Can a third party control property service charge costs?

Two recent cases have highlighted the ability of tenants to successfully challenge the apportionment of service charge costs applied by their landlord, even where their lease provides for third party determination of that apportionment.

The issues raised will be of interest to both landlords and tenants, especially of mixed-use developments where the service charge is apportioned by reference to the different types of properties and the individual benefit they each receive from the service, for example where security or maintenance costs differ.

Section 27A of the Landlord and Tenant Act 1985 (LTA 1985) provides that either the landlord or the tenant may make an application for a determination as to:

• What costs are recoverable through the service charge
• Whether the costs that the landlord is seeking to recover through the service charge have been reasonably incurred.

It was, however, unclear whether or not the apportionment of the service charge costs could be challenged under this legislation when the lease provided for third party determination that was final and binding.

Initially, applications under s27 LTA 1985 were made to the Leasehold Valuation Tribunal (LVT), but on 1 July 2013 the LVT was incorporated into the First Tier Property Tribunal (FTPT).

In the first case, “Windermere Marina Village Ltd v Wild and others [2014] UKUT 163 (LC)”, in which Harrison Drury acted for the landlord, residents of a mixed-use development challenged the apportionment of the service charge that had been determined by an expert valuer appointed by the landlord. The LVT upheld the challenge and proceeded to impose its own apportionment on the parties despite the fact that the relevant leases provided the expert valuer’s determination was “final and binding”

On appeal, the Upper Tier Property Tribunal (UTPT) confirmed that the LVT had not misdirected itself as to its statutory powers because section 27A(6) of the Landlord and Tenant Act 1985 (LTA 1985) renders void an agreement in a lease of a dwelling that the apportionment of service charge will be determined by a third party, even where the wording of the lease says that decision shall be “final and binding”.

These same principles were subsequently applied in “Gater and others v Wellington Real Estate Limited and LCP Commercial Limited [2014] UKUT 0561 (LC)”. This case was slightly different in that residential subtenants were obliged to pay, as a service charge, a fixed proportion of the sum payable by their immediate landlord to the freeholder.

Under its headlease, their immediate landlord was obliged to pay the freeholder such fair amount as the freeholder’s surveyor determined. The subtenants disputed the amount of service charge allocated to their immediate landlord but were unsuccessful before the FTPT.

On appeal, the UTPT held that FTPT was wrong in the limited view it took of its role in relation to apportionment. A provision providing for the determination of proportions by the freeholder’s surveyor was void, whether it was expressed to be final and binding or not.

What are the lessons for landlords and tenants arising from these cases?

In the Windermere case, the UT emphasised that s27(6) LTA 1985 only applied where the parties have not agreed the apportionment at the commencement of the lease, leaving it open determination at a later date. It therefore did not apply to leases with a fixed proportion or percentage.

Landlords who grant multiple residential leases in a development and want to ensure certainty when applying service charges therefore need to specify exactly what is covered in the charge and how the costs will be apportioned, so it is clear what each tenant will be liable for the commencement of the lease. If this is not possible, it is open for landlords themselves to make an application to the FTPT for approval not only of the service charge which is payable, but how the costs of individual items are apportioned between individual tenants, although this could prove an expensive approach as approval will be required each year.

Tenants on the other hand should be aware of their rights to challenge both the service charge calculation and how the costs have been apportioned, even if their lease stipulates that the apportionment is to be determined by a third party. It is also important that tenants are alive to this during initial lease negotiations if landlords seek to impose a specific service charge provision in their lease.

For more information on the law surrounding property service charges, or any other property and construction dispute, please contact Colin Fenny on 01772 258321