Residential service charges: common cause for concern

12th June 2015

Service charges are often contentious and two recent cases involving common residential lease clauses will be of concern for landlords. Housing Litigation specialist Karl Anders examines the Windermere and Gater decisions and considers how landlords can limit their exposure.

What landlords need to know

Section 27A (1) of the Landlord and Tenant Act 1985 (the Act) provides that The First-Tier Tribunal (Property Chamber) (the Tribunal) [1] may determine whether a service charge which has been demanded from a residential tenant is payable and, if so, in what amount.

Section 27A (6) of the Act ensures that parties cannot contract-out of that protection for tenants. It states that an “agreement…is void in so far as it purports to provide for a determination-(a) in a particular manner, or (b) on particular evidence, of any question which may be the subject of an application under subsection (1)”.

One area in which service charge disputes often occur is apportionment between occupiers. Tensions may arise where, for example, service charges are apportioned equally between residential units of different sizes or types; and friction can be especially heightened in complex or mixed-use developments, where residential tenants may feel that commercial or other occupiers should contribute more. The Tribunal is increasingly being asked to make section 27A (1) determinations in this context, and the recent cases of Windermere [2] and Gater [3] are examples of this trend.

Windermere involved a mixed-use development that included moorings, houses and flats, boathouse apartments, holiday cottages, a marina centre, a sales office, a boatyard, a car park and other marina village facilities. Previously the landlord had only sought to recover minimal costs relating to sewerage and drainage services from various residential tenants, but as development at the marina increased, the landlord sought to reassess its demand and apportionment of service charges.

The provisions of the relevant service charge clause were common. The clause provided that the tenants’ service charge contribution was to be a fair proportion to be determined by the landlord’s surveyor, whose decision was final and binding.

In line with the lease, the landlord engaged a surveyor to determine a fair apportionment of services among the marina’s various users. The surveyor did so using a methodology endorsed by the RICS Code of Practice on Residential Services Charges. However, the tenants disagreed with the surveyor’s apportionment and made a section 27A determination application. The landlord then appealed the Tribunal’s jurisdiction to make a decision to substitute its own apportionment formula.

The Upper Tribunal held that in purporting to provide for a final determination, in a particular manner, of a question that could otherwise be referred to the Tribunal, the lease clause was an attempt to contract-out of section 27A. As such, it was void under section 27A (6). The Upper Tribunal also held that the Tribunal had been entitled to make a finding on what was a fair apportionment, as the contractual mechanism for identifying that proportion was void.

In Gater, another appeal to the Upper Tribunal, the decision went even further. That case confirmed that a residential service charge clause which provides for third party determination in this way is likely to be void under section 27A (6) whether it is expressed to be final and binding or not.

In addition, Gater involved sub-tenants whose express service charge liability was to pay a fixed proportion of the service charge payable by their immediate landlord to the head landlord; it was the intermediate landlord’s service charge obligation which was to be a fair amount as determined by the head landlord’s surveyor. Despite the sub-tenants not being party to the intermediate lease, the Upper Tribunal noted that they did have the necessary legal standing to bring the section 27A challenge [4]; that the service charge apportionment mechanism in the intermediate lease was void under section 27A (6) (in accordance with Windermere); and that where a provision for apportionment is void and the parties cannot agree, the appropriate Tribunal must decide the fair proportion.

What landlords can do

The Upper Tribunal’s unambiguous interpretation of the anti-avoidance provision at section 27A (6) means that very many residential leases, which have hitherto provided landlords with widely accepted flexibility to deal with service charges as developments change over time, are now open to challenge. So, what can landlords do to limit the likelihood of a tribunal re-writing apportionment liabilities?

• In relation to future leases, landlords may choose the certainty of a fixed or specified apportionment provision (which could not form the basis of a section 27A determination application), over the flexibility of a clause which leaves open the question of the basis of apportionment for a later date (which could).
• So far as existing leases which contain the deferred third party determination provisions are concerned, landlords should do all that they can to keep tenants ‘on side’, so as to discourage discontent. Greater transparency, explanation and fairness in both the methodology of determinations and in the levels of service charge demanded should assist in keeping challenges at bay.
• Particular care and consideration should be given to ensure openly fair apportionments in complex or mixed-use developments.

If in doubt seek specialist advice from a surveyor and/or solicitor. For more information, please contact Walker Morris Director, Karl Anders.

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[1] in England, or the Leasehold Valuation Tribunal in Wales
[2] Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC)
[3] Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC) (UT (Lands))
[4] Ruddy v Oakfern Properties Ltd [2007] 1 All ER 337 and section 18 of the Act