The dispute

The dispute related to service charge payments for residential flats in Southsea.

Each tenant’s share of the service charge was stated to be a fixed percentage of the total “…or such part as the Landlord may otherwise reasonably determine”. The fixed percentages were agreed at the start of a series of 125 year leases, and the landlord had subsequently sought to re-allocate the amounts payable by the tenants.

The Landlord and Tenant Act 1985

Under Section 27A(1) of the Landlord and Tenant Act 1985, the parties to a residential lease can apply for a determination from the First Tier Tribunal (FTT) as to whether service charge is payable and, if so, the amount payable.

The 1985 Act is clear that the FTT cannot determine service charges which have been agreed by the tenant. In order to avoid landlords excluding the FTT’s jurisdiction, it also contains anti-avoidance provisions which provide that “an agreement by the tenant… 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 section 27A(1) of the Act]”.

FTT and Court of Appeal’s decisions

The tenants queried the landlord’s ability to re-apportion service charge payments, arguing that it fell foul of the anti-avoidance provisions in the 1985 Act or, alternatively, that the amount demanded was unreasonable, and sought a determination from the FTT.

The FTT decided that the landlord’s right to re-apportion service charge was not caught by the anti-avoidance provisions because the clause was limited by “reasonableness”, and did not prevent the FTT from determining whether or not the re-apportionment was reasonable. As the tenant’s challenge on reasonableness failed, the re-apportioned service charge was upheld.

The tenants appealed to the Upper Tribunal (Lands Chamber) (UTLC) which considered the previous cases on the 1985 Act, reversed the FTT’s decision and decided that the part of the clause allowing the landlord to re-apportion the amounts payable was rendered void by the anti-avoidance provisions. The landlord could only charge the percentage specified in the lease. As the tenant had already agreed to that percentage, the FTT had no jurisdiction to consider an application to vary the service charge payable.

The Court of Appeal disagreed and considered that the UTLC had gone too far in deleting part of the service charge clause, the effect of which would be to remove the FTT’s jurisdiction over service charge entirely, which is not what was intended. The only deletion necessary was the reference to the landlord, with the FTT substituted in its place to give it the right to determine the service charge payable.

Supreme Court decision

The Supreme Court rejected the UTLC and Court of Appeal decisions, and reverted to the original reasoning and decision of the FTT.

In doing so, they looked at the overall purpose of the 1985 Act, which was to allow the FTT to make determinations about whether the landlord had acted in breach of contract or the statutory regime, and not to challenge each discretionary management decision taken by the landlord in calculating the service charge after the event.

The Supreme Court rejected the Court of Appeal’s approach of “transferring” the landlord’s right to re-apportion service charge to the FTT, which would mean landlords could not safely make any decisions or incur service costs without first clearing them with the FTT, or agreeing them with each and every tenant, which would be impracticable for large blocks or estates.

This approach went further than was necessary to preserve the FTT’s jurisdiction and risked opening “a veritable pandora’s box of disputes about allocation which was plainly not contemplated by the lease, under which the key to the box lay firmly with the landlord, and for obviously good reason in terms of estate management and the avoidance of disputes”.

There was nothing in the 1985 Act which prevented the parties from including a mechanism to revise a fixed percentage to allow for a change of circumstances. In this case, the landlord had the power to trigger a re-apportionment, and to decide what the apportionment should be. It was not the FTT’s role to question those decisions. However, the requirement in the clause that the apportionment be “reasonable” was within the FTT’s jurisdiction and was not compromised by the landlord’s right to trigger the reapportionment.

Departure from previous caselaw

The Supreme Court acknowledged “with embarrassment and contrition” that this decision represents a departure from the previous line of case-law , which gave the FTT an expanded jurisdiction going beyond whether a particular decision breached the lease or the statute. They stated that such an approach would “put the anti-avoidance cart before the jurisdictional horse”.

What does this mean for landlords and tenants?

This decision reframes the FTT’s jurisdiction, making it clear that leases can give landlords the right to re-apportion service charges, as long as the tenant can still challenge the reasonableness of the amounts charged through the FTT.

The anti-avoidance provisions are aimed at circumstances where landlords seek to put the final and binding decision on service charge into their own hands, or the hands of a third party, rather than the FTT.

This will be welcome news for landlords, who can now safely exercise their discretion under the lease without constant fear of challenge, while preserving tenants’ rights of challenge where the landlord has gone beyond the limits of the discretion afforded to it under the lease.