[2024] UKUT 120 (LC)

I was not addressed about the physical layout of the property and it is not relevant to the appeal. Suffice it to say that Romney House was constructed in the 1930s as an office block and converted to mixed use by 2006; thereafter it comprised 168 flats, four commercial units and a gym. Long leases of the residential flats were granted. The commercial units are all let. The gym was not initially let; on 23 October 2013 the then Freeholder granted a 999-year lease of the gym to a wholly owned subsidiary, Nash City Limited. Shortly thereafter, the gym lease was assigned to Mr Adam White, who remains the lessee of the gym.

The respondent purchased the freehold of Romney House in 2017.

The appellants’ leases are in materially identical form to the rest of the flat leases. Unsurprisingly they contain provision for the tenants to pay a service charge.

Clause 1(a) of the lease sets out a number of definitions, including the “Estate” (being the landlord’s freehold), the “Building” (at that stage yet to be built) and the “Common parts.” It then defined the service charges payable; because of the mixed composition of the building the lease distinguished costs to be paid (“in whole or in part”) by both commercial and residential lessees and costs payable by the residential lessees (“in whole or in part”):

“Building Service Charge Item” means any 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)

“Building Service

Charge Proportion” means such fair proportion as the Landlord acting reasonably shall from time to time determine

“Residential Service

Charge Item” means any item of expenditure which is (or is intended) to be chargeable (in whole or in part) to the residential lessees of the Building

“Residential Service

Charge Proportion” means such fair proportion as the Landlord

acting reasonably shall from time to time determine

“Service Charges” means the Residential Service Charge Proportion and the Building Service Charge Proportion and the Parking Service Charge Proportion (or any one of them as appropriate or any combination of them as appropriate).

The lease then imposes covenants on the leaseholder, set out in the Fourth Schedule, of which the relevant ones are as follows:

“10

(a) to pay to the Landlord within seven days of demand the Residential Service Charge Proportion of:

(i)

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) designated as being a Residential Service Charge Item

(ii)

The costs charges and expenses which the Landlord shall incur in doing any works or things to those parts of the Building utilised by the residential flat owners and/or occupiers for the maintenance and/or improvement thereof and

(iii)

Any other costs charges or expenses incurred by the Landlord which the Landlord designates as a Residential Service Charge Item

(b)

to pay to the Landlord within seven days of demand the Building Service Charge Proportion of:

(i)

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) designated as being a Building Service Charge Item

(ii)

The costs charges and expenses which the Landlord shall incur in doing any works or things to the parts of the Building for the maintenance and/or improvement of the Building and

(iii)

Any other costs charges or expenses which the Landlord designates as a Building Service Charge Item”.

So the lease prescribes a designation process: the landlord is to designate its expenditure as Residential Service Charge Items or Building Service Charge Items (or Parking charges, with which we are not concerned here). The former are payable in whole or in part by the residential lessees, and the latter in whole or in part by both the residential and commercial lessees. The landlord’s obligations are set out in the Sixth Schedule and include the usual obligations to maintain the building, facilities and common parts.

I pause to note that the repeated use of the phrase “in whole or in part” is odd; but it is clear that a charge payable partly by the residential lessees and partly by the commercial lessees is a Building Service Charge Item, because otherwise the definition of Building Service Charge Item would be superfluous since everything would fall within the definition of a Residential Service Charge Item, being payable “in part” by the residential lessees. That prompts the question: if a charge is designated as a Residential Service Charge Item because the landlord (“acting reasonably”) has decided it is payable in part by the residential lessees, who is supposed to pay the rest? That is a question to which I shall return later.

The appellants’ leases also grant to them:

“The right (in common as aforesaid) to use such facility (if any) within the Building and the Estate that may from time to time be designated by the Landlord for use (with or without others) by the Tenant (including but not limited to the lift if any serving the Building)”.

That “right” is not a very solid one because it is only a right to use such facilities as the landlord may choose to provide. Those facilities have, since 2006, included the use of the gym. From 2006 to 2010 it was open to residents round the clock; in 2010 the landlord and residents agreed that it would be open from 6:00 a.m. to 10:00 p.m. each day, and so it continued until the 2020 lockdown when the gym was closed. However, since 2013 that use has not been exclusive to the leaseholders; the gym has been let to Mr White and his lease entitles him to make the gym available to his own clients provided that the residents of Romney House are not prevented from using it.

The gym lease grants the lessee:

“The Right for the Tenant and Guests to use the Gym Equipment from time to time in the Unit in conjunction with the Occupiers provided that the Tenant shall not allow such number of Guests to use the Gym Equipment that the Occupiers are routinely prevented from the [sic] using a reasonable proportion of Gym Equipment (with the intent that there should always be Gym Equipment available for use by a reasonable number of Occupiers”

The “Occupiers” there are the residential leaseholders of the building.

