The freeholder and head landlord throughout was Wellington Real Estate Ltd (“Wellington”).

The basement was unlet but used (rent free) for document storage by a firm of solicitors, which also rented the 1^st and 2^nd floors.

The ground floor shops were let to 3 commercial tenants.

The 3^rd and 4^th floors were subject to a long lease granted to a developer named Ian White (the “White Lease”).

The term of the White Lease was 150 years from 2004, expiring on 26 August 2154.

The permitted use was as eight residential private dwellings.

Wellington, the freeholder, retained:

• Two staircases and the lift, and
• The structural and external parts of the building.

The service charge under the White Lease

Mr White, as lessee, covenanted to pay a service charge in return for the normal services that a landlord covenants to provide – maintenance and repair of the exterior, internal decorations etc..

For mysterious reasons, the amount payable by Mr White by way of service charge was defined twice in the lease:

• As “an amount equal to a fair proportion (such proportion to be determined by the Landlord’s Surveyor who determination shall be final and binding) of all sums incurred by the Landlord in and providing the Services”, and
• As “… a due and fair proportion of the Service Cost (such proportion to be determined by the Landlord or its surveyor (in each case acting reasonably) and taking into account the relevant floor areas within the Building or other reasonable factors in making the determination.”

For the purposes of this appeal – for reasons which will become clear – the difference between the two definitions was insignificant.

The significant points to bear in mind are that the proportion payable:

• Was to be determined by the landlord’s surveyor or by the landlord’s surveyor/landlord;
• Was to be either “fair” or “due and fair”;
• In the first version, when calculated, was “final and binding”, and
• In the second was to be determined “acting reasonably and taking into account the relevant floor areas within the Building or other reasonable factors.”

The service charge under the sub-leases

The sub-lessees effectively paid two service charges:

• The first was described as the “service charge”;
• The second was described as the “maintenance rent”.

The service charge

The sub-lessees paid a fixed percentage of the cost of the services which Mr White provided under the sub-leases.

Those services were limited because Mr White was only landlord of the third and fourth floors, and even then not of the stairways, lift or external parts of the building.

The maintenance rent

This charge to the sub-lessees was also a fixed percentage, but this time of the service charge payable by Mr White to Wellington. The mechanism worked thus:

• Wellington incurred the costs of insuring, repairing and maintaining all parts of the building except for the areas which it had demised to the lessees;
• The White Lease required Mr White to pay to Wellington “a due and fair proportion” of those costs;
• The proportion payable by Mr White was calculated by the landlord’s surveyor;
• The sub-lessees paid a fixed percentage of that proportion. The percentage was prescribed in their sub-leases.

Here is handy chart showing how those costs flowed down to the lessees and sub-lessees.

In 2009, Mr White assigned the White Lease to Telegraph House (Sheffield) Management Company Ltd (“Telegraph House Management”). This was a company he controlled.

In 2010, Telegraph House Management was put into liquidation.

On 19 January 2011, the liquidator transferred the White Lease to LCP Commercial Limited (“LCP”).

Wellington and LCP were members of the same group of companies.

The service charge regime in practice

From January 2011 onwards therefore:

• Wellington, still the freeholder, remained responsible, as landlord of the White Lease (under which LCP was now the lessee), for servicing all of the building except the demised parts, and
• LCP was responsible for discharging the service obligations for the third and fourth floors which had previously been vested in Mr White/Telegraph House Management.

Being members of the same group of companies, Wellington and LCP worked together on the provision of some services.

In order to distinguish between the parties’ various liabilities for the services provided to the building, expenditure at Telegraph House was separated into five “schedules”, payable by the lessees and sub-lessees in various proportions in accordance with their contractual obligations.

This meant that, from the sub-lessees’ perspective, there was a departure from the procedural requirements of their subleases, but the arrangements were, as Martin Rodger QC observed, “an informal but practical modification of the contractual scheme with which all parties are prepared to live, for the time being at least”.

Whilst the sub-lessees’ service charge/maintenance rent was a fixed percentage, the service charge payable by the lessees was not fixed.

