In this week’s Legal Update, we report on the recent case of Spender & Ors -v- Fit Nominee Ltd & Anor [2025] EWCA Civ 1578, decided just before Christmas, in which the Court of Appeal gave useful guidance to how challenges over the reasonableness of costs for long term contracts should be approached.

Background

The case concerned a development at St. David's Square, Isle of Dogs. A number of leaseholders brought an application to the First-Tier Tribunal (Property Chamber) ("FTT") to challenge the reasonableness of costs incurred by the landlord between 2018 and 2020 under long term contracts for the hire and maintenance of equipment, including a video door entry system, under Section 27A of the Landlord and Tenant Act 1985 ("the 1985 Act").

Most (but not all) of the leases at the development were entered into after the date that the original landlord (and developer) had entered into the contracts in/around 2000, and therefore before the amended consultation requirements were introduced into Section 20 of the 1985 Act in 2002. Indeed, it was said possible (but not formally decided in the case) that the landlord was nonetheless bound by those contracts prior to any of the leases being granted, given that the video door entry system was literally hard wired into the development. 

The total costs being challenged over the three year period exceeded half a million pounds. The leaseholders’ position was that these costs were unreasonably high, relying on evidence that a whole new replacement system could be acquired outright for significantly less than the amounts charged over 2018 - 2020, and that an equivalent system at a nearby site was maintained for a considerably lower price.

As it happened, the landlord could have terminated the relevant contracts in 2020 but failed to do so, and conceded that for the second half of 2020 the costs should be reduced by 50% because of this. Thereafter, the landlord tested the market to replace the existing system but, after consultation with leaseholders, the decision was made to continue with the existing system and contracts, albeit with a reduction in the contract price negotiated by the landlord of 50%.

The FTT’s decision

Before the FTT, the leaseholders’ case was that the costs between 2018 and 2020 were unreasonably incurred because they were significantly higher than that which would been payable in the market at that time, by reference both to the cost of acquiring a new system, and to the cost of maintaining an equivalent system.

The landlord also focused on the position at the time and said that it had had no choice – in those years – other than to pay the amounts that fell due under the contracts which were binding on them. It maintained that the focus should be on the landlord’s decisions in 2018 to 2020, and not looking back at the original developer’s construction decisions.

Despite this, the FTT appeared to make a finding as to the reasonableness of the original decision to enter into the contracts in 2000. The decision was said to be “short sighted” and a “bad deal” for the leaseholders. Whilst the FTT accepted it was not open to it to “revisit a bad deal made in 2000”, it said that come 2018 - 2020, the leaseholders were still “victims of a bad deal in those years” and “the bad deal made in 2000 was still a bad deal in 2018”. The FTT said it would not be fair to say that the leaseholders should suffer just because the landlord could not extract itself from that bad deal.

The FTT therefore decided that the rental costs for the door video entry system were unreasonable, and the leaseholders should only have to pay the costs for maintenance and repairs for those years.

The Upper Tribunal’s decision

The landlord appealed to the Upper Tribunal ("UT"), who found in favour of the landlord.

The UT said that the parties had been wrong to focus only on the position as at 2018 - 2020. Instead, the UT said that the right test was to look at the circumstances in which the landlord assumed the liability to pay the relevant costs. In other words, the FTT should ask itself whether the landlord acted reasonably in taking on the commitment in the first place, and thereby making it inevitable that it would incur the cost when the invoice was presented (even if many years later).

The UT therefore conclude that the FTT had been right to look at what happened in 2000. However, it was not clear that the FTT's finding that the contracts had been a "bad deal" when entered into was in fact the basis of its decision that the costs were not reasonably incurred, given it accepted it was confined to a consideration of the years 2018 - 2020.

Nonetheless, the UT found that the FTT had reached a conclusion that was not open to it on the evidence, as there was no evidence that the contract was a “bad deal” in 2000; all the evidence presented by the parties related to prices in 2018 - 2020. The UT therefore set aside the FTT's decision on that basis, substituting its own decision that the relevant costs were reasonably incurred.

The Court of Appeal’s decision

The leaseholders appealed to the Court of Appeal. The grounds for appeal essentially boiled down to two main issues :-

1. The correct test for determining whether costs are reasonably incurred under Section 19(1)(a) of the 1985 Act

   On this, the Court of Appeal agreed with the UT's approach, that in order to determine whether a cost was reasonably incurred, it is necessary to have regard to the circumstances in which the landlord entered into the obligation to pay.

   Whilst the costs payable in 2018 - 2020 were a relevant factor in this, that was only insofar as they shed light on whether it was reasonable to enter into a contract in 2000 which led to those costs falling due in that amount in 2018 - 2020.

   The Court said that this was the same whether the landlord enters into a long term contract or a one-off arrangement, because even in a one-off arrangement there may be a delay between the landlord committing to works being done and the completion and invoicing of those works. There is always the possibility that in the intervening period there is a collapse in the market price for the materials or work provided. But the difference between a one-off arrangement and a long term contract lies mainly in the likelihood of there being such a change in price with the former.

   The Court concluded that, assessing the reasonableness of entering into a long term contract by reference to outcome, entails a consideration of various factors including :-

   • The nature of the goods or services to be supplied;

   • The length of term;

   • The particular terms; and

   • The price.

   This is all judged by reference to the circumstances existing at the time of the contract including what else was available in the market then. If the conclusion is that, both in terms of process and outcome (judged at that time) it was reasonable to incur the costs, Section 19 does not preclude recovery of the costs as service charge if in later years the cost is greater than could at that time be obtained in the market.

2. Where the burden of proof lies in making that determination

   On this, the Court of Appeal noted that neither side had identified the correct legal test in the proceedings before the FTT. It was not therefore appropriate for the FTT to make a finding that the costs were unreasonably incurred on the basis of the circumstances in 2000, when that was not the case advanced by the leaseholders and – for that reason – the landlord had not sought to adduce evidence to answer this.

   Equally, it was not appropriate for the UT to reach findings to the opposite effect on the basis of a legal test that they had (rightly) identified but which, because the parties had not advanced it, they had not addressed by way of evidence and submissions in the FTT.

   Whilst recognising that it would be less than ideal, because it leads to yet more cost, the Court of Appeal decided that remitting the matter back to the FTT for the parties to make submissions, and to adduce evidence, on the correct legal test as identified above would best meet the justice of the case.

   It would be for the leaseholders to formulate a case that the costs under the contract were unreasonably incurred. Once that meets the threshold of a prima facie case, there would be a need for directions for a responsive pleading from the landlord, further evidence, and for the FTT then to resolve the issue on the basis of all the evidence then before it.

The appeal was therefore allowed, and the application remitted back to the FTT on this basis.

Conclusion 

The case is helpful to see the approach the Tribunals should take when determining applications challenging the reasonableness of costs of agreements, which will include one-off as well as long term contracts. The Court of Appeal has made clear that the costs as at the date they are incurred are not to be considered in isolation; the various different factors need considering as at the date of the relevant contract (which could be many years prior to the costs in question).

Of course, how those factors will be applied and decided in the specific context of this case remains to be seen once the parties have presented their cases back in the FTT, using the correct legal test set out by the Court of Appeal. But in the meantime, the case will assist those both presenting and responding to challenges that service charge costs have not been reasonably incurred, particularly under long term contracts.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.