Philip Williams, lessees of 38 flats in Vista, Fratton Way, Southsea v Aviva Investors Ground Rent [2020] UKUT 0111 (LC)

Vista is a mixed-use block with a commercial unit on the ground floor and 69 residential units.

The residential leases were all in the same form – they comprised a genuinely short (not lawyers’ short) document of three pages, accompanied by a “Lease Book”, which detailed the terms of the lease.

The leaseholders were liable to contribute to three groups of cost:

• Insurance
• Building services costs
• Estate services costs

In each case, the lease provided that the leaseholder was to pay a fixed percentage of those costs “or such part as the Landlord may otherwise reasonably determine”.

The landlord demanded a different percentage to the one fixed by the lease. The parties found themselves in the FTT, and then before Judge Elizabeth Cooke on appeal in the Upper Tribunal.

There were two issues:

• Whether s.27A(6) prevented the landlord from changing the proportion from the fixed percentage to “such part as the Landlord may otherwise reasonably determine”, and
• If not, how that affect the leases.

You can read section 27A in full here. Subsection 6, which is key to this decision, reads thus:

(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)…” 

Judge Cooke turned first to Windermere Marina, where the lease required payment of:

“… 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…”

She noted that section 27A(1) covers issues that:

“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.” (Windermere, paragraph 38)

However, section 27A(4) deprives the FTT of the power to determine a dispute about apportionment if that apportionment has been “agreed or admitted by the tenant” (Windermere paragraph 39).

That, said Judge Cooke, includes an agreement in the lease itself. If the lease states that the tenant is to pay 5% of the service charge for the block, that is the apportionment that must be paid. It cannot be challenged in the FTT.

Section 27A(4) is however regulated by section 27A(6).

Section 27A(6) renders void an agreement by a tenant if that agreement would prevent the leaseholder from applying to the FTT under section 27A(1) or (3).

The purpose of section 27A(6), said Martin Rodger QC in Windermere Marina,

“…is clearly to avoid agreements excluding the jurisdiction of the First-tier Tribunal on questions which could otherwise be referred to it for determination.”

Judge Cooke set out the key paragraph of Martin Rodger QC’s reasoning:

“42. The question referred to the LVT, in this case, was what proportion of the expenses incurred by the [landlord] was to be paid by the [tenants]. By paragraph (2) of the Schedule to their leases, the [tenants] 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 the determination under section 27A(1) was to be determined, namely by a binding decision of the [landlord’s] surveyor.”

The consequence of that finding?

“[It] deprive[d] the landlord’s surveyor of his role in determining the apportionment. Paragraph (2) [of the lease] is to be read as if the method of ascertaining a fair apportionment was omitted altogether.”

The FTT itself was required to determine the apportionments.

Here the leases required payment of:

“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)”

Despite the absence of the phrase “final and binding”, the Upper Tribunal (Martin Rodger QC again, on rather a roll with this now) struck down the clause. It fell foul of section 27A(6) because in the words of Judge Cooke:

“it purported to provide for a determination in a particular manner of a question (namely the apportionment of the service charge) which could be the subject of an application under subsection (1)”.

The leaseholders argued that section 27A(6) was engaged by the clause in the leases that read “or such part as the Landlord may otherwise reasonably determine”.

They referred the FTT to Windermere Marina and Gater, but the FTT concluded that “the two cases quoted … do not have the effect of nullifying the lease provision”.

The leaseholders appealed.

Judge Cooke allowed the appeal. The FTT had misunderstood Windermere Marina and Gater, which:

“…say that a clause purporting to provide for a determination of apportionment by the landlord or the landlord’s agent is void. It is void whether or not it provides that the landlord’s decision is “final and binding” or similar, and whether or not the landlord agrees to submit to the jurisdiction of the Tribunal.”

She continued, in terms that irresistibly call to mind a certain sketch involving a parrot, John Cleese and Michael Palin:

“… in the leases in question in this appeal the words “or such part as the Landlord may otherwise reasonably determine” are void. They are deleted. They no longer appear in the lease.”