Where the amount to be paid was not fixed, Wellington’s surveyor apportioned liability. He based his calculations on the net internal floor areas (“NIA”) of lettable space in the building. His measurements were made in accordance with the RICS Code of Measuring Practice.

The sub-lessees were not prepared to live with that apportionment. They applied to the FTT for a section 27A determination. Their application was motivated by:

• An increase in the service charge payable per sub-lessee from less than £1,000 in 2006 to £3,300 in 2010, and
• An impending significant increase due to imminent external decoration and roof repairs, which would raise their annual service charge to £5,000 for what Martin Rodger QC described as “modest one bedroom flats in Sheffield”.

Any reduction in the service charge apportionment would therefore reduce that sizeable charge.

The sub-lessees had no contractual relationship with Wellington, but it was Wellington’s apportionment of the service charge that they challenged.

On what basis could they do that?

The meaning of “service charge”

The sub-lessees’ application for a determination whether a service charge was payable, and if it was, as to the amount which is payable, was made under section 27A of the Landlord and Tenant Act 1985.

Therefore, to establish whether the intermediate landlord’s service charge was a service charge over which the FTT had jurisdiction, Martin Rodger QC turned to the meaning of “service charge” in section 18 of the Act:

• The definition in section 18 includes “an amount payable by the tenant of a dwelling”;
• By section 38, “a “dwelling” means a building or part of a building occupied or intended to be occupied as a separate dwelling together with any yard, garden, outhouses and appurtenances belonging to it or usually enjoyed with it”.

There is also case law on this very point.

Ruddy v Oakfern Properties Ltd [2007] Ch 335

Oakfern was the head landlord. A company named PPM was the lessee of the upper floors of a building. Mr Ruddy was PPM’s residential sub-lessee:

• His lease required him to pay PPM a fixed proportion of the sum payable by PPM to the head landlord, Oakfern;
• He sought to challenge the sum payable by PPM to Oakfern.

Was PPM’s payment to Oakfern a service charge within the meaning of section 18 of the 1985 Act?

The answer turned on whether PPM was the “tenant of a dwelling” within the meaning of the Act.

The Court of Appeal determined that a person may be a “tenant of a dwelling” in the service charge context, even though the tenancy:

• Includes other property, such as commercial premises; or
• Comprises more than one dwelling, for example a tenancy of the upper floors of a building.

It held that:

• The amounts payable by PPM to Oakfern were service charges within the meaning of section 18 of the Act;
• The Leasehold Valuation Tribunal had jurisdiction to consider an application by Mr Ruddy under section 27A of the 1985 Act for a determination whether the sums payable by PPM to Oakfern were reasonable, and
• It was not necessary that the application be made by the “tenant of the dwelling” under whose lease the service charge was payable.

Applying this to Telegraph House, Martin Rodger QC held that:

• The sub-lessees in Telegraph House were in a comparable position to Mr Ruddy;
• The intermediate landlord (now LCP) was the “tenant of a dwelling” for the purposes of the 1985 Act, and
• The FTT therefore had jurisdiction to hear the sub-lessees’ challenge to the service charges payable by LCP to Wellington under section 27A(1) or (3) of the 1985 Act, even if they were not parties to the lease pursuant to which the charges were payable.

As a practical aside, Martin Rodger QC noted that, as a matter of good practice, an intermediate landlord should always be named as a respondent in cases such as these to avoid any later disputes as to whether it is bound by the FTT’s decision.

In this case, LCP had not been a party to the FTT application, but consented to being joined to the appeal.

Apportionment was the only issue before the FTT. The sub-lessees focused on three specific areas of the building where they contended that the apportionment calculation was askew.

The FTT decided that its role in determining the section 27A application was that of reviewer, not apportioner. In Martin Rodger QC’s words, the FTT considered that:

“Its task was to satisfy itself that the apportionment undertaken by Wellington was a reasonable one; it was not to ask itself how it would carry out a reasonable apportionment”.

Having reviewed the landlord’s apportionment methodology, the FTT decided that the apportionment was reasonable.

Was the FTT correct to review the landlord’s surveyor’s methodogy – or should it have carried out its own apportionment exercise?

