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

Before coming to the substantive question, I think it is helpful to be clear about the precise issue before the Court.

I have set out paragraph 10 of schedule 4 of the Flat Leases above (see paragraph 8). There was no dispute between counsel that this paragraph contemplates a two-stage process. First, certain expenses are identified which are allocated to one of three categories, namely Residential, Building or Parking Service Charge Items. By reference to the definitions of these terms in clause 1 (see paragraph 9 above), one can see that they are items which are intended to be chargeable to (i) the residential lessees, (ii) the residential and commercial lessees, and (iii) those with a right to park a car respectively. Then the items in each category (or “pot” or “bucket”) are apportioned between those liable to pay. This is in principle a separate exercise. The identification of what goes into each pot at the first stage is dealt with in paragraph 10 (in sub-paragraphs (a), (b) and (c) respectively). The identification of how much of each pot a particular leaseholder pays is dealt with through the definitions of Residential, Building and Parking Service Charge Proportions in clause 1.

Thus, to take the simplest case, that of the Parking Service Charge, paragraph 10(c) provides that the Landlord’s costs of complying with Part II of schedule 6 (which contains covenants concerning the Parking Spaces) fall within the pot of Parking Service Charge Items, as do any other costs incurred by the Landlord on maintenance or improvement of the Parking Area, and any other costs designated by the Landlord as Parking Service Charge Items. Once the expenses which go into the pot have been identified, the second stage is to apportion those expenses between those liable to pay, which is limited to those lessees with parking spaces (it is apparent that not all lessees have such a space). The actual apportionment is then fixed, being a straightforward arithmetical exercise of dividing up the expenses equally between each person entitled to a space: see the definition of Parking Service Charge Proportion. So if there are 70 spaces and 70 lessees with a space, they will pay 1/70 each. It may be noted that there is little need for these purposes for the Landlord to make any decisions as to how to apportion the costs: under paragraph 10(c)(i) all the Landlord’s expenses of complying with Part II of schedule 6 go into the pot, as do under paragraph 10(c)(ii) any other expenses incurred by the Landlord in maintaining or improving the Parking Area. It is only under paragraph 10(c)(iii), which permits the Landlord to designate other expenses as Parking Service Charge Items, that the Landlord may have a decision to make. That decision is not expressly constrained by paragraph 10(c)(iii), but paragraph 10(f) provides that the Landlord may “in its reasonable discretion” designate whether an item of expenditure is to be treated as a Residential, Building or Parking Service Charge Item. No doubt some such constraint would have been implicit anyway, as it obviously could not have been intended that the Landlord could designate as a Parking Service Charge Item some expense that had nothing to do with the Parking Area.

When it comes to the Residential and Building Service Charge Items however there are two differences. First, under paragraph 10(a)(i) and paragraph 10(b)(i) the expenses which go into the Residential and Building pots are:

“such of the costs charges and expenses which the Landlord shall incur in complying with its obligations set out in Part I of the Sixth Schedule hereto which the Landlord (acting reasonably) designates as being a Residential [or Building] Service Charge Item” (emphasis added).

That may be contrasted with paragraph 10(c)(i) under which all the expenses incurred by the Landlord under Part II of schedule 6 go into the Parking pot. There is a simple explanation for that: Part I of schedule 6 contains covenants by the Landlord (such as to repair, maintain and insure the Building and Estate) which do not distinguish between those matters which will benefit only the residential leaseholders and those which will also benefit the commercial tenants. So there has to be a division of the costs incurred by the Landlord under Part I of schedule 6 between those that ought to be borne by the residential leaseholders alone, and those that should also be contributed to by the commercial tenants. That division is contemplated by paragraphs 10(a)(i) and 10(b)(i), each of which expressly requires the Landlord to act reasonably in designating a cost, charge or expense as a Residential or Building Service Charge Item; and again this is supplemented by paragraph 10(f) which provides for the Landlord “in its reasonable discretion” to designate items as falling within the Residential or Building pots.

The other difference between the treatment of the Parking pot and the Residential and Building pots is that the proportion to be borne by any particular lessee is not (as in the case of the Parking items) a straightforward equal division but is:

“such fair proportion as the Landlord acting reasonably shall from time to time determine”.

There are a number of different ways in which expenses chargeable to lessees can be divided between them, although in practice this is often done by reference to the respective surface areas of their flats, and it appears that this is what was done at Romney House.

In the present case I do not think we are concerned with this second stage of dividing up the expenses between the leaseholders. What Abacus in fact did was designate all the gym costs as Residential Service Charge Items and then apportion them in exactly the same way as other items in the Residential pot, that is by reference to the size of each leaseholder’s flat. If it was entitled at the first stage to designate the entirety of gym costs as Residential items, then I do not think that there was anything wrong with the second stage of allocation between the leaseholders. No-one has suggested that the division of costs as between the leaseholders should have been done on any different basis.

