Provisions that allow landlords to choose how to apportion service charges between tenants are void

Parties to leases commonly agree to allow the landlord – or its surveyor or managing agent – to certify service charge totals and, sometimes, to select the most appropriate method of apportioning service charges between tenants as well. However, section 27A(6) of the Landlord and Tenant Act 1985 provides that agreements by the tenants of dwellings that purport to oust the tribunal’s jurisdiction to decide the amount, date and manner in which, by whom, and to whom service charges are payable, are void. The effect of these provisions came to the attention of the Upper Tribunal in Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC). It decided that section 27A(6) empowered it to determine the proportions in which service charge costs are split between tenants – and even to substitute its own apportionment in place of an apportionment that has already been made. Matters that have already been agreed by the tenant or determined by arbitration or the court are excepted from this rule: section 27A(4). Therefore, agreements that state precisely how service charge expenditure will be apportioned (for example, by using a specified formula, or by reference to a fixed proportion or percentage) are not affected. However, section 27A(6) applies where a lease leaves the method of apportionment open. The decision promised to affect the service charge arrangements for a significant number of properties around the country and has now been followed in Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC); [2015] PLSCS 12. Indeed, this case goes further still. The Upper Tribunal ruled that section 27A(6) applies where an intermediate lease of part allows the freeholder’s surveyor to apportion service charges between different uses in a building and the underleases granted by the intermediate landlord contain provisions designed to pass these costs on to its residential undertenants, who have no contractual relationship with the freeholder. The tenants had taken leases of apartments on the third and fourth floors of a building that was in mixed use. The intermediate landlord’s own lease of the third and fourth floors stipulated that the service charge expenditure for the building was to be divided between the different parts of the building, which were being put to different uses, in proportions that were to be determined by the freeholder’s surveyor, after “taking into account the relevant floor areas within the building or other reasonable factors”. The underleases of the individual apartments required the undertenants to share the freeholder’s costs in fixed proportions, which were stipulated in their underleases. In addition, the undertenants also covenanted to contribute to any separate costs that the intermediate landlord incurred in the provision of services on the third and fourth floors. The undertenants were unhappy with the way in which the freeholder had apportioned the service charge between the different users, because it had excluded the area of the basement from its calculations. Their service charges had trebled in the space of four years and was expected to increase again following external decoration and roof repairs – and they hoped that an adjustment to the apportionment of liability between the residential floors and the remainder of the building would result in real savings for them. The Upper Tribunal agreed that the residential tenants were entitled to ask the First Tier Tribunal to review the apportionment and directed it to do so by reference to “the relevant floor areas within the building or other reasonable factors”, since this was what had been agreed.   Allyson Colby is a property law consultant