Supreme Court clarifies the law on service charges for residential leases

The Supreme Court recently handed down its judgment in Aviva Investors Ground Rent GP Limited and another (Respondents) v Williams and others (Appellants), clarifying the law on residential lease service charges. The ruling is key for landlords and those operating in the property management sector.

Background

This case concerns a block of flats in Southsea which is part of a mixed use development. The leases provide for three heads of service charge- insurance, building service costs and estate service costs.

These service charges are payable as a specific percentage set out in the leases or “such part as the landlord may otherwise determine”.

The second part of this clause is not unusual and is found in many leases. Having the power to vary the percentage makes sense in some wider estates and developments and can contribute to good estate management.

The leaseholders challenged this particular clause on the grounds that any right to vary the service charge apportionments was void pursuant to Section 27A of the Landlord and Tenant Act 1985 (1985 Act). The First-Tier Tribunal (FTT) rejected this argument and the leaseholders were unsuccessful.

The FTT decided that the right to change apportionments should still remain with the landlord, although either party could turn to the FTT for a determination where an agreement could not be reached. The leaseholders successfully appealed to the Upper Tribunal (UT). The case has since made its way to the Supreme Court.

The law

Section 27A of the 1985 Act gives the FTT jurisdiction to determine whether a service charge demanded by a landlord is or would be payable.

This case concerned the effect of S27A(6) on leases which provided a specific percentage/proportion and a right for the landlord to vary the same.

The key issues

1. Is the landlord bound by the percentages specified in the lease? To what extent is a term in a lease which allows the landlord to change the tenant's share of the service charges invalidated by S27A(6) of the 1985 Act?

2. Does the right to vary the service charges under the lease rest with the landlord or does s27A(6) the FTT? If the right to vary the service charge rests with the FTT, can the tenant invoke the Tribunal's jurisdiction as well as the landlord?

The case's journey through the courts

In this case, the FTT determined that the ability to vary the apportionment should remain with the landlord, although either party could invoke the FTT's jurisdiction to determine what a reasonable apportionment would be if an agreement could not be reached.

The leaseholders appealed the FTT's decision to the Upper Tribunal. The Upper Tribunal agreed with the leaseholders and stated that the landlord's right to vary the service charge was void by virtue of s27A(6) of the 1985 Act.

The landlord then successfully appealed the Upper Tribunal's decision at the Court of Appeal. The Court of Appeal agreed with the FTT that this right to vary the service charge was not voided by S27A(6) of the 1985 Act, and it was open to either party to apply to the FTT to determine what was a reasonable apportionment.

In its judgment the Court of Appeal concluded that the effect of S27A(6) of the 1985 Act was to transfer the power to vary percentages payable by the tenant to the FTT.

The leaseholders then appealed the Court of Appeal's ruling at the Supreme Court. The Supreme Court ultimately restored the FTT's decision, but noted that it disagreed with the Court of Appeal's interpretation of the Act.

In it's judgment the Supreme Court unanimously dismissed the leaseholders' appeal, ruling that S27A(6) of the 1985 Act is designed to act as an anti-avoidance provision, preserving the FTT's jurisdiction.

The Supreme Court found that the provision's purpose or effect is not to enlarge the FTT's jurisdiction or deprive the landlord of their right to vary the service charges payable by the tenant.

Why is it important?

The Supreme Court's decision is an important ruling for landlords and those working in the management sector. It provided such much needed certainty and clarity on reasonable flexibility where the lease permits.

The full judgment is available to read here.

How we can help

Our enfranchisement team can advise across a range of issues, including lease extensions, collective enfranchisement and freehold sales to leaseholders.

If you would like to discuss any of the issues set out in this article, please contact Shabnam Ali-Khan in the enfranchisement team.