It is not uncommon, particularly with modern residential leases, for a landlord or management company to be afforded some degree of discretion when it comes to the service charge apportionment payable by the leaseholder under the lease, whether that be a fixed percentage or calculated by reference to some prescribed method (such as internal floor area).

In February 2023, the Supreme Court considered the legality of provisions allowing a landlord to vary a fixed service charge, to such other percentage as the landlord “may otherwise reasonably determine”, in the case of Aviva -v- Williams [2023] UKSC 6. Such a provision was held to be lawful, albeit the Supreme Court confirmed that this did not remove the jurisdiction of the First-Tier Tribunal (“FTT”) to determine whether those variations were reasonable, under Section 27A of the Landlord and Tenant Act 1985.  See our Legal Update on that decision here - Supreme Court gives final ruling in Aviva -v- Williams [2023] UKSC 6 on whether a landlord can amend the service charge proportions payable under the lease – KDL Law .

More recently, in the case of Fitzroy Place Residential Ltd and others -v- Lovitt and others [2024] UKUT 63 (LC), the Upper Tribunal (“UT”) again considered the lawfulness of variations to service charge provisions in the lease, in a decision which confirms that a discretion afforded by a lease is not always a complete discretion for the landlord to do as they please.

Background

The case concerned Fitzroy Place, a mixed-use development comprising six blocks north of Oxford Street in Central London. Two of the blocks are wholly commercial, and the remaining four blocks are wholly residential, containing 235 private flats and 54 flats allocated as affordable housing. Communal facilities within the development include meeting rooms, a lounge, a cinema and concierge service, the development also accommodates a school, a health centre, basement car parking and storage units. The landlord is Fitzroy Place Residential Ltd and the management functions are provided by a separate management company, Fitzroy Place Management Co Limited.

A dispute arose between the landlord, the management company and some leaseholders, through the residents association and separately in their own right, regarding the landlord’s allocation of the estate service charges payable.

Paragraph 6 of Part 1 of Schedule 6 to the residential leases defined the block and estate service charges payable. In essence, Para 6.1 provided for the apportionments to be calculated “primarily” by reference to the internal areas of the flats. However, Para 6.2 (for relevant purposes) gave the landlord and/or management company discretion to depart from that method of calculation, “having regard to the nature of any expenditure or item of expenditure incurred, or the premises in the Block or Estate which may benefit from it otherwise”, and to adopt such other method of calculation “as is fair and reasonable in the circumstances”.

In practice, the management company had never used the internal basis of measurement stipulated in Para 6.1 when calculating the estate service charges, but instead devised an entirely different method.

An application was presented before the FTT to decide, in particular, whether Para 6.2 gave the landlord/management company “carte blanche” to adopt an entirely different method to the internal area method set out in Para 6.1, and to apply it to all estate expenditure.

The decision of the FTT

The FTT determined that the discretion conferred by Para 6.2 to substitute a method of apportionment different from that required by Para 6.1 was limited to changing the way in which individual items of expenditure were apportioned, and did not provide the landlord and/or the management company with “a licence to adopt a wholly new basis of apportionment for all expenditure”. Therefore, insofar as the estate service charges were concerned, the FTT determined that these had not been apportioned in accordance with the methodology set out in the lease.

The consequences of that determination remained to be worked out at a later resumed hearing to deal with accounting issues. However, the landlord and management company (as well as the freeholder, e.g. the superior landlord) appealed the FTT’s decision to the UT.

The UT’s decision on appeal

It was said on behalf of the landlord, management company and freeholder that on any reading of Para 6.2, the discretion afforded to the landlord and/or management company was very wide and the FTT had been wrong to give it a restricted meaning. It was said that Para 6.1 should not be read as the main method of apportionment, and the fact that the internal area methodology was described as “primarily” the calculation to be used indicated that the parties appreciated that the method of apportionment might have to change. Further, the lease was for an exceptionally lengthy term and the estate itself was complex and included a number of different uses, so there was every reason for the parties to foresee that changes in the basis of apportionment might be required for any number of reasons, if “fair and reasonable in the circumstances”.

The UT did not accept those submissions and agreed with the interpretation of Para 6.2 given by the FTT. Whilst the UT agreed that Para 6.2 anticipated that changes to the service charge apportionments might be required, there were detailed provisions about the extent and circumstances of the change which would be permitted.

The UT said that the word “primarily” meant more than just “ordinarily” or “first” but meant “mainly” or “mostly”, and indicated the parties intended for the service charge apportionments to be calculated, for the most part, by reference to the internal area method described in Para 6.1.

The UT went on to say that a consideration of “commercial common sense” also supported a limited interpretation of Para 6.2. The UT considered the fact that it was concerned with expensive flats and the service charges provided on the estate are elaborate. So whilst the parties had agreed a “primary” basis of apportionment and a means by which that primary method may be recalculated, it was most unlikely that the parties would also agree an “entirely open ended discretion” to vary the apportionments.

The UT therefore confirmed the FTT’s decision that the power conferred to the landlord and/or the management company in Para 6.2 was limited and could only be exercised on an ad hoc basis in relation to particular items or types of expenditure. It could not be relied upon to justify the abandonment of the primary method of apportionment described in Para 6.1.

Conclusion

Given the specific wording of Paras 6.1 and 6.2 of the residential leases, it is unsurprisingly that the FTT and UT reached their conclusions that any departure from the internal area methodology for calculating service charges was only permissible by reference to individual items or types of expenditure.

That is not to say that there would not be other circumstances in which a landlord or management company would be able to vary the methodology or service charge apportionments, depending on the specific wording of the leases concerned (as was the case in Aviva -v- Williams). However, specialist advice should always be taken before any departure from the methodology or apportionment prescribed by the lease is embarked upon, to try and avoid costly and time consuming disputes later on.

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.

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