How to deal with contractual provisions for amending service charge contributions under the lease.
2nd November 2023
2nd November 2023
The Upper Tribunal’s recent decision on the case of Braganza -v- Riverside Group Ltd deals with the common questions affecting the ability of the landlord to amend service charge proportions where the lease provides for them to do so. The questions dealt with in this case were :-
initially whether the method of calculation for the new proportions were credible; and
whether the provision in the lease enabling the Landlord to amend the original proportions was in fact void by virtue of s.27(6) Landlord and Tenant Act 1985 (“LTA”).
Brief summary of the Braganza case
Dr Braganza was the leaseholder of a flat in a building to which Riverside Group Ltd owned the freehold. The development was made up of both flats and leasehold houses. Whilst the leases of both types of unit were similar, there were differences. Notably, whilst the service charge was used to maintain the exterior of the flat blocks, the house owners were obliged to repair the exterior of their own units - all quite usual.
The lease required the leaseholder to pay the “Specified Proportion” of service charge; in the case of Dr Braganza’s lease, a specific amount. That Specified Proportion was, though, subject to a provision enabling the landlord’s surveyor to determine an alternative sum from time to time, with the stipulation that that new sum must be “equitable”. The surveyor based their recalculation on the benefit of the various services to the respective owners who would contribute. For example, the surveyor determined that all leaseholders benefitted equally from the insurance cover on the development and the management costs, but the costs for communal cleaning and maintaining internal common parts were only payable by the leaseholders of flats.
The FTT approved the approach adopted by the surveyor and dismissed Dr Braganza’s criticisms of the method use for the calculation. Dr Braganza then appealed to the UT, both on the basis that the FTT was wrong in its decision in respect of the method of calculation but also, following the then recent decision in Aviva -v- Williams, that the clause enabling the landlord to amend the service charge proportion was void by virtue of s.27A(6) LTA.
A reminder - the point in Aviva -v- Williams?
As in the Braganza case, the clause in the Aviva leases expressed a fixed percentage but enabled the landlord, at its discretion, to amend that later. The leaseholders though, took the view that the clause enabling the landlord to unilaterally amend what the leaseholders were bound to pay, must be void on account of s.27A(6) LTA.
Section 27A LTA enables a leaseholder to apply to the FTT for a determination as to whether a service charge is payable under the lease. Section 27A(6) then provides that a lease term is void insofar as it purports to provide for a determination (a) in a particular manner, or (b) on particular evidence, of any question which may be the subject of an application.
The Supreme Court found that s.27A(6) is an anti-avoidance provision designed to preserve the jurisdiction of the Tribunal over matters relating to whether a charge is payable and reasonable. It rejected the leaseholders’ argument on the basis that the effect of removing altogether the ability to vary the service charge apportionment would have the result that any errors in the original drafting, or events occurring after the original drafting that necessitated changes to the apportionments (such as roof top development increasing the number of contributing flats), would be incapable of rectification for the whole of the term of the lease. A potentially commercially disastrous position, where the re-apportionment was necessary or not offensive to the purpose of legislation.
The Judges considered that, in the Aviva case, the clause enabling the landlord to adjust the proportions of the leaseholders’ service charges did not remove from the FTT its jurisdiction to rule upon the charges levied. Given that the FTT was still able to review whether the adjustments were reasonable, s.27A(6) of the Landlord and Tenant Act 1985 was not engaged and thus the provisions remained valid, as did the amended apportionments made by Aviva.
The full decision of the Supreme Court can be downloaded here.
Dr Braganza’s Appeal to the Upper Tribunal
Dr Braganza appealed to the Upper Tribunal (“the UT”) on the two grounds referred to above but saw both grounds dismissed.
On the approach to the calculation of the new apportionment, the UT considered that the method adopted by the surveyor to determine the apportionment - by considering the benefits enjoyed by different leaseholders - was reasonable.
On the point that the clause was void by reference to s.27A(6)LTA, the argument was inconsistent with the then subsequent Supreme Court ruling on the same issue in Aviva -v- Williams, and so should also fail.
The above shows that the Tribunals and Courts do not wish to become too involved in the contractual arrangements between landlords and tenants. Section 27A is there to protect leaseholders by giving the Tribunals the jurisdiction to determine whether a service charge contribution is reasonable and payable, in the event of a dispute. However, this does not stop landlords from having the power under the lease to increase the proportion of service charge (where the lease makes provision for such re-apportionments), if the apportionment is fair and reasonable and the process used to decide the revised apportionment falls within the scope of reasonable methodologies.
It is, of course, an obvious point but one worthy of repetition, that where as a landlord/RMC/RTM there is an intention to take a step such as those set out above, prior quality advice as to whether you should, can and how to do that is always sensible and likely ultimately a costs saving exercise.
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