[2023] UKUT 243 (LC)

In view of the fact that permission to appeal to the Supreme Court against the Court of Appeal’s decision had been granted in Aviva, the Tribunal granted permission to appeal on the issue of apportionment. The determination of the appeal was postponed until the final appeal in Aviva had been determined.

When it was, the Supreme Court reversed the decision of the Court of Appeal and took a narrower view of the scope of the FTT’s jurisdiction in sub-sections 27A(1) and (3), 1985 Act, and therefore of the scope of the anti-avoidance measure in section 27A(6). At [13], Lord Briggs JSC explained:

“An application under subsection (1) will necessarily be about the payability of an actual (i.e. already demanded) service charge. Under section 27A(3) it will be about the payability of a prospective service charge (i.e. before the costs are incurred). Questions arising under such an application are, presumably, questions of contractual entitlement and statutory regulation. To the extent that they are regulated neither by contract nor by statute, such as management decisions which the landlord is contractually entitled to make, they would not appear to fall within “questions” which may be the subject of an application under section 27A(1) or (3).”

Lord Briggs explained that although section 27A(6) rendered void any attempt to deprive the FTT of its jurisdiction to determine the questions identified in sub-sections (1) and (3), it did not have the effect of expanding that jurisdiction beyond “questions of contractual entitlement and statutory regulation”. It did not make the FTT the primary decision maker for the host of discretionary management decisions which would usually have to be made before a service charge could be collected, including what work should be done, and by whom, and (in some cases) in what proportions different leaseholders should be charged for it. At [15] he explained the boundaries of the FTT’s jurisdiction and its limited role in relation to discretionary decisions:

“[T]he jurisdiction of the FtT under section 27A(1) to decide whether a service charge demand is payable will extend to the contractual and/or statutory legitimacy of these discretionary management decisions. Thus, where the service charge enables the landlord to recover its cost of performing its repairing obligations under the lease, the replacement of a roof may give rise to questions whether replacement fell within the landlord’s repairing obligation (or rather whether it was an improvement) and whether, if it was a repair, the costs incurred satisfied the statutory reasonableness test in section 19. But, leaving aside section 27A(6) for the moment, it would not be a part of the FtT’s task to make those discretionary decisions itself, let alone for the first time. It would be too late, on an application under section 27A(1), and there would be no warrant either contractually in the lease or in the statutory regulatory regime under the 1985 Act for it to do so. If the landlord’s discretionary decision in question was unaffected by the statutory regime and fell within the landlord’s contractual powers under the lease, then there might at the most be a jurisdiction to review it for rationality: see Braganza v BP Shipping Ltd [2015] UKSC 17.”

In his written argument for the appeal Dr Braganza addressed three issues. The first was whether, as he put it, the FTT had “preserved its jurisdiction under section 27A(6)”. I take that to mean whether the FTT had properly understood the effect of section 27A(6) on its jurisdiction. Dr Braganza asserted that in the light of Aviva, it was incumbent on the FTT to simply ignore the role of the landlord’s surveyor and he complained that it did no such thing and instead derogated its responsibility for determining an apportionment by relying on the determination of the landlord’s surveyor. He relied in support of that submission on paragraphs 46 and 52 of the FTT’s original decision of 3 December 2021. In those paragraphs the FTT had satisfied itself that the apportionment had been made by the Surveyor in accordance with the terms of the lease and directed itself that, so long as the apportionment was rational, it was not for the tribunal to substitute an alternative approach.

As the respondent has pointed out, in submissions prepared by Mr Justin Bates, Dr Braganza’s first proposition is precisely the opposite of what the Supreme Court decided in Aviva. It would have been a legitimate criticism of the FTT’s original decision at the time it was made, on the understanding of the law reflected in the Court of Appeal’s decision in Aviva, but the Supreme Court has now determined that the Court of Appeal was wrong. On the law as it has now been explained by the Supreme Court the approach taken by the FTT in its original decision can now be seen to have been correct.

But, of course, the FTT amended its original decision when the Court of Appeal’s judgment in Aviva was brought to its attention. Although the excisions and additions it made in its reviewed decision of 12 April 2022 are not always consistent with the original text which remained, it is clear enough that, conscientiously following what it then understood to be the law, the FTT decided for itself what a fair apportionment was to be.

Unfortunately for the FTT, the approach it took in its revised decision has now been found by the Supreme Court to have been wrong, and its original approach to have been correct.

Does that mean that the appeal should be allowed? I do not think so. The right of appeal is against the FTT’s decision, not against its reasons. The decision was that the service charges demanded by Riverside were payable in full. The FTT’s final reasons can now be seen to have been wrong, because it asked itself the wrong question; but when it had asked itself the right question, in its original decision, it had come to the same answer. It was satisfied both that the Surveyor’s decision was fair and rational, and that the method of apportionment adopted by the Surveyor was the one which it would adopt if it was left to make the decision for itself. In those circumstances it does not seem to me that there is any reason for this Tribunal to interfere with the FTT’s determination that the service charges were payable by Dr Braganza in full.

