Tribunal Clarifies Landlords’ Right to Determine Service Charge Apportionment

How service charges should be divided between leaseholders – known as ‘service charge apportionment’ – has been a difficult area for landlords and management companies for a long time. Fortunately, two recent court cases have provided some welcome clarity over the rights of landlords and their agents with regard to this issue.

We cover the key points for landlords and management companies to know and what these rulings mean for them below. We have also provided some of the background to the case for those who are interested.

Looking for expert advice on a service charge dispute or other property dispute? Please get in touch with John Wagstaffe, Partner and Head of Property Litigation.

Key points for landlords and management companies to know

• Landlords and management companies do have the right to determine service charge apportionment – as clarified by the Supreme Court in the Aviva Ground Rent vs Williams case
• A fair and proper process must be followed when determining service charge apportionment
• The decision reached following that process must be ‘rational’ and meet the principle of ‘Wednesbury unreasonableness’ i.e. it must not be something that no reasonable person would have concluded based on the same process
• Leaseholders do still have a right to apply to the First-tier Tribunal (Property Chamber) to determine if a service charge is reasonable under section 27A(6) of the Landlord and Tenant Act 1985
• However, the First-tier Tribunal would only reject a landlord’s decision and substitute its own if it concluded that the landlord’s determination was one that no reasonable person would have made under the same circumstances – as clarified by the Upper Tribunal (Lands Chamber) ruling in the case Braganza v The Riverside Group Ltd

What this means for landlords and management companies

These recent rulings are good news for landlords and management companies as they affirm their right to decide how they apportion service charges and give them fairly wide latitude over what decisions they make.

Under the well-established legal principle of Wednesbury unreasonableness, landlords and management companies do not need to show that the way they apportion service charges is the only reasonable option or even that it is the most reasonable option – all they need to do is be able to show that it is not so unreasonable that no rational person would have done it that way. This avoids the need to get into highly bespoke determinations for every individual leaseholder based on a minute examination of exactly what benefit they derive from each facility covered by the service charges.

The outcome of these rulings should, hopefully, be fewer service charge apportionment decisions being challenged by leaseholders, saving landlords, management companies and their agents time, expense and uncertainty.

Ultimately, as long as landlords and management companies follow a fair and proper process when determining service charge apportionments, they should be able to have confidence that the First-tier Tribunal and courts will uphold their decisions.

Background to the case

In the past, there has been considerable confusion over exactly what rights landlords and management companies have to vary the apportionment of service charges between leaseholders in shared buildings and developments. This situation arose due to differing interpretations of the legislation around this issue (specifically section 27A(6) of the Landlord and Tenant Act 1985).

Understandably, landlords and management companies generally feel that it is essential that they are able to vary what proportion of the overall service costs of a building or development is paid by each leaseholder as and when required. This is to ensure that each leaseholder bears the  proper costs associated with the services provided.

However, some interpretations of section 27A(6) of the 1985 Act seemed to suggest that only the First-tier Tribunal (Property Chamber) could decide how service charges should be divided between leaseholders. This issue was ultimately resolved by the Supreme Court in its ruling on the Aviva Ground Rent vs Williams case. This firmly established that landlords and management companies do have the right to determine the apportionment of service charges.

Unfortunately, there was still some room for confusion. The case of Dr Lellis Francis Braganza v The Riverside Group Limited concerned a leaseholder, Dr Braganza, who disputed the service charges he had paid over a number of years. Dr Braganza’s concerns included whether the process to determine the apportionment of service charges had been fair.

The First-Tier Tribunal ruled in favour of the management company and, following an appeal by Dr Braganza, the Upper Tribunal upheld that decision. In its ruling, the Upper Tribunal said:

“The FTT’s only task when a leaseholder challenges a discretionary apportionment made by a landlord or its surveyor will be to consider whether the apportionment was “rational”, in the sense that it was made in good faith and not arbitrarily or capriciously, and was arrived at taking into consideration all relevant matters and disregarding irrelevant matters. Unless for one of those reasons the decision was not one which any reasonable landlord could make, the FTT must apply it, and may not substitute an alternative apportionment of its own.”

The Upper Tribunal has, therefore, clearly established that it considers the First-tier Tribunal should only overrule a landlord’s decision about service charge apportionment if the process followed to make that decision was unsound or if the decision was one no reasonable person would have reached following a sound process.

Get in touch with our property litigation solicitors

At Longmores, we have extensive experience supporting landlords, management companies and managing agents with both contentious and non-contentious matters.

Where clients are facing disputes with regard to residential service charges or other property litigation matters, we can provide able assistance using our expert knowledge of exactly what works and what your options are.

For more information, please get in touch with John Wagstaffe, Partner and Head of Property Litigation.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.