In the UT, the Judge agreed (at [97]) that the lease contemplates a two-stage process; first the Landlord must allocate charges between the Residential and Building Service Charges, and then it must determine a fair proportion for each leaseholder to pay. But at [98] she said that she did not agree that the two decisions were completely isolated from each other, and at [105] she said that the two decisions “bleed into each other”. Mr Walsh sought to support this; but I prefer on this point the analysis put forward by Mr Morris, namely that the real question on appeal is whether Abacus as the Landlord was entitled to put the entirety of the gym costs into the Residential pot to be borne by the residential leaseholders. If it was, then at the second stage, there seems to me no doubt that it was also entitled to divide those costs between the leaseholders as it did.

The Judge had a point arising from the definitions of Residential and Building Service Charge Items, each of which refers to an item of expenditure chargeable “in whole or in part” to the residential lessees, or residential and commercial lessees: see her decision at [10] and [101]-[104]. The point was that this contemplated that the whole of the expenditure itself was (for example) the Residential Service Charge Item even if only part of it was chargeable to the residential lessees, and hence each lessee was to pay a “fair proportion” of that whole, not of the part payable by the residential lessees. This is a very subtle point – the Judge herself said that she was conscious that she was making angels dance on pinheads and she suspected the parties did not do such an analysis – and I do not myself think it can bear the weight that the Judge put on it. It is admittedly not obvious why the drafter of the Flat Leases added the words “in whole or in part” to the definitions of Residential and Building (and Parking) Service Charge Items, but I am unpersuaded that the effect was that a Residential Service Charge Item could consist of an item of expenditure greater than that intended to be chargeable to the residential lessees.

I think the explanation for the drafting must be that a single item of expenditure might fall into more than one pot and be chargeable in part to each of two different pots. Suppose for example the Landlord incurred £100,000 on some works, part of which benefited the Parking Area and the remainder the Building as a whole. What one would expect is that the Landlord could add the appropriate part to each pot, so that say £10,000 was added to the Parking pot and £90,000 to the Building pot. This I think is precisely what paragraph 10(f) of schedule 4 provides, as it entitles the Landlord “in its reasonable discretion to designate whether an item of expenditure shall be treated as a Residential Service Charge Item and/or a Building Service Charge Item and/or a Parking Service Charge Item”. In this provision the words “and/or” enable the Landlord to designate the expenditure as both a Building Service Charge Item and a Parking Service Charge Item, and paragraphs 10(b)(iii) and 10(c)(iii) then entitle the Landlord to include those items in the Building pots and Parking pots respectively.

In such a case I think the “Building Service Charge Item” and “Parking Service Charge Item” must be the £90,000 and £10,000 respectively, not (as the Judge thought) the £100,000. One can see why she took that view. Paragraph 10(f) entitles the Landlord to designate “an item of expenditure” as both a Building and a Parking Service Charge Item; and the definition of Building Service Charge Item for example (see paragraph 9 above) is:

“an item of expenditure which is (or is intended) to be chargeable (in whole or in part) to the lessees of the Building (both residential and commercial)”.

It is not difficult to see why one might assume that the “item of expenditure” was the whole £100,000, that being chargeable in part to the Building lessees. Under the definition of Building Service Charge Proportion each Building lessee would then be liable to pay a “fair proportion” of that item, which could be done in such a way that collectively they did not pay more than 90% of the £100,000. But the difficulty with that is that, as explained above, the division of the Parking Service Charge Items between the lessees with parking spaces does not contain any provision for them to pay a fair proportion: it is an arithmetical one which (assuming the spaces are all let) will always add up to 100%. So one cannot include the whole of the £100,000 as a Parking Service Charge Item as the lessees with parking spaces would end up paying £100,000 between them, rather than £10,000 as they should. It follows in my view that only the £10,000 can be treated as the Parking Service Charge Item; and that it really follows that only £90,000 should be regarded as the Building Service Charge Item.

The upshot of that rather long digression is that I accept the analysis put forward by Mr Morris: at the first stage the Residential, Building and Parking Service Charge Items are those amounts which go into the respective pots; those items are then divided up at the second stage among those liable to bear them by the Residential, Building and Parking Service Charge Proportions respectively. As I have already said, on that view I do not think we are concerned with the second stage which is solely concerned with how the costs chargeable to residential leaseholders are split between them. I therefore do not think we are concerned with whether they are being asked to pay a “fair proportion” of the costs.

I may add that one of the questions touched on in argument was whether the same Residential Service Charge Proportion has to be used for all the items in the Residential pot. Mr Morris submitted that it did, each leaseholder being liable to pay “the Residential Service Charge Proportion” of the Residential Service Charge Items. He submitted that this contemplated a single figure, not one that could differ according to the different items. I accept that that would seem grammatically to be the more natural reading; but Mr Walsh showed us a decision of the FTT dated 24 September 2020 (LON/00BK/LSC/2020/0132). This was an application by Abacus itself against some of the leaseholders at Romney House in which Abacus successfully argued that the costs of an air-conditioning system (known as a Variable Refrigerant Volume or VRV system) should be borne solely by the seven leaseholders whose flats benefited from the VRV system rather than by the residential leaseholders as a whole. That seems inconsistent with the stance adopted by Mr Morris in the present appeal; and the good sense of the decision is obvious. In those circumstances I am inclined to think, as the FTT in that case did, that it is indeed possible to have a differing Residential Service Charge Proportion for different items. But the point does not arise in the present appeal. I do not think we need to actually decide it, and in those circumstances I do not propose to do so.

