The much-awaited Supreme Court judgment in Aviva Investors Ground Rent GP Ltd v Williams and Others provides welcome clarification regarding the extent to which s.27A of the Landlord and Tenant Act 1985 restrains a landlord from varying service charge contribution proportions within leases.
Section 27A(1) of the 1985 Act reserves the right for a residential long leaseholder to apply to the First Tier Tribunal (FTT) to have it determine whether any service charge is payable (with the most common challenge being whether the charges are reasonable, as required by s.19 of the same act). Section 27A(6) acts as an anti-avoidance provision; stating that where a tenant agrees that any question arising from the lease is to be determined in a particular manner or on particular evidence, such an agreement will be rendered void if the resolution of that question would otherwise lie within the Tribunal's jurisdiction.
It is common for leases to provide that a tenant pay "X% of the service charge, or such other proportion as the landlord may reasonable determine" (or similar wording). The question in Aviva was whether these types of provisions fall within the remit of s.27A(6), and if so what is the effect.
When Aviva was heard in the FTT, the Tribunal determined that the landlord's contractual ability to vary the service charge did not fall foul of s.27(6) as it was still open to the tenant to challenge the re-apportion by way of a s.19 reasonableness challenge.
The Upper Tribunal disagreed. There it was held that the entirety of the variation clause was void under s.27A(6), with the effect that any proportions specified within a lease were fixed and unimpeachable, and the only way for them to be varied was with the agreement of the tenant.
The Court of Appeal fell somewhere between the two tribunals – it held that s.27A(6) prevented the landlord from exercising the power by itself, but either party could apply to the FTT for a re-apportionment and it would then be down to the FTT to determine whether a re-apportionment was justified, and if so what the appropriate level of contribution should be.
In working its way to the Supreme Court, the case attracted three different judgments, ranging from the landlord friendly (FTT) to the tenant friendly (Upper Tribunal). Given the range of possible outcomes the Supreme Court judgment was eagerly awaited, particularly given that if the Supreme Court were to follow the Upper Tribunal, it would make it very difficult for landlords to ever increase a proportion specified within a lease as it would be entirely dependent on the tenant agreeing.
So who was right?
The Supreme Court favoured the determination and reasoning of the FTT.
The Supreme Court stated that the Upper Tribunal's decision was contrary to the aim of s.27A to reserve a level of jurisdiction to the FTT. That interpretation would effectively set the stipulated proportion in stone for the full term of the lease leaving the FTT with no jurisdiction and having the commercially unattractive result of removing a mechanism that the parties chose to agree within the lease.
The Court of Appeal formulation was criticised for the opposite reason – completely substituting the FTT in for the landlord as the sole entity able to reapportion would mean that either the landlord or tenant could apply at any time (and any number of times) for a re-apportionment. This was described as opening "a veritable Pandora's box of disputes about allocation."
The Supreme Court also commented as a general point that if s.27A(6) were to be interpreted more widely there was no reason why such an interpretation should only apply to reapportionment decisions and not more general management decisions which are also at the landlord's discretion. This would have unintended and bizarre consequences in that it may prevent a landlord from ever safely incurring management costs without first applying to the FTT for approval. This in turn would lead to the FTT being overwhelmed by a deluge of applications from landlords seeking approval for prospective costs to ensure that they could eventually be recovered.
For these reasons the FTT's determination and reasoning was restored. It was held that reapportionment clauses do not offend s.27A(6) on the basis that the FTT retains the ability under s.27A and s.19 to review any reapportionment for legitimacy both in terms of contractual validity and reasonableness.
This is a decision which accords with commercial and practical common sense and will be welcomed by landlords, particularly given the difficulties they would have faced had an alternative formulation been preferred. Given the length of residential leases it is reasonable for a landlord to reserve some flexibility, and equally it is reasonable for a tenant to have some protection from the landlord's discretion to vary the apportionment.
The decision of the Supreme Court strikes an attractive balance in this regard; a landlord is permitted to pursue a variation so as to account for any changes in circumstances during the term of the lease, whilst a tenant is adequately protected by being able to refer any potentially unreasonable variation to the FTT for an impartial determination. It may have been a long road of litigation to return to the initial decision, but it is difficult to find reason to criticise the outcome.