Landlords have freedom to decide how to apportion service charges between commercial tenants in McKinsey case

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The High Court has ruled that a landlord has authority to decide the “due proportion” of the service charge that is payable by each of its tenants. Criterion Buildings Ltd v McKinsey and Company Inc (UK) and another [2021] EWHC 216 (Ch) concerned the Criterion Building at Piccadilly Circus, comprising offices, a sportswear store, a theatre and a restaurant.  McKinsey was a tenant of the offices.

A “due proportion”

McKinsey’s lease contained a covenant, typically found in commercial leases of multi let buildings, to pay a “due proportion” of the costs of various services and expenses incurred by the landlord in connection with the building.  “Due proportion” was defined as a “a fair proportion to be determined from time to time by the landlord or the landlord’s surveyors taking into account the use made of and the benefit received from the services and expenses and each of them…”.  McKinsey sought to challenge the amount of the service charge allocated to them.

The Court found that the landlord was entitled to determine the “due proportion” of the service charge that was payable by McKinsey.  The judge considered that the percentage apportionment of the service charge payable by each tenant made no financial difference to the landlord.  As such, the landlord could be trusted to make a subjective determination of the percentage payable.  It would not be sensible to hold the landlord to an objective standard so that any tenant could simply reject the decision as unfair.  Instead, the evidential burden was on the tenant to show that the landlord’s decision was irrational and the tenant had been charged more than a due proportion of the costs incurred. 

The sinking fund

The Court also found in favour of the landlord’s request for contributions to a sinking fund for the future refurbishment of the goods lift.  McKinsey asserted that, since the goods lift was in working order, it did not require replacement and works to the lift would be unnecessary and premature.  The Court found that the wording of the lease allowed the landlord to require contributions to the sinking fund to replace the lift from the outset; building up a fund from a time when such replacement was not necessary. This was what a sinking fund was for; to spread the costs over the term of the lease. The lease gave the landlord the discretion to decide, notwithstanding that the lifts still operated day to day, that the lack of knowhow of current lift engineers and lack of parts to ensure uninterrupted service meant that it may be better to refurbish or replace the lifts. Whilst others may have a different view of the best course of action, it was the landlord’s decision.

Conclusion

Landlords will always be wise to retain evidence of how they arrive at apportionments of service charge in case they are challenged on the matter at a later date. Nevertheless, with the current limits on debt recovery options available to landlords, this case gives landlords a reason to be robust in the pursuit of service charge arrears.  The wording of the lease must be scrutinised in each case, but it seems that clear wording will be needed to show that apportionment is not a matter of a landlord’s discretion and/or is to be assessed by objective criteria.

The judge commented in this case that the landlord could be trusted to determine the apportionment of the service charge since it would make no financial difference to the landlord. With so many sectors suffering from the effects of the pandemic, what if the recovery of service charge from some tenants in a building is considerably more difficult than others?  Could it still be said that the apportionment makes no financial difference to the landlord?

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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