[2024] UKUT 120 (LC)

It is fair to say, I think, that Mr Sandham was hampered by the structure of grounds of appeal which he did not draft, and I hope he will forgive me if rather than going through the individual grounds I take the four grounds together and set out what I understand to be the appellants’ case on appeal.

First, Mr Sandham points out that the FTT mischaracterised the appellants’ argument in its paragraph 21, which I repeat here for convenience:

““21. Currently, the service charges for the gym area are apportioned in accordance with the terms of the lease under which the Respondent landlord has a discretion as to the inclusion and allocation of charges. This is not therefore a matter over which the Tribunal has jurisdiction under this application which concerns only the payability and reasonableness of service charges. This issue would need to be dealt with by an application to vary the leases.”

Mr Sandham points out that the appellants were not asking for a variation of the lease; their application was for an assessment of whether the respondent had acted in accordance with the terms of the leases. Indeed, the FTT then continued, apparently without regard for what it had said in paragraph 21 by making its determination in paragraph 28, which again it is convenient to repeat:

“28.

In the present case the landlord appears to have had two options from 2013 onwards: to continue to charge the gym expenses to the tenants as before or to bear part of the charges itself to reflect the shared use of the gym between the residents and the gym tenant. The Respondent landlord chose the first option which it was entitled under the terms of the lease to do. That choice, though unpalatable to the residential tenants, cannot therefore be said to be unreasonable. It was not a decision of the type where it could be said that no reasonable landlord in a similar position could ever have made it.”

That, said Mr Sandham, was an application of the Braganza rationality test, which in light of the terms of the lease was not the right test.

Mr Sandham’s argument then has two limbs.

First, if it was in fact correct to apply a rationality test, nevertheless the FTT got it wrong. Rationality is not simply a matter of process, as Baroness Hale observed in Braganza (paragraph 40 above); outcome is relevant. What the FTT omitted to consider was the prior decision to grant the gym lease, and to grant it without reserving a service charge; that itself was an irrational decision by the landlord.

Second, and as his primary argument, Mr Sandham argued that it was not right to apply a rationality test to the respondent’s decision to allocate 100% of the gym costs to the residential lessees (we have seen, of course, that that was not actually what it did before 2021; but it certainly did do so after 2020, at a point when the costs were going to become significantly greater as a result of the forthcoming major works). What the FTT should have done was to assess whether the respondent’s exercise of its discretion met the requirements of the lease – as the Tribunal did in Hawk Investments and indeed as the Supreme Court did in Aviva itself. And the FTT failed to recognise that the respondent had contracted to be bound by more than a rational process of apportionment. It was committed to ensuring a reasonable outcome in the form of a “fair proportion” while “acting reasonably”.

And what the respondent did, Mr Sandham argued, did not meet those requirements. Plainly if the landlord withdrew the use of the gym (as it was entitled to do: see paragraph 12 above) then it would not be reasonable to impose any of the gym costs on the residential lessees. Where the residents’ right to use the gym was restricted, and shared with others, as it had been since 2013 and far more so after 2020, it could not be reasonable for them to pay 100% of the gym costs; that was not a “fair proportion”. Liability for the gym costs was plainly intended to be commensurate to the benefit derived, and that benefit was reduced by the fact that it was now shared with the external customers of the gym. The FTT’s attention had been drawn to the RICS Code of practice which refers to the need for apportionment of charges between different leaseholders to reflect the relative benefit enjoyed

Implicit in the appellants’ arguments is that the respondent ought to have borne part of the gym costs itself in the absence of a service charge provision in the gym lease.

Furthermore (and this is ground 4) the major works to be carried out at the gym were, according to the consultation notices sent out by the respondent, done in performance of the landlord’s covenants in the gym lease as well as in performance of its obligations to the residential leaseholders, and for that reason also should have been apportioned between the residents and the gym tenant.