Variable service charge provisions are common in residential long leases to enable reapportionment. In Aviva Investors’ Ground Rents v Williams, the Supreme Court confirmed that the effect of section 27A(6) of the Landlord and Tenant Act 1985 (Act) is not to transfer the landlord’s discretionary decision-making powers to the First-tier Tribunal (FTT).
Background
The leaseholders of a block of flats in Swansea, of which Aviva was the landlord, sought to challenge Aviva’s ability to vary service charge contributions. The service charge payable by leaseholders was expressed as a percentage or such other proportion “as the Landlord may otherwise reasonably determine” of Aviva’s costs of maintaining the common parts and structure of the property.
Legal arguments
The leaseholders argued that a clause enabling their landlord to unilaterally amend the service charges payable was void on account of section 27A(6) of the Act.
Pursuant to section 27A of the Act, disputes concerning service charges in residential leases can be referred to the FTT for determination. Section 27A(6) goes on to state that any provision in a lease that purports to oust or restrict the jurisdiction of the FTT under section 27A is void.
Decision
The Supreme Court unanimously decided that:
- The argument put forward by the leaseholders was incorrect. It would have had the effect of entirely removing the ability of the landlord to vary service charge apportionment, even in circumstances where re-apportionment was essential or uncontroversial.
- The clause in the lease did not remove the FTT’s jurisdiction to make a determination on the service charges levied. The FTT remained entitled to review whether the landlord’s amendments were reasonable or not. Indeed, the FTT had ruled at first instance that Aviva’s amendments were reasonable. Accordingly section 27A(6) was not triggered and the amended proportions were permitted.
- It criticised the Court of Appeal’s decision in favour of the leaseholders, as it would have effectively subjected landlords to the risk of every service-charge related decision being referred to the FTT. This would have imposed a quasi-management role on the FTT, extending its jurisdiction far beyond what was envisaged by parliament. It would also have led to the unworkable situation where landlords would never be able to safely incur costs without applying to the FTT first to determine whether those costs were recoverable from its tenants.
Comment
Whilst this outcome should provide some reassurance to landlords, it does not give them carte blanche to vary service charge contribution. The FTT still has a role to play to decide (a) whether the landlord’s decision is within its contractual discretion, and (b) if so, whether the outcome was reasonable.
Section 27A(6) will still strike down clauses restrict the tenant’s ability to challenge the landlord’s decision, for example if it is said to be final and binding or can only be challenged in case of manifest error.
Care should be taken when drafting service charge provisions as well as when implementing any change to the tenants’ contributions to minimize the risk of challenge.