It is in the deletion of the entire phrase that this case differs from Windermere Marina and Gater.

In those two cases, there was only one way of apportioning costs: the leases outsourced to the landlord or landlord’s surveyor the calculation of the “fair proportion” payable by each leaseholder.

That outsourcing being void, it fell to the FTT to determine what was fair.

Judge Cooke continued:

“Similarly, in Fairman and others v Cinnamon (Plantation Wharf) Limited and others [2018] UKUT 421 (LC) the deletion of void wording that enabled the landlord to determine when a change in the apportionment of charges was “necessary or reasonable” meant that the FTT had to decide a change was necessary or reasonable and, if it was, to decide for itself what the new apportionment should be”.

At Vista, however, there were two, alternative means of apportioning costs. Either:

• As a fixed percentage or
• As an apportionment determined at the landlord’s discretion.

The removal of the void phase did not affect the fixed percentage. Nothing further was required from the tribunal:

“Without the void wording, the lease obliges the tenant to pay a stated percentage of the service charge. There is nothing left to decide. The FTT has no jurisdiction to amend the stated percentage as a result of section 27A(4).

“Accordingly, the appeal succeeds. The decision of the First-tier Tribunal is set aside and the Tribunal substitutes its own decision that the words “or such part as the Landlord may otherwise reasonably determine” in the Vista leases are void. The [landlord] can recover only the apportionments stated in the lease and if it wishes to change that apportionment it will have to do so by varying the leases with the tenants’ agreement.”

Should section 27A(6) remove what might be said to be an eminently sensible power to vary service charge contributions? I am in two minds.

There is of course the argument that the leaseholder should know what they are signing up to when they take on a lease, and should therefore reject or negotiate away any provision that is unacceptable. The fact that Parliament has legislated to protect leaseholders would suggest however that not everyone knows what they are signing up to, and there are energetic calls for reform.

There is also the connected fact that leases tend to be drafted by landlords, and the shortage of housing generally means that intending purchasers are not – or at least not at present – in the driving seat so far as the terms of purchase are concerned.

On the other hand, there is the question of how to efficiently deal with surpluses or shortfalls if the number of properties contributing towards relevant costs grows or shrinks after the grant of leases with fixed percentages.

An increase in the number of properties would presumably be uncontroversial because it should bring down the percentage, but where a development loses units, for example through reconfiguration of space, a landlord might reasonably wish to recover the lost contribution(s) by re-apportionment, particularly where it is cash-poor and has no other means of bridging the service charge gap.

From a purely legal perspective, it might also be said that the Supreme Court, through Braganza v BP Shipping Ltd [2013] UKSC 230, and Court of Appeal, through Waaler v LB Hounslow [2017] EWCA Civ 45, have ensured that contractual discretions cannot be exercised arbitrarily or capriciously, and that reasonable safeguards now exist.

Whatever the pros and cons, as the law now stands, contractual mechanisms that permit a discretionary variation by the landlord will be struck from leases in most, if not all, cases.

Variation by consent is always possible, but what happens if consent is not forthcoming?

In certain circumstances, variation can be achieved, for flats at least, through Part IV of the Landlord and Tenant Act 1987, either:

• Under section 35, on the ground that the leases do not make satisfactory provision for computation of the service charge, that is, that contributions no longer add up to 100%, or
• Through the majority consent procedure under section 37, if the appropriate majority can be achieved.

In both cases, even where the ground is made out, the FTT has discretion as to whether to order the variation sought.

Would a power to challenge the rationality and reasonableness of the exercise of a contractual discretion, bolstered by Braganza and Waaler, be more cost-effective than the 1987 Act alternative? I suspect that there would be little to separate the cost of the two sets of proceedings, and the certainty provided by section 27A(6) is at least a rare port of calm in the ocean of reasonableness-testing that otherwise courses across the service charge provisions of the 1985 Act.

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Click here to read the decision in full on the Upper Tribunal (Lands Chamber) website.