In January 2021 we reported on the above case as it travelled through the Courts reaching then, the Court of Appeal - see our report here.  The case was appealed again to the Supreme Court, the highest Court in England & Wales, and so a final determination of the question was made and handed down yesterday on 8 February 2023, thankfully firmly closing, as some have described the earlier decisions in the case, the ‘Pandora’s box’ that had been opened for the property management sector. 

So what is this all about and why is it important?

The point in issue was whether a provision written into the lease that enabled the Landlord (Aviva in this case) to vary the fixed service charge proportions payable by the leaseholders was valid or entirely void.  This arose because Aviva sought to demand service charges from the leaseholders at a rate different (and, so far as the leaseholders were concerned, higher) than those fixed percentages expressed in the leases. 

The landlord relied upon a clause set out in the lease which stated the service charge proportion of the leaseholder to be:

“[   ]% or such part as the Landlord may otherwise reasonably determine”

The clause therefore expressed a fixed percentage but enabled the landlord, at its discretion, to amend that later.

The leaseholders took the view that:-

1. The charges were unreasonable insofar as they were higher than the fixed percentage in the lease; and, in any event

2. The clause enabling the landlord to unilaterally amend what the leaseholders were bound to pay must be void on account of s.27A(6) of the Landlord and Tenant Act 1985.

In the first instance the First Tier Tribunal (“FTT”) dismissed both of the leaseholders’ arguments holding the sums demanded to be reasonable and that the claimed breach of s.27A(6) LTA1985 was misguided.

The leaseholders appealed on the second point to the Upper Tribunal (“UT”), who favoured the leaseholders’ argument holding that s.27A(6) did indeed make the provision void and so charges based upon the revised proportions were unenforceable.

The landlord appealed to the Court of Appeal (“CA”), who reversed the UT finding that the provision was not wholly void, so long as the clause could be read to that 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 - see here.

The leaseholders were not happy with that outcome and so appealed to the Supreme Court from whom we have now heard with the final answer. Before we discuss that though it is worth reconsidering what s.27A(6) is about.

s.27A(6) Landlord and Tenant Act 1985

s.27A allows for disputes relating to service charges in residential leases to be resolved by application to the FTT.  s.27A(6) specifically provides that any provision in  a lease which purports to provide for a manner of determination of any matters that fall to the jurisdiction of the Tribunal (including, for example, payability of service charges) is void.

The leaseholders argued that the lease clause in issue is plainly such a provision and so the whole clause in question must be void, with the result that the landlord is unable to amend the service charge proportions from those expressed in the lease, no matter what the circumstances.

Aviva argued that the CA was correct in that if the clause does offend s.27A(6) then it can be read in a way so as to remove that offence.  Therefore, in this case, the word “landlord” in the clause can be swapped out to read “tribunal”, ensuring that the final say rests with the FTT on whether or not a charge is payable or reasonable. 

Decision of the Supreme Court  

The five Judges of the Supreme Court unanimously took a different view to the FTT, the UT and the CA.  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 Court held also that the CA’s interpretation of s.27A(6) was incorrect.  They considered that that interpretation would have the effect that every discretionary management decision of the landlord which would affect the amount of a tenant’s service charge, such as what works to carry out, would be capable of application to the FTT and thus providing the FTT with a quasi management role.  That outcome would greatly extend the jurisdiction of the FTT beyond what was intended by s.27A and it was unlikely that an anti-avoidance provision would be intended to have that effect.  It would also mean that a landlord could never safely incur costs without first seeking a decision of the FTT as to whether those costs could be charged to its tenants.  A plainly an unworkable position.

The leaseholders’ argument was also rejected on the basis that it would have the effect of removing altogether the ability to vary the service charge apportionment, even where that re-apportionment was necessary or not offensive to the purpose of legislation. This 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.

The Judges considered that, in this case, the clause enabling the Landlord to adjust the proportions of the leaseholders’ service charges did not remove the 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, and that they had so determined in the original FTT hearing, s.27A(6) of the Landlord and Tenant Act 1985 was not engaged, and the amended apportionments were valid.

The full decision of the Supreme Court can be downloaded here.

Conclusion

The Supreme Court has therefore settled the matter on a key and often contentious point. 

As we summarised in our 2021 article, this judgment confirms that where there is a provision in leases enabling a degree of flexibility, that provision can be relied upon to react to changes in circumstances at a development over time and which may require amendments to the charging mechanisms. This may arise, for instance, following further development at the block or other changes to a block or estate where the other facility for amendment, provided by sections 35 or 37 Landlord and Tenant Act 1987 (see here), would not be available simply because the lease presently enables a 100% recovery of the charges due.

As always, it is wise to seek advice before embarking on any scheme that might seek to amend what is set out within a lease, be that through a significant change, as in this case, or perhaps the creation or amendment of regulations, as the costs and hassle consequences of getting it wrong often significantly outweigh the advantage sought.  The mind boggles as to what Aviva incurred in legal fees on the long journey taken in this matter and, of that, what proportion they might recover from the leaseholders (if any).

If you or your clients would like further advice on the implications of the Aviva Investors case, please get in touch at info@kdllaw.com or on 01435 897297.

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