CA-2024-001597 - [2025] EWCA Civ 1308

Against that background it is now possible to address the question in the present case. Much of the argument was conducted on the basis that the question was whether the appropriate test was that of “rationality” or “objective reasonableness”. That is not perhaps surprising in light of the authorities, but ultimately I did not find this the most helpful way of characterising the question.

Thus on the one hand it is clear that the task before the FTT was not to act as primary decision-maker. The starting point is the wording of the contractual provisions and here the Flat Leases confer on the Landlord the right in its discretion to designate items of expenditure as Residential Service Charge Items. That contractual allocation of the power to make the decision has to be respected. The suggestion that the effect of s. 27A(6) L&TA 1985 was to render such a provision void and transfer the power to determine the apportionment of service charges to the FTT was the very point disapproved of by the Supreme Court in Aviva. So it is quite clear that there is no question of the FTT deciding the question for itself from scratch as if it were deciding (“on entirely objective criteria”) what a reasonable price, or a reasonable time, is. Rather the function of the FTT is, as Lord Briggs puts it in Aviva, “limited to deciding whether the landlord acted in breach of contract”.

For this reason I do not accept the submission of Mr Walsh that the task of the FTT is similar to that on an application under s. 19 L&TA 1985 raising the question whether costs have been reasonably incurred or are of a reasonable amount. As decided by this Court in Waaler, that gives the FTT a jurisdiction to decide for itself, by reference to an objective standard, whether costs have been reasonably incurred or are of a reasonable amount, not just to police the landlord’s decisions. It seems to me clear from Aviva that the role of the FTT on an application under s. 27A is the different one of deciding if the landlord’s decisions are in accordance with the contract or not.

On the other hand, I agree with the Judge that Aviva is not authority for the proposition that whenever a discretion is conferred by a lease on a landlord, and whatever the language used in the lease, the FTT’s function is limited to a rationality review of the type envisaged by Braganza. It is true that Lord Briggs twice refers in Aviva to the FTT conducting a Braganza rationality review: see at [15] and [16]. But I agree with the Judge on this. She repeated what she had said in an earlier UT decision, Hawk Investment Properties Ltd v Eames [2023] UKUT 168 (LC) (“Hawk Investment”), namely that in Aviva at [15]-[16] Lord Briggs is considering the background or general law rather than the facts of the particular case, and that when in [33] he applied the law to the particular provision in question in Aviva (which referred to the apportionment of costs being “such part as the Landlord may otherwise reasonably determine”) he said that the question for the FTT was whether the re-apportionment had been “reasonable”. As the Judge says, if Lord Briggs had meant “rational” he no doubt would have said so.

Moreover I think there is some force in the point made by the Judge that the parties presumably meant something by expressly requiring the Landlord to act reasonably or to make a decision in its reasonable discretion. It would seem odd if a discretion expressly qualified in that way meant exactly the same as a wholly unqualified discretion. This is especially so where, as Mr Walsh pointed out, the person drafting the Flat Leases did elsewhere go out of his way to confer an absolute discretion on the Landlord: see paragraph 10(d) of schedule 4 (set out at paragraph 8 above).

So I agree that the requirement that the Landlord act reasonably does mean reasonably, and not just rationally. But I do not think that by itself answers the question. The question for the FTT as I have said is whether the Landlord acted in breach of contract. The Landlord will have acted in breach of contract if, and only if, it can be said to have acted unreasonably, or to have not exercised a reasonable discretion. The very fact that the Landlord is given a discretion indicates that where there is a range of possible views, it is the Landlord who is entitled to choose between them. It is not therefore a question of how the FTT would have chosen had the decision been for them, but of whether the Landlord’s choice was outside the range of permissible decisions. Only if it was will the Landlord have acted in breach of contract such as to entitle the FTT to decide that the service charge is not payable.

What then is the limit of permissible decisions? I do not think one can improve on the way it was put by Lewis LJ in argument, namely that a decision is a permissible one if it is one that a landlord acting reasonably could reach. Or to put it negatively, the landlord’s decision will be flawed only if it is one that no reasonable landlord could have reached.

Such a test accords with the long-established principles applicable to the question whether a landlord’s consent has been unreasonably withheld: see Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59, [2001] 1 WLR 2180 at [5] per Lord Bingham, referring to the statement by Danckwerts LJ in Pimms Ltd v Tallow Chandlers Company [1964] 2 QB 547 at 564 that the question was whether the landlord’s conclusions were conclusions “which might be reached by a reasonable man in the circumstances”; see also at [70]-[71] per Lord Rodger referring to what “a reasonable landlord” might decide, and whether “no reasonable landlord … would withhold consent”. I do not think any sensible distinction can be drawn between the question whether a landlord is acting reasonably in refusing consent or is acting reasonably in designating costs as a service charge item.

This conclusion is also in line with certain decisions on the ISDA Master Agreement. In Peregrine Fixed Income Ltd v Robinson Department Store Public Co Ltd [2000] CLC 1328 the relevant provision applied where a Market Quotation “would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result”. Moore-Bick J held that the question was whether the belief was “one which can reasonably be held” (at [38]) and that in the case before him the relevant party’s belief was not one “a reasonable person in its position, properly directing himself in accordance with the Agreement, could hold” (at [39]). Similarly in Fondazione Enasarco v Lehman Brothers Finance SA [2015] EWHC 1307 (Ch) the provision in question referred to an amount that the relevant party “reasonably determines in good faith” to be its total losses. David Richards J held that that party “is not required to comply with some objective standard of care as in a claim for negligence, but, expressing it negatively, must not arrive at a determination which no reasonable non-defaulting party could come to” (at [53]).

Admittedly Robin Knowles J took a different view in Lehman Bros where the relevant provision provided that an amount would be determined by the Determining Party “which will act in good faith and use commercially reasonable procedures to produce a commercially reasonable result”. He held (at [81]) that this form of agreement required the Determining Party “to use procedures that are, objectively, commercially reasonable in order to produce, objectively, a reasonable result”. I can see that this language, expressly referring to the result or outcome as “commercially reasonable” may be more open to such an interpretation. The same may be true of the Judge’s decision in Hawk Investment where the relevant provision in the lease required the proportion of the service charge to be calculated by “some other just and equitable method”. This is an illustration of the fact that one cannot necessarily give a single answer that applies across the board: as with any other question of contractual interpretation, it will depend on the precise wording of the provision in question.

But in the present case, once one puts on one side the reference to a fair proportion (which, as I have accepted above, applies only to the second stage of apportioning the relevant service charge items between the lessees, and not to the first stage of deciding what goes into the pot), then one is left with the provisions in the Flat Leases that the Landlord is to act reasonably in designating, and is to exercise a reasonable discretion. For the reasons I have given the Landlord is in my judgement only in breach of those provisions if it makes a decision that no reasonable landlord could have done.

I do not think this test is best described as a test of “objective reasonableness”. As Lewison LJ referred to in Waaler, the language of objective reasonableness suggests that it is for the FTT to form its own view just as if deciding whether a price was a reasonable price. But that is not the exercise the FTT is obliged to carry out.

That is why I have not found the debate about whether the FTT is to apply a rationality test or a test of objective reasonableness a useful one in practice. I prefer to say that in a case like this the role of the FTT is limited to deciding whether a landlord has acted in breach of contract; that a landlord will only have acted in breach of contract if the decision it has made was not one open to it in the circumstances; and that where the lease requires the landlord to act reasonably or exercise a reasonable discretion, that will only be so if the decision is one that no reasonable landlord could have reached.