If a landlord would like to carry out major works to a block that would cost any one leaseholder over £250, all leaseholders must be consulted. This consultation process is called Section 20, and it is contained within the Landlord & Tenant Act 1985 (as amended by the Commonhold & Leasehold Reform Act 2002).
A common way to recover these costs is through service charges. Most well-drafted leases will set out how service charges are to be apportioned between the leaseholders in a block. Some leases give fixed apportionments. Others require lessees to pay a fair and reasonable proportion. There are even some leases that set out a fixed apportionment but appear to give the landlord (or some other third party) the ability to vary that apportionment. But as a recent legal case that went through the Upper Tribunal (UT) and Court of Appeal showed, the latter variant can be dicey territory, and there was some disagreement on how enforceable they could be.
Recent Court of Appeal Judgement on Service Charge Apportionment
Aviva Investors Ground Rent GP LTD & Anor v Williams & Ors concerned a lease which set out a fixed percentage of service charge payable by each leaseholder in a residential and commercial development in Southsea, Hampshire. The lease contained a clause that allowed the landlord to vary the fixed percentage as they “may otherwise reasonably determine”. The question was whether the landlord was restricted to the specified percentage set out in the leases or whether they could determine different amounts.
Initially, the Upper Tribunal ruled that the landlord would be restricted to the percentages specified in the lease and that this wording was void because of Section 27A(6) of the Landlord and Tenant Act 1985. This section essentially states that an agreement between a landlord and leaseholders allowing for the determination of anything that could be determined through application to the Tribunal is void. Section 27A(1) of this Act states that, upon application, the Tribunal has jurisdiction over service charges.
With the wording from the lease void, the UT decided, the landlord could only set service charges at the fixed percentages specified and that they could not be varied, causing alarm with managing agents and landlords across the country operating with similar leases. The landlord appealed this decision, arguing that Section 27A(6) only deprived the landlord of making a decision about service charges and that this role in the lease should be replaced by the Tribunal.
Accepting the appeal, the Court of Appeal determined that the effect of Section 27A(6) was only to deprive the landlord of their role in the determination process. The effect of the decision, they determined, was “to deprive the FTT of all jurisdiction over the apportionment of service charges; which is not what section 27A (6) was intended to achieve.”
The Court of Appeal decided, based on previous decisions, that the landlord’s role on the lease as the party who “may otherwise reasonably determine” the service charge could be replaced by the First-tier Tribunal (FTT), thus allowing them to determine service charge percentages if asked to do so by either the landlord or the leaseholders.
What this means for landlords and block managers
The disagreement that the different tribunals had over leases that allow the landlord to vary service charge apportionment revealed just how complex an area this can be.
Ultimately, the Court of Appeal ruled that a lease with a clause like the one seen in this case is legally enforceable, but the landlord could just as easily have needlessly restricted themselves and suffered financial losses as a result. This shows just how important block managers are to help landlords and RMCs determine matters around major works and leasehold management.
