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

So how is such a provision to be understood, that is a provision in a lease which confers on the landlord a reasonable discretion, or a right to make a decision acting reasonably? We were cited a large number of cases from a variety of different fields. These provide helpful guidance, and certain points seem to me reasonably clear.

First, a lease is a contract. It is of course a particular type of contract as it is the grant of an estate in land. But it also contains provisions, such as the service charge provisions, which regulate the continuing relationship between landlord and tenant, and the general principles applicable to contracts apply to such provisions in leases just as they do to other contracts.

Second, Courts are regularly required to decide questions of reasonableness on the basis of what have been called in the cases “entirely objective” criteria. The usual examples given are a duty to take reasonable care, or the fixing of a reasonable price, or of a reasonable time: see Socimer International Bank Ltd (in liquidation) v Standard Bank Ltd [2008] EWCA Civ 116, [2008] Bus LR 1304 (“Socimer”) at [66] per Rix LJ, Lehman Brothers Special Financing Inc v National Power Corporation [2018] EWHC 487 (Comm), [2019] 3 All ER 53 (“Lehman Bros”) at [63] per Robin Knowles J. The distinctive thing about such provisions (often the result of an implied term, either at common law or under statute) is that no decision-making power is conferred on either of the contracting parties. In the event of a dispute, therefore, the decision has to be that of the Court: see Socimer at [66] per Rix LJ, referring to the way in which it was put by Laws LJ in argument (“on entirely objective criteria of reasonableness the decision-maker becomes the Court itself”). And see Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661 (“Braganza”) at [19] where Baroness Hale DPSC refers to the question whether the Court is the “primary decision-maker”.

Third, it is well established that even if a contract confers an apparently unqualified discretion on one of the contracting parties, there are implicit constraints on the exercise of the discretion. The previous cases were collected by Rix LJ in Socimer at [60]-[64], and summarised by him at [66] as follows:

“It is plain from these authorities that a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.”

Rix LJ said that the concern was that the discretion should not be abused, and that although “reasonableness” and “unreasonableness” were also concepts deployed in this context, they were only used in a sense “analogous to Wednesbury unreasonableness” (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223), which for the sake of clarity he preferred to call “rationality”.

This principle was endorsed and applied by the Supreme Court in Braganza which concerned a contract of employment under which benefits were payable on the death of an employee in service, but not if “in the opinion of the company” death resulted from the employee’s wilful act. (This is not I think strictly speaking a case of a discretion being conferred on the employer, but rather of a power to make a contractually binding decision, but the same principles apply). The decision was neatly summarised by Lewison LJ in Waaler v Hounslow LBC [2017] EWCA Civ 45, [2017] 1 WLR 2817 (“Waaler”) at [20] as follows:

“It was, I believe, agreed by all members of the court that the exercise of a contractual discretion is constrained by an implied term that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose; and that the result is not so outrageous that no reasonable decision-maker could have reached it: para 30 (Baroness Hale of Richmond DSPC); para 53 (Lord Hodge JSC) and para 103 (Lord Neuberger of Abbotsbury PSC). However, as Lord Hodge pointed out this is a rationality review, not the application of an objective test of reasonableness.”

It is clear that this “rationality” test is in some respects analogous to that applicable in public law to judicial review of decisions by public bodies, but the Supreme Court did not suggest in Braganza that they were precisely the same (see per Baroness Hale at [28] referring to the contractual implied term “drawing closer and closer to the principles applicable in judicial review”), and did not consider it necessary to reach any final conclusion on the precise extent to which they might differ (see per Baroness Hale at [32]).

Fourth, in Waaler the question was whether certain costs were reasonably incurred within the meaning of s. 19 L&TA 1985. Lewison LJ (with whom Burnett and Patten LJJ agreed) held (at [23]) that so far as the landlord’s contractual ability to pass on costs was concerned, its decision both when choosing between different possible methods of repair, and when deciding whether to carry out optional improvements, was subject to the rationality test approved in Braganza; but (at [29]) that the question whether costs were of a reasonable standard or reasonably incurred within the meaning of s. 19 L&TA 1985 must “be decided by reference to an objective test just as that test would be applied to deciding whether a price was a reasonable price”.