Service Charges: Can a Landlord amend the service charge proportions payable under a lease?

This case has been a long running case and has finally now been decided. It concerned a block of 69 residential flats and a commercial unit where the leases set out each tenant’s apportionment of service charges for insurance costs, building services costs and estate services costs. 

 

A set percentage was stated in the lease for each unit against the cost areas but the clause also stated after the fixed percentage “or such part as the Landlord may otherwise reasonably determine”. 

 

Once the residential and commercial units ceased to be in common ownership the fixed percentages no longer allowed the landlord to fully recover its costs. Therefore, the landlord started to claim service charges in different proportions to the fixed percentages set out in the leases. 

 

A few years after the landlord started charging the different proportions, a group of tenants sought to challenge this practice and lodged an Application with the First Tier Tribunal (‘the FTT’) pursuant to Section 27A(1) of the Landlord and Tenant Act 1985 (‘the Act’). 

 

The tenants argued that because of section 27A(6) of the Act the clause that allowed the landlord to charge anything other than the fixed percentage was invalid. The landlord disagreed and argued that section 27A(6) does not wipe out that part of the lease and claimed that the clause is still valid and the landlord could decide how to apportion service charges. 

 

The FTT decided that the landlord can adjust the service charge apportionment but the FTT has the power to check that the landlord’s decision is reasonable. 

 

The tenants appealed the decision to the Upper Tribunal (Lands Chamber)(‘the UT’). The UT held that these terms were to be deleted entirely so that only the fixed percentage in the leases remained. It was also deemed that the FTT had no jurisdiction to determine the apportionment. 

 

The landlord appealed to the Court of Appeal (“CA”), who reversed the UT finding that the service charge provisions were not void. The CA stated that they remained in place but the final say on the issue (as to the amount of any revised proportion payable) fell to the FTT to decide and not the landlord. 

 

The case then reached the Supreme Court. They 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. 

 

The service charge clause in the lease that gave the landlord the ability to vary the percentage “or such part as the landlord may otherwise reasonably determine” was not void by reason of Section 27A(6). However, any variation would still be subject to reasonableness and could be reviewed by the FTT. 

 

 

The decision provides greater clarity and reassurance that if a lease gives them a discretionary power to vary the service charge share, providing they act “reasonably” they can exercise it subject to review by the Tribunal and it will not automatically be void by Section 27A(6). 

 

Tenants remain able to challenge the reasonableness of the landlord’s exercise of the discretion but they cannot automatically say “the variation clause is void, so we can stay on the fixed percentage only”. 

 

The decision emphasises the importance of clear drafting of the variation clause for example specifying that any variation must be “reasonable” in accordance with defined criteria and proper decision making and documentation by landlords when exercising this discretion.