the power, because review of its contractual and statutory legitimacy remained open. Whether to re-apportion, and in what fractions, was not a question for the tribunal within section 27A(6). Whether the re-apportionment had been reasonable was, and the tribunal had answered it.
Verdict: The Supreme Court unanimously dismissed the tenants’ appeal and restored the First-tier Tribunal’s decision and reasoning. The power to re-apportion was valid, and the tribunal’s finding that this re-apportionment was reasonable stood.
Source: Aviva Investors Ground Rent GP Ltd and another v Williams and others [2023] UKSC 6