Dr Bragaza’s second submission was that contrary to the FTT’s original conclusion, the Surveyor’s apportionment was not rational. Mr Bates suggested in his response that this was not an issue for which permission to appeal had been requested or granted. Leaving that objection to one side for the moment, I will consider the various different ways in which Dr Braganza has put this point. But before doing so it may help if I briefly recap on the background to Lord Briggs’ statement Aviva at [15] (see paragraph 32 above), that the FTT might, at most, have a jurisdiction to review a landlord’s discretionary decision “for rationality”? The concept of a rational or irrational discretionary decision had been explained by the Supreme Court in the case to which Lord Briggs referred, Braganza v BP Shipping Ltd. 

Braganza was a claim brought by the widow of a sailor who had fallen from his ship and been lost at sea. The sailor’s contract entitled his widow to financial benefits if he died in service, but these were not payable if, in the opinion of his employer or their insurers, his death was the result of his own wilful act. After a lengthy investigation the employer concluded that the most likely explanation of the sailor’s death was that he had jumped overboard intentionally and had taken his own life. The employer therefore concluded that the death benefits provided for by the contract were not payable but the widow challenged its decision.

The parties agreed that when the contract gave the employer the power to decide if the death was the result of a wilful act, it required that the employer’s decision must be a reasonable one, and that if it was not the widow would be entitled to succeed in her claim. The main issue considered by the Supreme Court was what it meant to say that the decision of a contractual decision-maker must be “reasonable”.

There was agreement that the court was not entitled to substitute its own view for that of the person charged by the contract with making the decision; instead it had to conduct a “rationality review”. Lord Hodge explained what that involved (at para 52):

“"the right test is one of irrationality or perversity (of which caprice or capriciousness would be a good example) i.e. that no reasonable employer would have exercised his discretion in this way."

Like Lady Hale, with whom Lord Neuberger agrees on this matter (para 103), I think that it is difficult to treat as rational the product of a process of reasoning if that process is flawed by the taking into consideration of an irrelevant matter or the failure to consider a relevant matter.”

Lady Hale also discussed the difference between rationality and reasonableness, quoting, at [23], the explanation given by Lord Sumption in Hayes v Willoughby [2013] UKSC 17, at [14]:

It follows that, after Aviva, the FTT’s only task when a leaseholder challenges a discretionary apportionment made by a landlord or its surveyor will be to consider whether the apportionment was “rational”, in the sense that it was made in good faith and not arbitrarily or capriciously, and was arrived at taking into consideration all relevant matters and disregarding irrelevant matters. Unless for one of those reasons the decision was not one which any reasonable landlord could make, the FTT must apply it, and may not substitute an alternative apportionment of its own.

I can now consider the various ways in which Dr Braganza says the Surveyor’s apportionment was not rational.

First, he points out that in their leases all of the leaseholders of flats and houses were granted the same rights over the “common areas” of the Development. That is true, but it does not make an apportionment based on unequal contributions an irrational one. Whatever rights may have been granted to the leaseholders of houses, in practice it is inevitable that they will make much less use of the common parts of the blocks of flats that the leaseholders of flats. It is also the case that the landlord is obliged to repair and maintain the structure and exterior of the blocks of flats, whereas the householders are liable to repair and maintain the structure of their own properties. There is nothing arbitrary or capricious in taking those considerations into account in determining an apportionment.

Secondly, Dr Braganza argues that nothing in the lease authorises the landlord’s surveyor to apportion some heads of expenditure to leaseholders of flats only, and other expenditure to all leaseholders. The lease requires all leaseholders to contribute to all services. I do not agree. The lease requires the leaseholder to pay the Service Charge, which is to be the Specified Proportion of the Service Provision. As I have explained, by completing the lease in the form they did the parties agreed that the Specified Proportion was to be a sum of money rather than a proportion. They also agreed that the Surveyor was to have the discretion to vary that sum of money, thereby leaving it to that person to determine how that amount was to be ascertained. In my judgment, although the way in which the lease fits together leaves something to be desired, the FTT was right to decide that the apportionment was in accordance with the terms of the lease. Once again, there was nothing irrational in the determination.

Thirdly, he suggests that an irrational method of apportionment which does not comply with the covenants in the lease cannot be reasonable within the meaning of section 19(2), 1985 Act. That submission confuses the operation of the contractual provisions for ascertaining the service charge with the statutory restrictions on what costs may be taken into account. It also assumes that the method of apportionment is irrational and provides no reason why that should be.

Contrary to Dr Braganza’s submissions it seems to me to be incontrovertible that a method of apportionment which takes account of the benefits which, in practice, different leaseholders enjoy as a result of the landlord’s expenditure is a reasonable method. It is an approach which is often adopted by reasonable landlords and tenants. It has never been suggested that the Surveyor was motivated by some improper purpose or took account of some irrelevant consideration. The FTT was therefore right to adopt the Surveyor’s apportionments when determining the amount payable by Dr Braganza.

The third and final question addressed by Dr Braganza in his submissions concerned the effect of section 20B, 1985 Act. His point was that, as the demands issued by Riverside were based on an irrational apportionment and were not contractually valid for that reason, it was now too late for new demands to be issued and all of the service charges paid by Dr Braganza should be refunded. That was not a ground of appeal for which permission was given by the Tribunal, but, in any event, as the apportionment was not irrational, none of the suggested consequences need be considered.