Martin Rodger QC considered the position at common law:

“On general principles where one party to a contract is given the power to decide a matter subject to a proviso that the decision must be fair or reasonable, a challenge to the decision will only succeed if no reasonable person in the position of that party could have reached the same decision (see, for example, cases on unreasonable refusals of consent to assign a lease, such as Pimms v Tallow Chandlers [1964] 2 QB 547, and Ashworth Frazer v Gloucester City Council [2001] UKHL 59).  As an application of the common law, therefore, without considering the effect of statute, the First-tier Tribunal’s approach to the issue of apportionment was unimpeachable”.

What then about the position under the Landlord and Tenant Act 1985?

Schilling v Canary Riverside Development PTD Limited (2005) LRX/26/2005

In Schilling, the lease required the lessee to pay fixed percentages of the service charge.

HHJ Rich QC in the Lands Tribunal held that the LVT (as it was at the time) had no jurisdiction under sections 19 or 27A to carry out its own apportionment exercise where the lease provides that service charges are to be apportioned by what Martin Rodger QC described as “a pre-determined formula”, including:

• A fixed percentage, or
• By reference to relative floor area or
• By reference to rateable value.

Re Rowner Estates Ltd (2006) LT LRX/3/2006 (unreported) and Warrior Quay Management Ltd v Joachim (2008) LT LRX/42/2006 (unreported) run along the same lines.

Levitt v London Borough of Camden [2011] UKUT 336 (LC)

In Levitt, the lease allowed the landlord to choose between several methods of apportionment, including apportionment on a “fair and reasonable basis”.

HHJ Walden Smith found that the landlord’s apportionment had been “not unreasonable”, and followed Schilling, saying, at paragraph 36 that:

“Section 19 does not permit the tribunal to ascertain what is a reasonable apportionment of the relevant costs.”

Martin Rodger QC made no comment as to whether he agreed with HHJ Walden Smith, but moved on. I have a sneaking suspicion that he may not have done.

Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC)

Windermere Marina post-dated the FTT’s decision by three months. It focused on the impact of section 27A(6) of the 1985 Act and was decided by Martin Rodger QC.

You can read my review of the case here.

The key clause of the lease in that case obliged the lessees to pay service charges, being:

“a fair proportion (to be determined by the Surveyor for the time being of the Lessors whose determination shall be final and binding) of the expense of all communal services …”

“This Tribunal”, said Martin Rodger QC, referring to his decision in Windermere Marina, “decided that s.27A(6) of the 1985 Act was relevant to a contractual provision by which a landlord or its surveyor was given responsibility for the apportionment of service charges on a fair basis”.

Section 27A(6) provides as follows:

(6) 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).”

Faced with a case redolent of Windermere Marina, Martin Rodger QC cited Morgan J’s reference to section 27A(6) in London Borough of Brent v Shulem B Association Limited [2011] EWHC 1663 (Ch), and reviewed his Windemere Marina reasoning:

• Section 27A(1)(a) empowers the FTT to decide how much a lessee was liable to pay as a service charge;
• That decision included the apportionment of service charge expenditure;
• The leases provided that the apportionment was to be determined by a surveyor;
• This constituted the calculation of the amount payable “in a particular manner” as envisaged by section 27A(6);
• Section 27A(6) therefore rendered void the words in brackets;

He then quoted excerpts from the Windermere Marina decision:

37. It is perfectly possible to contemplate an application to the first-tier tribunal under section 27A(1) where the only question in issue concerns the proper method of apportionment of a sum which is agreed to have been incurred reasonably on services provided to a reasonable standard and which otherwise falls within a tenant’s contractual liability.  An issue might arise about the correct classification of a particular item of expenditure where different proportions were payable for different items; or the method of apportionment itself might be open to different interpretations.  In this case, as the LVT said in paragraph 97 of its decision, “the heart of the dispute” is the apportionment.  It was not submitted by Mr Gilchrist that an issue of apportionment could never be the subject of a determination under section 27A(1), and such a submission would be unsustainable.

