[2024] UKUT 63 (LC)

One of the main issues which the FTT had to resolve concerned the calculation of the Tenant’s Proportion and, in particular, the basis of the comparisons between the area of the Premises (the flat) and the Lettable Areas of the Block in the Block Service Charge proportion, and the area of the Premises and the Lettable Areas of the Estate in the Estate Service Charge proportion. Paragraph 6.1 states that these areas were to be taken as net internal areas “as defined by the Measuring Code”. The Measuring Code (meaning the latest edition of the Code of Measuring Practice published from time to time by the Royal Institute of Chartered Surveyors) does not provide a definition of net internal area for residential premises and the evidence before the FTT, which it accepted, was that net internal area was not a recognised basis for the measurement of residential units. Residential accommodation in the same block may contain different arrangements of toilets, bathrooms or other areas which would normally be excluded from a net internal measurement, such that it is considered by the RICS to be an inappropriate basis of comparison.

The FTT heard expert evidence about measuring practice. It recorded in its decision that the experts had agreed a statement to the effect that “Gross Internal Area measurements, in accordance with RICS Measuring Code of Practice, is the nearest to that defined in the lease of Net Internal Area”. It determined that the Lease contained an “error” and that the requirement in paragraph 6.1 to rely on net internal area was “unworkable”. Giving particular weight to the experts’ joint statement, the FTT determined that “as a matter of interpretation … the references to ‘net internal area’ can be read as ‘gross internal area’”.

There has been no appeal against that determination.

In practice the Company has never used the net internal basis of measurement stipulated in paragraph 6.1(b) when calculating the Estate Service Charge, but nor had it adopted the method favoured by the FTT as the true meaning of the agreement. Instead it devised an entirely different method which first divided the total charges for the whole Estate into commercial and residential pots based on the gross external areas of the commercial and residential buildings, and then allocated the residential portion amongst the residential leaseholders based on gross internal area of their individual flats. This avoided an imbalance created in part by the requirement in paragraph 6.1(b) to compare the Lettable Areas of the Commercial Buildings with the area of the Premises (i.e. the flat), and by the abandonment of net internal area as the basis of measurement for the commercial buildings. The consequence of making that comparison on a gross internal basis would be that the common parts of the commercial buildings would be counted for the purpose of apportionment, but those of the residential buildings would be ignored, thereby weighting responsibility for Estate expenditure more heavily against the commercial tenants than the Company was happy with.

The FTT considered that the alternative approach adopted by the Company was permissible under the terms of the Octavia lease, which required a “fair and reasonable” apportionment, and that it was also “understandable”. The question it had to determine, however, was whether it was permissible under the terms of the residential Leases. That depends on the scope of the discretion given to the Landlord and the Company by clause 6.2 to depart from the method of apportionment agreed in clause 6.1 and in particular whether it gives the Company carte blanche to adopt an entirely different method and to apply it to all Estate expenditure.

The FTT addressed that question at paragraphs 50 and 51 of its decision, where it said this:

“50 […] Ms Mather submitted that paragraph 6.2(a) allows for the exercise of discretion to make a permanent and blanket change to the basis of apportionment as the Applicants have done in the present case. In particular, it was said that the provision can be read as follows:

"The Landlord and/or the Company may in its or their respective discretion having regard to the nature of ... the Estate ... adopt such other method of calculation...

As such, it was submitted that paragraph 6.2 gives the Applicants a discretion to adopt a different method of calculation for various reasons, including the nature of the Estate.

51.

However, we do not consider this to be a valid reading of the clause. In particular, it ignores the words the words immediately following the word `Estate', i.e. `as the case may be which benefit from it or otherwise'. In our finding, those words must relate back to the earlier reference to expenditure or item of expenditure. In other words, on proper interpretation, the clause gives a power to the landlord, `haying regard to any expenditure or item of expenditure or the premises in the Block or the Estate as the case may be which benefit from it [i.e. the expenditure] adopt a different method'. The reference to the Estate or block is to the estate or block benefitting from such expenditure. Thus, the discretion arises by reference to particular expenditure. It does not give a discretion to adopt a blanket change to the method of calculation for everything.”

The FTT therefore determined that the discretion conferred by paragraph 6.2 to substitute a method of apportionment different from that required by paragraph 6.1 was limited to changing the way in which individual items of expenditure were apportioned and did not provide the Company with a licence to adopt a wholly new basis of apportionment for all expenditure. As that was what the Company had done, the FTT determined that “insofar as the Estate Service Charges have been apportioned in accordance with such methodology, such apportionments are not in accordance with the provisions of the private residential leases”. The consequences of that determination remain to be worked out at the resumed hearing dealing with quantum and accounting issues.