This Legal Update follows our earlier note from May last year (see here), on the Upper Tribunal’s decision in Bradley and another v Abacus Land 4 Ltd [2024] UKUT 120 (LC), as to the correct approach to determining when a landlord is “acting reasonably” as per the terms of the lease, in the context of allocating service charge costs.

The Court of Appeal has now delivered its decision in the appeal of that case, providing clarity on how “acting reasonably” operates when a landlord has the discretion to make an allocation of service charge costs under a lease.  

The full judgment in can be read here.

Whilst the Upper Tribunal had previously adopted a fairness focused approach, the Court of Appeal has re-framed the test, restoring the FTT’s original decision and reaffirming that the contractual discretion when designating service charge liability is that of the landlord, so long as it can justify its approach to reaching that decision.

Background

Readers from our previous Legal Update on this case (see link above) above will recall that the dispute concerned a mixed use building containing residential flats and a self-contained gym. From 2006 to 2013, the leaseholders enjoyed exclusive use of the gym and bore 100% of its running costs via the residential service charge.

The lease designated costs as residential, building or parking service charges, but for relevant purposes the apportionment payable was defined as :-

“such fair proportion as the Landlord acting reasonably shall from time to time determine”

The residential and building costs forming the service charge were defined as :-

"such of the costs charges and expenses which the Landlord shall incur in complying with its obligations set out in Part I of the Sixth Schedule hereto which the Landlord (acting reasonably) designates as being a Residential [or Building] Service Charge Item"

In 2013, a long lease of the gym was granted to Mr White (“the Gym Lease”) who was permitted, in accordance with the terms of the Gym Lease, to make the gym available to users outside of the development as long as the residential leaseholders were not prevented from using the gym.  Although Mr White had to pay an annual rent, there was no covenant in the Gym Lease that he pay a service charge for the costs associated with the gym despite the fact that he was receiving an income from his customers.

Although the leaseholders retained access, after 2020 that access later reduced following refurbishment and operational changes and despite this, leaseholders continued to contribute 100% of the gym’s maintenance costs as part of the service charge.  The leaseholders sought to challenge the continued recovery of 100% of the gym expenditure.

The FTT upheld the landlord’s approach but the Upper Tribunal disagreed, finding that full allocation of the gym costs to the residential leaseholders was no longer objectively reasonable, given they no longer had unrestricted use of the gym.

The Landlord appealed the Upper Tribunal’s decision, on grounds that the Upper Tribunal was wrong to find that, in deciding on the appropriate apportionment, the landlord had to reach a decision that was objectively reasonable or fair.

 The Court of Appeal’s decision

 The Court of Appeal allowed the Landlord’s appeal and reinstated the FTT’s decision.

The Court of Appeal confirmed that, based on the wording of the lease, the relevant apportionment was to be approached in a two-stage process :-

1. Firstly, an assessment was to be made as to what (and how much of those) costs go into the ‘pot’ of service charge costs;

2. Then, an assessment was to be made as to the ‘fair’ apportionment payable by each of the residential leaseholders liable to pay those costs.

Here, the Court of Appeal was only concerned with the first stage, and whether the landlord was ‘acting reasonably’ in deciding that 100% of the gym expenditure should be allocated to the residential service charge pot. In other words, the Court of Appeal was not concerned with whether the apportionments the individual leaseholders were being required to pay were ‘fair’.

The Court of Appeal held :-

• In these cases, the task before the FTT is not to act as primary decision-maker. The starting point is the wording of the contractual provisions in the lease. The lease conferred on the landlord the right in its discretion to designate items of expenditure as a service charge item, and that contractual allocation of the power to make the decision has to be respected.

• It is not for the FTT to decide from scratch, in this instance, the relevant apportionment (on entirely objective criteria). Rather the function of the FTT is limited to deciding whether the landlord acted in breach of contract.

• Based on the wording of the lease, the landlord had to act ‘reasonably’ and not just ‘rationally’. The landlord’s decision must therefore be one that, a landlord acting reasonably, could reach. It is not a question of how the FTT would have chosen had the decision been for them, but of whether the landlord's choice was outside the range of permissible decisions. Only if it was, will the landlord have acted in breach of contract such as to entitle the FTT to decide that the service charge is not payable.

The FTT had directed itself to the right question and its finding that the landlord’s decision was "not a decision of the type where it could be said that no reasonable landlord in a similar position could ever have made it" was one the FTT could properly make. Therefore the FTT did not err in law, and the Upper Tribunal was not entitled to substitute its own view of the reasonableness or fairness of the landlord's decision.

Conclusion

The Court of Appeal’s decision will be significant for both landlords and leaseholders.

For landlords, the judgment will be viewed as broadly favourable. Where leases provide discretion to allocate expenditure, a decision supported by reasoning will ordinarily be upheld, unless it is one that no reasonable landlord could make. The Court of Appeal has confirmed that, primarily, this function is one of the landlord.

For leaseholders, the scope of the challenge has narrowed. A leaseholder unhappy at the manner of the exercise by the landlord of its discretion under the lease must instead be able to show that the landlord’s approach fell outside the scope of decisions reasonably open to it.

This is, of course, based on the wording of the specific lease in question.

But the advice when a lease provides for discretion to be exercised by the landlord, RMC or RTM company in cases like this is always to seek advice on the likely alternative approaches that might be taken, such that it can be shown that the matter has been properly considered and its own decision, whatever that is, can be supported by its approach to reaching that conclusion.  Whilst this will never guarantee that the result selected will not be capable of challenge, it should limit the risk and thereby limit the prospect of challenge in the first instance.

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.