38. …

39. Having identified that section 27A(1) is not confined to issues of quantification, and may include issues of apportionment, it is then necessary to consider section 27A(4).  This has the effect that no application may be made under section 27A(1) or (3) in respect of a matter which has been agreed or admitted, or which is to be, or has already been, the subject of a determination either by the court or by arbitration pursuant to a post dispute arbitration provision.  Where the amount which is payable as a service charge, or some component or issue relating to that amount, has been agreed, it may not subsequently be referred to a first-tier tribunal for determination.  In the same way, where the parties have agreed in their lease how service charges are to be apportioned (for example, in fixed proportions or percentages, or in proportions referable to floor area or rateable value) section 27A(4) will preclude an application under section 27A(1) in respect of that matter.

40. The prohibition in section 27A(4) on re-opening matters which have been agreed must, however, be considered in the light of section 27A(6).  This renders void any agreement by the tenant in so far as it “purports” to provide for the determination of any question which could be the subject of an application under sub-section (1) or (3) “in a particular manner” or “on particular evidence”.  The purpose of the provision is clearly to avoid agreements excluding the jurisdiction of the first-tier tribunal on questions which could otherwise be referred to it for determination.

41. In a statutory anti-avoidance provision such as section 27A(6) an agreement will “purport to” provide for an outcome if it has the effect of providing for that outcome.  In Joseph v Joseph [1967] Ch 78 the Court of Appeal held that in section 38(1), Landlord and Tenant Act 1954 the expression “purports to preclude the tenant from making an application or request” for a new tenancy means “has the effect of precluding the tenant” so that an agreement for the tenant to surrender their tenancy at a future date was void.  The same broad approach is appropriate in the case of section 27A(6) so that the question in the case of any particular agreement by a tenant is whether it has the effect of providing for the determination of any question which could be the subject of an application under sub-section (1) or (3) “in a particular manner” or “on particular evidence”.

42. The question referred to the LVT in this case was what proportion of the expenses incurred by the appellant was to be paid by the respondents.  By paragraph (2) of the Schedule to their leases the respondents had already agreed that the answer to that question was that they were to pay such proportion as was determined by the appellant’s surveyor, whose decision was to be final and binding.  In my judgment that agreement was void because it had the effect of providing for the manner in which an issue capable of determination under section 27A(1) was to be determined, namely by a binding decision of the appellant’s surveyor.  I cannot accept Mr Gilchrist’s submission that the apportionment of service charges is not a question which arises under sub-section (1) or that sub-section (6) is directed only at provisions which purport to make a determination of the relevant expenditure by the landlord’s surveyor or accountant determinative.”

This case is not however Windermere Marina Mark II.

In Windermere Marina, the lessees took issue with:

• The wording of their own lease, and
• Their direct landlord.

In this case, the subleases provided for a fixed percentage to be payable. That fixed percentage was not susceptible to challenge under sections 19 or 27A.

The issue taken by the lessees here was with the apportionment provisions in the White Lease. As a short recap:

• The White Lease governed the relationship between the sub-lessees immediate landlord – originally Mr White, now LCP – and Wellington;
  • The sub-lessees had no contractual relationship with Wellington, which carried out the apportionment exercise under the White Lease;
  • The apportionment exercise affected the sub-lessees however because when Wellington raised a service charge demand of LCP, and LCP passed that demand, in the fixed percentages provided for by the sub-leases, onto the lessees.

Wellington’s UAP therefore was the impact of section 27A(6) on the non-contractual relationship between Wellington and the sub-lessees.

Resolution of the appeal

On Martin Rodger QC’s analysis, the impact of section 27A(6) was the same as it had been in Windermere Marina: a provision in the White Lease whereby the service charge apportionment between the intermediate landlord and Wellington was determined “in a particular manner” was void, even when challenged by a person who was not party to the White Lease.

It was therefore adieu to the two service charge apportionment methods appearing in the White Lease:

• “Such proportion to be determined by the Landlord or its surveyor (in each case acting reasonably)”, and
• “(Such proportion to be determined by the Landlord’s Surveyor whose determination shall be final and binding)”.

What happened to the vacuum left by the void?