Reverting to what we do need to decide, I consider, as I have already said, that the only question is whether Abacus was entitled to include the entirety of the gym costs in the Residential pot. (I have not overlooked the Leaseholders’ contention that as well as the direct gym costs, they are being made to bear what they call the indirect gym costs – that is the share of common costs that would have been apportioned to the Gym Tenant had his lease required him to pay service charges – but I do not think this in truth raises any separate question). By the terms of paragraph 10(a)(i), the answer to that question depends on whether Abacus was “acting reasonably” in designating all such costs as a Residential Service Charge Item.

27A Landlord and Tenant Act 1985

Legislation controlling the recoverability of service charges was first introduced by the Housing Finance Act 1972 and is now found in ss. 18 to 30 L&TA 1985. The protection for tenants has been progressively extended by amendments and additions to these provisions since they were first enacted.

The primary protection is in s. 19(1) L&TA 1985 which provides that costs incurred or to be incurred by a landlord shall be taken into account in determining the amount of a service charge only “to the extent that they are reasonably incurred”, and, where incurred on services or works, only if they are “of a reasonable standard”. As already referred to, it is not suggested in the present case that either limb of s. 19(1) is engaged.

Instead the application is brought under s. 27A L&TA 1985. This was introduced by the Commonhold and Leasehold Reform Act 2002. It provides, so far as relevant, as follows:

“27A Liability to pay service charges: jurisdiction

(1)

An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to—

(a)

the person by whom it is payable,

(b)

the person to whom it is payable,

(c)

the amount which is payable,

(d)

the date at or by which it is payable, and

(e)

the manner in which it is payable.

(2)

Subsection (1) applies whether or not any payment has been made.

(3)

An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to—

(a)

the person by whom it would be payable,

(b)

the person to whom it would be payable,

(c)

the amount which would be payable,

(d)

the date at or by which it would be payable, and

(e)

the manner in which it would be payable.

…

(6)

An agreement by the tenant of a dwelling (other than a post-dispute arbitration agreement) is void in so far as it purports to provide for a determination—

(a)

in a particular manner, or

(b)

on particular evidence,

of any question which may be the subject of an application under subsection (1) or (3).”

Before the decision of the Supreme Court in Aviva, there was authority of this Court that the effect of s.27A(6) was to render void a provision in a lease that enabled the landlord to make a discretionary decision as to the apportionment of a service charge: see Oliver v Sheffield City Council [2017] EWCA Civ 225, [2017] 1 WLR 4473 at [53]-[55] per Briggs LJ (as he then was), approving two decisions of the Upper Tribunal to that effect, Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC) and Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC). But in Aviva the Supreme Court overruled the Oliver case, Lord Briggs JSC (as he had become) confessing that his earlier view had been wrong. The effect of s. 27A(6) is not to transfer a landlord’s discretionary powers in relation to service charges to the FTT (something which would produce “bizarre and surely unintended” results); rather, it is to enable the FTT to conduct a “review of the contractual and statutory lawfulness of the service charge demanded”. In other words the jurisdiction of the FTT is “limited to deciding whether the landlord acted in breach of contract or in contravention of the statutory scheme regulating residential service charges”: Aviva at [21].

In the present case the statutory scheme regulating residential service charges does not say anything about the apportionment of service charges to lessees: s. 19(1), as explained above, 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. So the only question for the FTT was whether the service charges demanded were in accordance with the contractual provisions in the relevant leases.

As set out above, the relevant contractual provision in the present case is the provision in paragraph 10(4)(a)(i) of schedule 4 to the effect that included in the Residential Service Charge pot are:

“such of the costs charges and expenses which the Landlord shall incur in complying with its obligations set out in Part I of the Sixth Schedule hereto which the Landlord (acting reasonably) designates as being a Residential Service Charge Item” (emphasis added).

For reasons already explained, if Abacus was acting reasonably in designating the gym costs as a Residential Service Charge Item, then I do not think we are concerned with the question whether the leaseholders are being asked to pay a “fair proportion” of them, this in my view being solely concerned with splitting such costs between the leaseholders, as to which there is no dispute.

Before addressing this question there is one other point to make on the wording of the Flat Leases, which is, as already noted, that paragraph 10(f) of schedule 4 entitles the Landlord “in its reasonable discretion” to designate whether an item of expenditure shall be treated as a Residential Service Charge Item and/or a Building Service Charge Item and/or a Parking Service Charge Item. I think the two provisions in paragraph 10(a)(i) and 10(f) must be read together; it is impossible to think (nor was this suggested) that these two references to the Landlord designating expenditure as a Residential Service Charge Item were intended to have a different effect. So when we read in paragraph 10(a)(i) a reference to the Landlord “acting reasonably” in designating an item, we must understand this as meaning the same as the Landlord designating the item “in its reasonable discretion”.