The Supreme Court has this week (8 February 2023) handed down a judgment considering whether landlords have management discretion to vary service charge percentages in residential leases.

S.27A(1) of the Landlord and Tenant Act 1985 (the Act) gives the First-tier Tribunal (FtT) the ability on application to make various decisions about service charges in residential dwellings, including whether it is payable or not. If it is, the FtT may also determine:

• by and to whom it is payable;
• the amount payable; and/or
• the date and manner of payment. 

S.27A(6) of the Act provides that an agreement is void in so far as it purports to provide for a service charge determination in a particular manner or on particular evidence of any question which falls under s.27A(1). 

In this case, the lease in question provided for residential leaseholders to pay a fixed percentage of various costs in respect of service charge but additionally gave the landlord, pursuant to their management functions, an ability to vary the percentage. 

The intention behind such flexibility is to anticipate future events that may be unforeseen when drafting the lease, but which would prompt or require a variation to service charge contributions.  

Previous decisions

At first instance in this case, the FtT determined that the landlords’ ability to vary the percentage was part of their management function, and so the provision was not void. 

The Upper Tribunal (UT) disagreed on appeal, finding that neither the landlords nor the FtT could vary the percentages in the lease unless the leaseholders agreed. 

The different result stemmed from the extent of the wording being deleted under the “blue pencil” test – as a general rule, if part of a contract is found to be void, the courts have been willing to sever that provision so long as the remaining contact makes sense and retains its overall character.

The Court of Appeal landed in the middle. It held that the intention of s.27A(6) was to remove the landlords’ role in the decision-making process, and instead transfer the power under the clause to the FtT. 

The Court of Appeal found that there was no objection in principle to a degree of flexibility in the apportionment of the service charge, meaning the original decision of the FtT could be enforced. This interpretation also meant however that the tenants could apply to the FtT to change the service charge percentages – so flexibility was not only in the hands of the landlords. 

The tenants appealed again.

The importance of the case, and the prevalence of these sorts of clauses, is evidenced by the fact that an intervenor third party also made representations to the Supreme Court.

Supreme Court decision 

1. The Supreme Court was asked to consider: 
2. To what extent the clause permitting the landlords to vary the percentage payable by the tenants was rendered void by s.27A(6); and

If the effect was that the power to vary the percentage was transferred from the landlords to the FtT, whether the tenant as well as the landlords could apply for it to be varied. 

The Supreme Court held that although the Court of Appeal was correct to decide in favour of the landlords, its reasoning was flawed – and so was the reasoning in the preceding case law, including the decision in Oliver v Sheffield City Council [2017], where the leading judgment was also given by one Briggs LJ (as he then was).

In this case, Lord Briggs decided that in fact, the provision did not need to be blue pencilled, nor reconstructed (although he in fact preferred the latter approach).

The purpose of s.27A(6) is to avoid attempts to oust the jurisdiction of the FtT to review the contractual and statutory legitimacy of a landlord’s management decisions, in the sense of whether they are legitimately due under the lease and under statute – not to stop the landlord making those decisions.

Equally, s.27A(6) is not intended to give the FtT special powers or enlarge its jurisdiction beyond that already contained in s.27A(1), or to stop any flexibility whatsoever to service charge provisions. Deleting the clause in its entirety – as the UT had suggested – meant that only the fixed percentage remained – “a far cry for the bargain the parties had apparently intended”.

Here, the FtT had found that the landlord was entitled to trigger a reallocation of the agreed contribution proportion and had acted reasonably in deciding what the revised apportionment should be – so that decision was reinstated.

In disapproving the Court of Appeal’s interpretation, the Supreme Court felt that if the landlord’s discretionary management powers were transferred to the FtT, this would produce the “most bizarre and surely unintended results” in that landlords would never be able to safely incur costs without first checking with the FtT that the costs could be charged to its tenants. This could in consequence greatly increase the number of applications made and overwhelm the Tribunal system.

Comment

Lord Briggs was keen not to “put the anti-avoidance cart before the jurisdictional horse”.

Opening with a discussion about the intentions of Parliament in the inclusion of s.27A in order to avoid fettering tenants’ rights to have service charge disputes resolved by the court or Tribunal, the court also considered the purpose of the 1985 Act in relation to service charge – to impose statutory constraints on recovery by the landlord.

S.27A provides generous jurisdiction for the FtT to determine whether a service charge is payable.

This significant decision reminds us that the FtT’s role is as a reviewer and moderator – reducing the scope for applications and meaning landlords can go about their usual management business without the constant risk of disputes and litigation, so long as they act in a reasonable and rational way.