[2024] UKUT 120 (LC)

However, the lease in Aviva expressly stated that the landlord’s discretion was to be exercised “reasonably” in determining the service charge proportion. Again the provision conferring the discretion is not, as was thought before Aviva, void; but what is the effect of that express term qualifying the discretion? That is the issue in the present case although it was not the focus of Aviva and therefore the issue was not clearly addressed. Lord Briggs said this at paragraph 33:

“Applied to the provisions in issue in the present case, the construction which I now consider to be correct applies as follows. Those provisions gave the landlord two relevant closely related rights: first to trigger a re-allocation of the originally agreed contribution proportions and secondly to decide what the revised apportionment should be. In both respects the landlord is contractually obliged to act reasonably. The FtT decided that the landlord had acted reasonably in making the re-apportionment which was challenged, and it is not suggested that it fell foul of any part of the statutory regime, apart only from section 27A(6). But that subsection did not avoid the power of the landlord to trigger and conduct that re-apportionment, because the jurisdiction of the FtT to review it for contractual and statutory legitimacy was not in any way impeded. The original question, whether there should be a re-apportionment and if so in what fractions, was not a “question” for the FtT within the meaning of section 27A(6). The question for the FtT was whether the re-apportionment had been reasonable, and that question the FtT was able to, and did, answer in ruling on the tenants’ application under section 27A(1).”

Mr Morris argued that the word “reasonably” in the lease in Aviva meant “rationally”; in his skeleton argument he explained:

“Lord Briggs’ decision proceeds on the basis that the express obligation to act “reasonably” was in substance the same as the implied obligation considered in Braganza: an obligation to act reasonably in the Wednesbury sense – i.e. to make the decision lawfully and to deliver an outcome which is not one to which no reasonable landlord would subscribe. Lord Briggs nowhere suggested that an express obligation to act reasonably imposed any requirements above what would otherwise be implied. That is unsurprising: it is difficult to see what more a landlord could be expected to do in complying with an express obligation to act reasonably than a landlord under an implied obligation so to act.”

This is where I part company with Mr Morris’ analysis of the law. Mr Sandham also disagreed. I do not accept that when he used the word “reasonable” in paragraph 33 Lord Briggs meant “rational”, as I said in Hawk Investment. In that case the landlord argued that where the lease required the landlord’s surveyor to produce a “just and equitable” apportionment of the charges the FTT was nevertheless able to conduct only a rationality review. The argument was subtly different from that in the present case; it was in effect that the express contractual term had to be ignored so far as the FTT’s review was concerned and that only a rationality review was permissible whatever the contract said. That required consideration of what Lord Briggs said in paragraph 33 in Braganza when he decided that the landlord had acted reasonably. I said this:

“50.

What is the effect of a qualification such as the one in Aviva (“such part as the Landlord may otherwise reasonably determine”) or the one in the leases in Heritage Close (“some other just and equitable method to be … determined by the Landlord’s Surveyor”)?

51.

On Mr Loveday’s interpretation of Aviva v Williams the additional words “acting reasonably” and “just and equitable” have no effect. What the lease requires is that the landlord shall make a decision, and so long as he does so rationally the FTT cannot change the decision.

52.

It is very difficult to see that that can be right. It is particularly difficult to see that if the Landlord were to impose an apportionment method devised by its surveyor that was not “just and equitable” it would not be in breach of contract, since the lease specifically requires that the method be just and equitable.

53.

I find that the respondents’ interpretation of the standard of review to be carried out by the FTT is correct, for three reasons.

54.

First, as just stated, to restrict the FTT to a rationality review would render redundant the additional words that the parties to the lease agreed to include. They wanted a new apportionment to be just and equitable. The parties to the lease in Aviva v Williams agreed that  the landlord would act reasonably in making the apportionment. … It is difficult to see how the landlord would not be in breach of contract if his new apportionment, in the present case, was not just and equitable; and for the landlord to be able to make a conclusive decision that his new scheme was just and equitable is to nullify the anti-avoidance provision of section 17A(6).

55.

Second, that approach is consistent with what the Supreme Court did in Aviva. That is the inevitable conclusion on reading paragraph 33 of the Supreme Court’s decision … - unless one is to re-write it and read “rational” for “reasonable”. It is vanishingly unlikely that that is what the Supreme Court intended. It is worth noting that Lord Briggs mentioned Braganza and a rationality review only twice, in paragraphs 15 and 16 where he was considering the background law rather than the facts of the case before the court. If he had meant to say that in reviewing this kind of decision the FTT is restricted to a rationality review regardless of the wording of the lease he would have said so and he would have explained why.

I stand by that view. The contract in Aviva used the word “reasonably” and if Lord Briggs took the view that that meant “rationally” he would have said so.

I do not agree that comparisons with the law relating to fully-qualified covenants relating to consent (not to assign the lease for example, with the landlord’s consent, such consent not to be unreasonably withheld) have any relevance here; the meaning of the word “reasonable” in that context has been analysed by the courts in the light of that specific factual context which is very different from the context of contractual discretions relating to service charges and their apportionment.

In my judgment if the parties to the lease in the present appeal, or in any lease where a discretion is required to be exercised “reasonably”, meant “rationally”, they would have said so, or would simply have left the discretion unqualified. Their use of the word “reasonably” meant something; it did not simply duplicate the term that would otherwise have been implied. Moreover, it is unlikely that leaseholders would intend the landlord to act without consideration of the outcome for them, in the absence of special circumstances that would make them content with that approach. And in ordinary language the word “reasonable” does not mean Braganza rationality, which is very much a lawyers’ construct; I do not believe that in ordinary language a decision taken by a landlord without objective consideration of the fairness of the outcome to the tenants would be described as “reasonable”. We say: “be reasonable!” when people are being unfair. Therefore if the parties really intended rationality rather than objective reasonableness they would have used the word “rational”, or “rationally”, rather than “reasonable” etc; if that was really what the parties meant then the landlord in drafting or approving the drafting of the lease would have taken great care to make sure that ambiguity was avoided.

Therefore in my judgment an express requirement in a lease or to act “reasonably” in exercising a discretion refers to objective reasonableness. By contrast where a landlord’s discretion is unqualified then the test to be applied is one of rationality only.

I stress that I am considering only an express requirement to exercise a discretion reasonably, and my decision is purely about the meaning of the word “reasonable” in that context – which has not been the subject of a determination above FTT-level since the Supreme Court’s decision in Aviva. The law relating to fully-qualified covenants relating to consent has been the subject of many years of analysis by the courts and what I have decided is not relevant to that context.