The implementation of service charges under residential leases is a controversial topic. The primary reason for such is twofold: costly and protracted litigation can be generated, and landlords can often seek to reduce litigation risks by enforcing contractual limitations upon tenants regarding their rights to have service charge disputes settled appropriately.

Parliament endeavoured to mitigate these unjust restrictions on tenants by implementing section 27A of the Landlord and Tenant Act 1985 (LTA 1985). 27A states that tenants may make an application to a suitable tribunal to determine whether a demanded or prospective service charge is payable. Furthermore, it states that any agreement between the landlord and tenant that tries to decide such matters in a specific way or based on certain evidence is void.

Aviva Investors Ground Rent GP Ltd v Williams refers to residential units within a building in Southsea. The dispute in question came from the landlords demanding service charges because of an apportionment different from, and higher than, the numerically stated percentages in the relevant leases.

The Supreme Court discussed the effect of the LTA 1985 s.27A(6) on a contractual provision in a residential lease which allowed a landlord to change a tenant's share of service charge costs.

Facts

In Aviva Investors Ground Rent GP Ltd v Williams, the tenants argued that the landlord's contractual entitlement was void under section 27A of the LTA.

In court, Lord Briggs recognised the controversial nature of service charge implementations. The landlords argued that voiding any contractual power of the landlords regarding service charges would shift decision making authority from themselves to the tribunal. They further asserted that this would provide the tribunal with the burden of having to make extensive service charge related decisions.

Lord Briggs looked beyond 27A in considering other statutory constraints on the imposing of service charges. Of note was Section 19, which limits service charge costs to those reasonably incurred in providing services or carrying out works to a reasonable standard. Also, Section 21 requires landlords to consult tenants on specified works and provide tenants with the right to withhold payment of service charges if the landlord fails to comply. Section 20B sets a time limit of 18 months for service charge demands.

Considering these statutory provisions, Lord Briggs found that 27A was designed to prevent certain types of contractual provisions from limiting the jurisdiction of the tribunal; the tribunal's jurisdiction extends to determining the legitimacy of discretionary management decisions made by landlords demanding service charges.

If the landlord's discretionary decision falls within their contractual powers under the lease and is unaffected by the statutory regime, however, it is not the tribunal's role to make those decisions.
Lord Briggs saw no benefit in expanding the tribunal's jurisdiction to include making discretionary management decisions related to service charges. Doing so would undermine the landlords' decision-making process. Therefore, he concluded that discretionary management decisions of this kind were not subject to Section 27A.

The judge also noted that revising the initial allocation of service charges to accommodate changing circumstances did not offend 27A. Removing a clause that allows such revisions would leave the original apportionment fixed permanently, which goes against the parties' intention to provide for variation. Ultimately, it was decided that 27A does not aim to deprive landlords of their ordinary contractual authority in making managerial decisions about service charges.

The law

Windermere Marina Village Ltd v Wild 2014 expanded the meaning of S.27A(6) LTA 1985 to include a 'fair and reasonable' arm to the service charge legislation which was to be decided by the first-tier tribunal. This was the first of many cases, such as Gater v Wellington Real Estate 2014 and Oliver v Sheffield City Council 2017, which essentially established that the landlord's decision-making regarding apportionment of service charge should be disregarded – it would be for the first-tier tribunal to determine what is 'fair and reasonable' in each scenario.

In Aviva, Lord Justice Briggs recognised a mistake he made in his judgment in Oliver. He noted that the decision in Oliver essentially deprived landlords and property managers from making managerial decisions about their properties. This Supreme Court decision essentially repeals Oliver and permits landlords to engage a reapportionment of service charge and decide what the new proportion of service charge should be by virtue of lease agreements, rather than what is considered 'fair and reasonable' by the first-tier tribunal. The first-tier tribunal will retain scrutiny in determining whether a landlord is exercising their power in a manner that is contractually valid.

The Birketts view

This Supreme Court judgment acts to relieve Landlords and property managers of their duty to apportion service charges with what is considered to be 'fair and reasonable'. Instead, service charges can be determined by the lease between landlords and tenants and will only be subject to the scrutiny of the first-tier tribunal. Scrutiny will be used to determine whether a party is exercising their power in a contractually valid manner and will not determine whether service charge demands are valid. These changes are intended to allow landlords and property managers a degree of freedom to make decisions that will aid the management of their properties if circumstances change.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.