Demanding a differing apportionment of the service charge in your residential lease
This article was published on: 9th February 2021Matt Pugh
Can a landlord, or even a tenant, do so? With a little help from its friend, the Tribunal, the answer may be yes, following the recent Court of Appeal decision in Aviva Investors Group Rent Limited v Williams & Others  EWCA Civ 27.
However considerable care should always be taken when seeking to vary a service charge relating to a residential lease to mitigate the risk of dispute, maximise recovery, and save on cost.
Homes which are rented under long residential leases may require the tenant to pay the landlord a “service charge”, in addition to rent. This is commonly found in blocks of residential flats. A service charge is intended to cover costs incurred by the landlord in providing services relating to the property, typically maintenance and repair.
Whilst landlords are expected to seek to recover only those “reasonable” costs incurred in providing such services, disputes in relation to the scope and amount levied under the service charge are common.
As with any landlord and tenant dispute, the starting point to determine whether a service charge is payable or not, is to consult the lease itself.
However, significantly, residential leaseholders enjoy further protection from having to pay excessive service charges under statute and will not necessarily be bound to pay an ‘unreasonable’ service charge.
Landlord and Tenant Act 1985
The Landlord and Tenant Act 1985 (‘the LTA’) allows either the landlord or the tenant of a qualifying lease to ask the Tribunal to determine what amount the tenant is required to pay as service charge in the event of dispute.
Under section 27A of the LTA, the Tribunal can be asked to make a binding decision as to whether:-
- a service charge is payable, and if it is;
- to whom it is payable, by whom it is payable, the amount of the service charge, the date by which it must be paid and the manner in which it is payable.
This can prove to be an effective means of resolving disputes but is only available where the tenant has not previously admitted or accepted the charges. Where landlords and tenants have agreed how a service charge is to be apportioned, for example, at lease commencement, this cannot later form the subject of an application under section 27A.
At the same time, the Act prohibits any contracting out from these provisions and will render void any attempt to stop references to the Tribunal being made, for example, by appointing the landlord or a third party as the final decision-maker.
But what if the parties have agreed a service charge apportionment at the outset and there are later legitimate reasons why a departure is necessary? This might be, for example, due to development and the initial apportionment is preventing the landlord from recovering its full outlay of expenditure, or the tenant feels it is paying too high a percentage.
The law will not allow either party to unilaterally vary the lease, so what can be done to preserve and access that valuable flexibility?
The Court of Appeal decision in Aviva v Williams now appears to allow a path forward.
The case concerned a block of residential flats in Hampshire with 69 leaseholders, all of whom occupied pursuant to the same form of lease.
The landlord divided the service charge costs between the tenants through fixed apportionment calculations as contained in the leases. However, the leases also contained a caveat, permitting the landlord the discretion to “otherwise” determine a reasonable split.
The landlord had stopped charging the fixed percentages, relying on the latter part of the clause. The tenants therefore applied to the Tribunal to determine what they were properly required to pay by way of service charge.
In the first instance, the Tribunal held that the wording allowing the landlord to decide the appropriate apportionment was void because it sought to make the landlord ultimate decision-marker. It determined that the tenants could only be required to pay the initial, stated percentage amounts as had been agreed.
However, on appeal, the Court of Appeal found in favour of the landlord. It held that whilst the landlord could not impose a new apportionment, after cutting out the offending reference to the “the landlord,” the remaining provisions enabled the Tribunal to “step in” and do so.
Either party thus remained able to require the Tribunal to determine whether the different percentages were payable, and reasonable.
The decision is to be welcomed, particularly by landlords, where leases have sought to allow them manoeuvrability to re-apportion service charges if required when managing their estates. It is likely that permutations of this type of drafting are likely to be widespread and the decision will therefore be of interest and importance, to many.
It is also likely that the principles derived from the decision could extend to be applied in circumstances where a lease allows for the service charge to be varied upon the happening of a ‘trigger’ event. In such circumstances, the Tribunal may have the power to decide whether a varied apportion is payable, as well as the varied amount. In such cases, it may be wise for landlords to seek a Tribunal determination that a variation can be applied early on, to lessen the risk of challenge by tenants.
The Court of Appeal has demonstrated that it is receptive to the fact that there may be reasons why an agreed apportionment needs to be varied during the lifetime of a long lease, and that holding parties to a historic formulation may not be helpful.
The decision recognises this commercial reality, whilst ensuring that tenants remain shielded from excessive charges and have a means of recourse where necessary, as was envisaged by the LTA.
The alternative outcome would have left the landlord in this case able only to recover as per the original fixed apportionment and thereby exposed to a possible shortfall; or else forced to undertake a costly exercise in agreeing variations to a significant number of leases.
Author: Amy Chadwick, Associate