The gym lease makes no provision for the gym tenant to pay a service charge. It reserves a rent, with limited scope to increase the rent when reviewed; it requires the landlord to provide heat, lighting, water and electricity for the gym at its own cost, to provide and maintain the gym equipment and replace it when required, and to pay “rates and property outgoings” in respect of the gym as well as “service charges and utility costs for services and utilities consumed” by the gym. On any reckoning the gym tenant has a remarkably good deal. It might well be described as a gift, despite the rent.

After the 2020 lockdown the residents’ access to the gym was considerably reduced by the gym tenant; Mr Rhodes’ evidence was that the residents were allowed access only between 7:00 and 10:00 a.m. and 5:00 and 8:00 p.m. (and not at all on Sundays or bank holidays).

Until 2013 the residential leaseholders were the only people using the gym, and its maintenance and equipment were paid for through their service charge. From 2013 the gym tenant was able to take fees from his own clients, yet was paying no service charge. In 2014 the then freeholder agreed with the residential tenants that the £5,000 per annum rent paid by the gym tenant would be put towards the cost of maintaining the gym, with a corresponding reduction in the amount charged to the tenants by way of service charge in respect of the maintenance of the gym.

In 2019 the gym tenant alleged that the respondent was in breach of its repair and maintenance obligations as landlord under the gym lease. That led to a dispute lasting a year or more. It was settled in September 2021; the respondent agreed to refurbish the gym, and also to take no rent from the gym tenant for three years. Its contribution of the gym rent to the service charge therefore also stopped.

In November 2021 the respondent sent to all the residential leaseholders a notice of its intention to carry out major works to the gym, to be paid for by their service charge. That notice was the first step in the process of consultation required by section 20 of the Landlord and Tenant Act 1985 when a programme of works is going to cost each leaseholder more than £250. The notice stated that the work was being done in order to comply with the landlord’s responsibilities both under the gym lease and under the residential leases. A notice of estimates, served later in the process, indicated that the work would cost over £218,000.

In December 2022 the appellants made an application to the FTT for a determination of in relation to the service charges demanded relating to the gym in the years 2013 to 2021, and to be demanded in 2022 and 2023. The application form stated:

“… the Applicants seek a determination that, in light of the grant of the Gym Lease on 25 October 2013, it was not fair and reasonable for the Freeholder to recover 100% of the Gym costs in aggregate from the residential Leaseholders.”

The form went on to say:

“… the Applicants also seek a determination of what would be a fair and reasonable apportionment of the Gym costs to the residential Leaseholders in light of the grant of the Gym Lease on 25 October 2013”

and that a fair and reasonable apportionment would be that the residential leaseholders would pay no more than 50% of “the Gym costs” incurred in 2013 to 2020 and 0% thereafter because their access to the gym had been restricted after July 2020.

I will set out the legal background to the application below, but for now it is important to recognise that this was not a claim based on section 19 of the Landlord and Tenant Act 1985; the appellants were not saying that the costs relating to the gym had not been reasonably incurred or that work was not of a proper standard, nor were they saying that interim charges were not at a reasonable level. This was a challenge to the decisions taken by the landlord pursuant to provisions in the lease, set out above, which require him to decide which charges are payable in whole or in part by the residential leaseholders.

The application form did not state the amount of the service charges in issue; I am told that that was because the appellants were not able to work out what they and the other leaseholders had been paying for the gym until disclosure was given by the respondent in the FTT proceedings. The respondent disclosed its accounts and budget, and from that the appellants were able to construct a helpful spreadsheet, appended to their statement of case filed in March 2023.

The appellants were not represented in the FTT. Their statement of case set out the history of the gym and its availability to the residents and explained the provisions of the lease (which I shall come on to shortly). It sought relief as follows:

“a determination that the recovery of Gym costs by the Respondent (and its predecessors in title) following the grant of the Gym Lease has breached the terms of the residential Leases”…

The spreadsheet that accompanied the appellants’ statement of case in the FTT indicates that the appellants were arguing:

Thus the “gym costs” comprise both the direct costs of the gym, which the respondent’s accounts showed had been included in the residential service charge, and also what the appellants regarded as the gym’s share of the costs of maintaining the building (insurance, management, cleaning repair etc). In light of the absence of a service charge in the gym lease, the appellants took the view that the landlord should bear the gym costs itself. The spreadsheet alleged, among other things, that:

Obviously, the individual appellants’ challenge was to their share of those headline figures, each being one of 168 residential leaseholders.