Surfing the waves of Windermere

Many leases provide for residential service charge determinations to be made by landlords and their surveyors and for these decisions to be final and binding. Two recent cases have highlighted just how powerful section 27A(6) of the Landlord and Tenant Act 1985 can be as a statutory tool for challenging such provisions.

Section 27A(6) provides: ‘An agreement by the tenant of a dwelling (other than a post-dispute arbitration 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) or (3).”

Subsection (1) gives the leasehold valuation tribunal (now the First-tier Tribunal (Property Chamber)) jurisdiction to determine the amount of
a service charge and by whom,
to whom, when, and in what manner it is to be paid; subsection (3) gives a similar jurisdiction in respect of costs not yet incurred.

Service charge provisions

In Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC), the deputy president of the Upper Tribunal (Lands Chamber)
held that the service charge provision in the lease, whereby the tenant covenanted to pay
a fair proportion of the cost
of services “to be determined
by the surveyor for the time
being of the Lessor whose determination shall be final
and binding”, amounted to an agreement that was rendered void by section 27A(6).

Accordingly, the apportionment made by the surveyor was void, and the relevant tribunal would be obliged to consider the matter afresh.

It is important to note, however, that the decision
does not assist a tenant
who has agreed to a fixed apportionment of service charges (such as a percentage), or an apportionment by way of an agreed formula (such as by reference to floor area, bed spaces, or rateable value).
It is concerned only with cases where the parties have not agreed the apportionment of liability at the commencement of their lease but have left the question of apportionment to be determined, including by
a third party, at a later date.

The decision is also likely to be relevant to leases under which more than one method of apportioning charges is identified, but where the choice of which method is to be adopted, either generally or in relation to particular categories of expenditure, is left to the landlord or to a third party.

Intermediate leases

In Gater and others v Wellington Real Estate Ltd and another [2014] UKUT 0561 (LC), the deputy president returned to the issue of the effect of section 27A(6) and – following Ruddy v Oakfern Properties Ltd [2007] Ch 335 – determined that where an intermediate lease purported
to allow the freeholder’s
surveyor to determine the apportionment of service charges payable by the intermediate lessee, which charges were ultimately recoverable by
that intermediate landlord by
way of fixed-percentage
service charges payable by
the residential sub-lessees,
that provision – following Windermere – would be void
as against those sub-lessees,
even though they had no direct contractual relationship with the freeholder.

Accordingly, the matter
was remitted to the First-tier Tribunal for it to determine the due and fair proportion of the service charges payable under the intermediate lease in accordance with that part of the service charge provision which had survived the intervention of section 27A(6), namely “taking into account the relevant floor areas within the building or other reasonable factors”.

Lessons learned

Many leases will be caught
by the section 27A(6) anti-avoidance provisions simply because they were drafted in order to enable developments, particularly mixed residential and commercial ones, to grow and change over time, and thus for the relevant service charge apportionments to be adapted accordingly. Complications will arise where residential tenants dispute such apportionments but the commercial tenants remain bound by them.

Surveyors experienced
in determining service
charge apportionments will,
no doubt, still be involved in the
process as experts, assisting
tribunals tasked with making determinations when apportionments are disputed.

And yet, many applications for determinations are driven
by a deep sense of grievance
on the part of tenants, who feel – rightly or wrongly – that they are expected to pay substantial sums of money to landlords who do not respect them,
starve them of information,
fail to communicate, and generally treat them as being
a nuisance.

Perhaps if the landlords’ determinations were more
open and better communicated, agreements would more easily be reached on a basis of apportionment with which
all could be content. SJ

Alastair Redpath-Stevens is a barrister practising from Hardwicke

@hardwickelaw

Copyright & permissions