“If the parties cannot agree what is fair, the consequence is that the fair proportion falls to be determined by the appropriate tribunal…, said Martin Rodger QC. “In carrying out an apportionment the appropriate tribunal will have regard to the parties’ agreement, so far as it remains. In this case the parties agreed that the Tenant’s Share would be a due and fair proportion of the service costs which would be apportioned “taking into account the relevant floor areas within the Building or other reasonable factors”. That is not a provision the effect of which is to provide for a determination “in a particular manner” and it survives the intervention of s.27A(6)”.

The appeal was therefore allowed.

With some reluctance, Martin Rodger QC remitted the case to the FTT for a re-determination.

The disadvantages of remitting were twofold:

1)    The FTT’s new determination may not be very different to its original determination;

2)    Inevitably, the remission meant that the dispute between the parties would be prolonged.

There were however several reasons for remitting it:

1)    The FTT had asked itself the wrong question, and the lessees were entitled to a determination based on the FTT determining the matter correctly;

2)    There were a number of factual issues which the FTT appeared to have overlooked;

3)    There were some measuring inconsistencies which may impact on the FTT’s decision when looked at anew.

The sub-lessees expressed the view that they were given very little information by Wellington or LCP, to the extent that they felt that their landlords considered them to be little more than a nuisance. It was the lack of information which had caused them to make the application to the FTT.

“As a result of the application”, said Martin Rodger QC, “a very full explanation has been provided by the respondents, which includes measurements and calculations which should significantly improve the tenants’ understanding of how the apportionment has been carried out so far.  I very much hope that, with the benefit of that information and in view of the expense and inconvenience which a further hearing before the First-tier Tribunal will involve, the parties will now be able to reach agreement on a basis of apportionment with which all are content”.

Multiple level service charges can crop up in any building, but it seems to me that they are most likely to occur in two types of leasehold situation:

1)    Shared ownership, and

2)    Mixed use.

Shared ownership

In some shared ownership lease situations, the housing provider holds the long leases of individual flats in a block as opposed to a long lease of the whole block.

Until such time as the owner of the flat staircases up to 100% ownership, s/he generally holds the flat on a sublease from the housing provider.

The housing provider in turn then holds the flat on a long lease from the freeholder.

Ironically therefore, in the light of the aims of shared ownership, which are to provide an affordable method of owning property, the sub-lessee can find him/herself liable for two sets of charges, including two sets of management fees.

Mixed use

Telegraph House strikes me as a paradigm example of a mixed use development: the commercial units are let individually, but the residential units are let as a whole, effectively on a commercial basis, with subleases being carved out of that letting.

Commercial leases generally provide for a flexible service charge apportionment – “due and fair” and “reasonable” tend to be the watchwords.

In order to avoid disputes, a landlord may incorporate into the lease a provision whereby the fairness and/or reasonableness of the apportionment is to be determined by its surveyor, that decision to be final and binding on the parties.

In the residential context, this case and Windermere Marina make it pretty clear that those provisions are highly susceptible to challenge.

The consequence for the head landlord of mixed use property with a tiered residential element may therefore be that:

• The commercial lessees pay their “fair and reasonable” proportion as determined by the landlord’s surveyor;
• The lessee of the residential portion receives a demand for his/her “fair and reasonable” proportion, determined in the same way, and passes it down to the sub-lessees;
• The sub-lessees challenge that “fair and reasonable” proportion on section 27A(6) grounds;
• The FTT determines the amount payable, including the proportion, and
• The head landlord’s recovery is incomplete because the proportions payable by the lessees do not add up to 100%.

In that event, it is the method of apportionment which prevents the landlord from recovering expenditure in full, even before the FTT considers whether that expenditure has been unreasonably incurred, unreasonable in amount and/or carried out to an unreasonable standard.

And finally

I confess that this is more of a note to self than an observation of any merit.

A section 27A(6) challenge depends on the lease providing for the determination of the service charge “in a particular manner” or “on particular evidence”.

It is not therefore the use of words such as “fair”, “reasonable” or “due” which should set the alarm bells ringing, but the description of how or on what basis that fair, reasonable or due proportion should be calculated.

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