Apportionment of Service Charges: section 27A(6) strikes again …

A well drafted lease will set out how service charges are to be apportioned between lessees.  Apportionment can take a wide variety of forms; from equitable split between lessees, to a stated percentage or alternatively a proportion to be reasonably determined by the landlord (or management company).

Some leases set out a stated percentage, but give the landlord (or management company) the ability to alter the percentages.

And where landlords have this flexibility to vary apportionments, leases often set out the mechanism or process that must be followed.

We know from the earlier of the Tribunal decisions in Windermere Marina and Gater about the impact of s.27A(6) of the Landlord and Tenant Act 1985 on apportionment clauses which left the decision in the hands of the landlord of landlord’s surveyor.  But what’s the impact of s.27A(6) on an apportionment clause which sets out a stated percentage, but then allows a landlord to deviate from this?

And whilst I appreciate that a blog dealing with s.27A(6) may not, at first blush, appear particularly exciting, I suspect many landlords and management companies (or their managing agents) may be utilising an ability in the lease to vary the apportionments and the recent Upper Tribunal decision in Williams and ors v Aviva Investors Ground Rent [2020] UKUT 111 (LC) may well put a stop to such practices.

 

What does s.27A of the Landlord and Tenant Act 1985 say?

Section 27A of the Landlord and Tenant Act 1985 gives the Tribunal jurisdiction to make decisions about service charges.

It enables the Tribunal to determine whether a service charge is payable and, if it is:

  1. The person by whom it is payable.
  2. The person to whom it is payable.
  3. The amount which is payable.
  4. The date at or by which it is payable.
  5. The manner in which it is payable.

There are a couple of exceptions to this, including where the service charges have been agreed or admitted by the leaseholder, and where they have already been the subject of determination by a Court.

Section 27A(6) deals with “agreements” by leaseholders.  And essentially s.27A(6) says that an agreement by a leaseholder is void in so far as it purports to provide for a determination of any question which could be the subject of an application to the Tribunal under s.27A(1).

 

Decisions in Windermere Marina and Gater

The Upper Tribunal grappled with s.27A(6) in their previous decisions in Windermere Marina and Gater.

In Windermere Marina, the leases obliged each lessee:

“To pay a fair proportion (to be determined by the surveyor … of the lessor whose decision shall be final and binding) of the expense of all communal services.”

In Gater, the leases required each lessee to pay:

“A due and fair proportion of the service cost (such proportion to be determined by the landlord or its surveyor) (in each case acting reasonably).”

And to cut two very long stories short, the Upper Tribunal in both of those cases held the effect of s.27A(6) was to delete the words “to be determined by the surveyor” (or similar), leaving the Tribunal to decide what was a fair proportion of the service charge.

As the Tribunal put it in Windermere Marina:

“Section 27A deprives the landlord’s surveyor of his role in determining the apportionment.  [The lease] … is to be read as if the method of ascertaining a fair apportionment was omitted altogether.”

 

Terms of the Lease in Williams

The leases in Williams set out each lessee’s share of three types of service charge.  Although the figures differ from lease to lease (because they’re calculated on square footage), by way of example the Upper Tribunal decision sets out the following extract:

  • “Your share of the insurance cost is 0.7135% or such other part as the landlord may otherwise determine reasonable.
  • Your share of the building services costs is 0.7135% or such other part as the landlord may otherwise reasonably determine.
  • Your share of the estate services costs is 0.5427% or such other part as the landlord may otherwise reasonably determine.”

It was accepted that for a number of years the landlord had been demanding service charges in different proportions to those set out in the leases.

 

Decision of the FTT

At the FTT, the lessees argued that section 27A(6) rendered void the words “or such other part as the landlord may otherwise reasonably determine”.  Accordingly, they argued that the only way the landlord could change the apportionment in the lease was by an agreed variation.

The landlord argued that the words “or such other part as the landlord may otherwise reasonably determine” didn’t oust the FTT’s jurisdiction, and that the FTT “retains jurisdiction to determine whether the apportionment determined by the [landlord], being different from that stated in the lease, is a reasonable apportionment”.

 

Issues on Appeal

There were two issues in the appeal:

  1. Whether the landlord is able to demand service charges in different proportions from those stated in the lease, or whether the words “or such other part as the landlord may otherwise reasonably determine” are rendered void by s.27A(6); and
  2. If those words are rendered void, what’s the effect?

 

Decision of the Upper Tribunal

The Upper Tribunal considered their previous decisions in Windermere Marina and Gater, stating:

“Those decisions say that a clause purporting to provide for a determination of apportionment by the landlord or landlord’s agent is void. It is void whether or not it provides that the landlord’s decision is “final and binding” or similar….”

And when applying that rationale to the leases here:

“Accordingly in the leases in questions in this appeal the words “or such part as the landlord may otherwise reasonably determine” are void.  They are deleted.  They no longer appear in the lease”

But if those words no longer appear in the lease, what’s the effect?

Does the stated proportion stand alone?  Or is there scope for the FTT to make its own decision as an alternative to the stated percentage and instead of the landlord?

The Upper Tribunal considered the earlier decisions in Windermere Marina and Gater.  And recognised the deletion of the void wording had created a vacuum.  But in those cases there was still a determination to be made because the lessees had to pay a “fair proportion” of the service charge.

But this case is different.  The Vista leases set out a fixed percentage, and the landlord’s discretionary apportionment is an alternative.  There is no provision for a “fair proportion” or the like. As the Upper Tribunal put it:

Without the void wording the lease obliges the tenant to pay a stated percentage of the service charge.  There is nothing left to decide.”

 

Commentary

The consequence of this decision was that the landlord could only recover the apportionments stated in the leases.  As the Upper Tribunal said, “if it wishes to change that apportionment it will have to do so by varying the leases with the tenants’ agreement”.

Will Tribunals see more applications under section 37 as a result of this decision?

 

 

 

29 April 2020

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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