Landlord and tenant – Service charges – Apportionment – Appellant lessees in block of flats appealing against decision of First-tier Tribunal concerning reasonableness and payability of service charges – Respondent landlord having contractual obligation to act reasonably – Whether standard imposed by express term in lease was reasonableness or rationality – Whether reasonable outcome unfair – Appeal allowed in part
The appellants held long leases of two flats in Romney House, 47 Marsham Street, London. The property comprised 168 flats, four commercial units and a gym. Long leases of the residential flats were granted. The commercial units were all let. In 2013, the then freeholder granted a 999-year lease of the gym to a third party which was not required to contribute to the landlord’s maintenance costs. The respondent purchased the freehold of the property in 2017.
The appellants applied to the First-tier Tribunal for a determination that service charges paid, or to be paid, by them in respect of the upkeep of the gym were not payable, on the basis that the respondent landlord’s decision to demand those charges had been taken in breach of the terms of the lease.
The appellants contended that, in light of the gym lease, it was not fair and reasonable for the freeholder to recover 100% of the gym costs in aggregate from the residential leaseholders. The FTT held that the respondent had followed a rational process and the charges were payable.
The appellants appealed, arguing that the FTT failed to recognise that the respondent had contracted to be bound by more than a rational process of apportionment and was committed to ensuring a reasonable outcome in the form of a fair proportion while acting reasonably. It should have assessed whether the respondent’s exercise of its discretion met the requirements of the lease.
Held: The appeal was allowed in part.
(1) An express requirement to act “reasonably” in exercising a discretion conferred by a lease was likely to refer, and should be understood to refer, to objective reasonableness. Otherwise, the word was redundant. In ordinary language “reasonable” did not mean “rational” in the narrow sense expressed in Braganza v BP Shipping Ltd and another [2015] UKSC 17; [2015] 1 WLR 1661.
There was nothing in the language of the present lease to indicate that “acting reasonably” meant “acting rationally” and nothing in the circumstances to indicate that the original parties (lessee as well as lessor) intended to sanction an outcome that was unfair to the tenant. Had the parties intended that, they would have said so and would have used the word “rational” or some other term to indicate that objective reasonableness was not required. In designating costs as residential service charge items and then deciding how much each leaseholder is to pay, the landlord’s decision had to be objectively reasonable: Williams and others v Aviva Ground Rent Investors GP Ltd [2023] UKSC 6; [2023] EGLR 18 considered.
(2) The FTT had failed to appreciate the crucial distinction between “acting reasonably” and “acting rationally”. The lease referred expressly to the landlord “acting reasonably” and therefore imposed an objective standard of reasonableness, which encompassed considerations of fairness of the outcome, rather than merely rationality in the process adopted. It was manifestly unfair, and therefore not objectively reasonable, for the residential leaseholders to pay the whole of the gym costs after 2020 when they no longer had exclusive use of the gym.
So far as the years from and including 2021 onwards were concerned, the FTT’s decision that the landlord’s decision to charge the whole of the gym costs to the residential lessees was in accordance with the terms of the lease was set aside.
(3) The freeholder in 2013 decided to grant the gym lease in extraordinarily generous terms, and the respondent was now seeking to charge that generosity to the residential tenants. The freehold, when the respondent bought it, was already devalued by the terms of the gym lease (which did not impose a service charge) and was already subject to the terms of the residential leases which enabled the landlord to recover only a fair proportion of the gym costs. The respondent bought into the generosity of its predecessor and could not visit the consequences of that generosity on the residential lessees.
Insofar as it related to the charges from 2013 to 2020, the FTT was right to conclude that the respondent’s decision was made in accordance with the terms of the lease, even though the route by which the FTT reached that conclusion was unclear.
During that period, the two appellants paid their service charge, which they knew included their share of the whole of the gym costs less the respondent’s contribution of £5,000 per annum. That contribution was agreed following discussion with the leaseholders. It was open to the appellants and to any of the leaseholders to challenge the service charge, informally or by issuing proceedings, at any time during those eight years and they did not do so. They did not need to know the amount they were paying for the gym in order to make that challenge.
(4) The appellants’ application form in the FTT simply said that it was “not fair and reasonable for the freeholder to recover 100% of the gym costs in aggregate from the residential leaseholders”.
That was not what the respondent was doing before 2021; it was contributing the £5,000 rent and thereby reducing what the leaseholders were paying. That was an arrangement with which the residential leaseholders agreed and it was not challenged until the present proceedings were commenced. That indicated that the appellants agreed to pay that element of their service charge that included the gym costs, from 2013 to 2020 within section 27A(4)(a) of the 1985 Act which provided that no application might be made in respect of a matter which had been agreed or admitted by the tenant: Cain v Islington London Borough Council [2015] UKUT 542 (LC); [2015] PLSCS 284 and G & A Gorrara Ltd and others v Kenilworth Court Block E RTM Co Ltd [2024] UKUT 81 (LC); [2024] PLSCS 73 considered.
(5) If that was wrong, the question was whether the charge imposed by the landlord was objectively reasonable. Until after the commencement of proceedings the appellants did not know what that charge was, but they had been content to pay subject to the respondent’s contribution. The appellants had not made a prima facie case, by reference to the figures now disclosed, that the charge made for the gym was unreasonable.
James Sandham (instructed by Direct Access) appeared for the appellants; Tom Morris (instructed by JB Leitch) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Bradley and another v Abacus Land 4 Ltd
