Outcome
The Supreme Court recently determined that landlords are permitted to make discretionary management decisions affecting service charges. This is provided the lease provisions do not attempt to make those decisions final and binding such as to deprive the leaseholder of a right to challenge them in the First Tier Tribunal (Property Chamber) (the FTT) on the basis that they are unreasonable.
Facts
Residential leaseholders in a mixed residential and commercial block in Southsea entered into standard form leases with their landlord. These provided for percentage allocations for the cost of insurance, building and estate services, reserving to the landlord the right to reapportion those percentage contributions. The operative wording in the leases was "as the Landlord may otherwise reasonably determine".
Section 27A of the Landlord and Tenant Act 1985 (the 1985 Act) allows for applications to be made to the FTT to determine the manner in which service charge payments are payable. Furthermore, Section 27A(6) renders void any lease terms which purport to fetter the FTT's discretion to determine service charge payments.
The landlord sought to reapportion the percentage contributions between leaseholders. The leaseholders initially applied to the FTT, arguing that terms in the leases which purported to grant the landlord its discretion to reapportion were void under Section 27A(6) of the 1985 Act. The FTT disagreed with the leaseholders and held that the landlord was entitled to vary the apportionment.
Appeals process
The Upper Tribunal (UT) allowed an appeal agreeing with the leaseholders. The UT determined that the provisions allowing variation of the apportionment were void under Section 27A(6) meaning that the percentages were fixed to those expressly stated in the leases and could only be changed with permission from the individual leaseholders.
The landlord took the case to the Court of Appeal which found that Section 27A(6) had the effect of transferring the authority to determine reapportionment from the landlord to the FTT.
On appeal, The Supreme Court, held that the role of the FTT was generally to review the decision of the landlord to reapportion the service charge in order to consider whether they had done so correctly under the terms of the lease and whether the costs were reasonable under Section 19. Section 27A(6) does not deprive the landlord of its right to make management decisions allowed under the lease.
Trowers Insights
Landlords may now look to reserve their right to exercise discretionary management decisions concerning service charge payments in lease terms, such as varying apportionments of service costs.
If landlords are looking to revise the apportionment of service charge percentage contributions between leaseholders (where the terms of the lease permit them to do so) they would be wise to fully document the basis for their decisions, to limit the scope of a challenge regarding those decisions.
