The recent Court of Appeal decision in Bradley and Rhodes v Abacus Land 4 Ltd [2025] EWCA Civ 1308 confirms the approach which should be taken by the First-Tier Tribunal (‘FTT’) when reviewing the exercise by a landlord of a contractual discretion to apportion service charge.
The Application
The application concerned the extent to which residential leaseholders could be required to contribute towards costs incurred in connection with a gym which they did not have exclusive use of.
The leaseholders were granted a right to use the gym under the terms of the flat leases. The landlord subsequently granted a 9-year lease of the gym to an operator of a personal training business. The gym lease contains provisions preserving the leaseholders’ rights to use the gym (it was noted that, in practice, there has been some interference with the leaseholders’ rights to use the gym, but that this was a matter between the leaseholders and the gym tenant and could not be resolved in these proceedings).
Under the gym lease, the gym tenant is required to provide certain services (including staffing the gym during certain times and providing assistance to leaseholders on how to use the gym equipment) and to pay a modest annual rent, which the landlord puts towards the costs of maintaining the gym. However, the gym tenant is not required to pay a service charge. Therefore, the gym costs (less the gym tenant’s rent) are passed onto the leaseholders through the service charge. This was challenged by the applicant leaseholders.
The jurisdiction of the FTT that was invoked was that in section 27A of the Landlord and Tenant Act 1985 (‘LTA 1985’) which provides that an application may be made to the FTT for a determination whether a service charge is payable.
Service Charge Apportionment
Under the terms of the flat leases, the landlord has the right “in its reasonable discretion” to allocate items of expenditure to one or more of three ‘pots’: “Residential Service Charge Item”, “Building Service Charge Item” and/or “Parking Service Charge Item”. The leaseholders are then required to pay a ‘fair proportion’ of any items of expenditure that have been allocated to a pot to which they are liable to contribute.
LJ Nugee considered that this was a two-stage process and that the reference to ‘fair proportion’ only applied to the second stage of apportioning costs between the group of leaseholders liable to contribute to the relevant pot, and not to the first stage of deciding what goes into the pot.
The leaseholders’ complaint was that the landlord had designated all of the gym costs (less the gym tenant’s rent) as a Residential Service Charge Item, to which only the residential leaseholders were required to contribute. The question for the Court of Appeal was whether this was a decision which the landlord was entitled to make.
The Court of Appeal’s Decision
LJ Nugee acknowledged that the statutory scheme regulating residential service charges does not say anything about the apportionment of service charges to leaseholders: section 19(1) LTA 1985 is concerned with whether costs have been reasonably incurred, or whether work or services are of a reasonable standard, not with how those costs are borne. Therefore, the only question for the FTT was whether the service charges demanded were in accordance with the contractual provisions in the flat leases.
LJ Nugee reaffirmed the recent decision of the Supreme Court in Aviva Ground Rent Investors GP Ltd v Williams [2023] UKSC 6, [2023] AC 855 that the FTT’s function is limited to deciding whether the landlord acted in breach of contract: The flat leases conferred on the landlord the power to designate items of expenditure as a Residential Service Charge Item, and that power had to be respected.
However, he did not consider that whenever a discretion is conferred on a landlord, and whatever the language in the lease, the FTT’s function is limited to a rationality review. He considered that the requirement under the flat leases to act reasonably did mean reasonably and not just rationally, and that the test to be applied was the same as that which is applied when determining whether a landlord’s consent has been unreasonably withheld, i.e., the landlord’s decision will be flawed only if it is one that no reasonable landlord could have reached.
In this case, LJ Nugee considered that it might have been thought to be both reasonable and in the interests of the leaseholders to grant a lease to the gym tenant on the condition that it provided certain services to leaseholders and made some contribution towards the gym costs by way of an annual rent. The fact that no rent was currently being received from the gym tenant due to a dispute between the landlord and the gym tenant, and that the gym costs were much more significant than might have been anticipated did not change this principle.
He further considered that if the landlord could not recover the gym costs from the residential leaseholders, it would have to bear them itself, and that this would result in the landlord spending the minimum that it could on the gym, which was unlikely to be in the leaseholders’ interests.
Accordingly, the landlord’s decision was not of the type where it could be said that no reasonable landlord in a similar position could ever have made it.
Key Take-aways
- Where section 19(1) LTA 1985 is not engaged, the FTT’s function is limited to deciding whether the landlord acted in breach of contract.
- The obligation on a landlord under a lease to act reasonably does not require objective reasonableness.
- The landlord’s decision will be unreasonable only if it is one that no reasonable landlord would make.