Is the (Third) Party Over for Apportionment of Service Charge (Part Two)?

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Summary: This decision has now been followed and amplified in the case of Jeanna Gater and others v Wellington Real Estate Ltd and LCP Commercial Ltd where it was decided that s.27A(6) equally applies where there is an intermediate landlord between the residential owner occupiers and the ultimate freeholder.

The recent case of Windermere Marina Village Ltd v Wild and others, decided that section 27A(6) of the Landlord and Tenant Act 1985 makes void any provision in a lease of a dwelling that the apportionment of service charge will be determined “in a particular manner” such as by the landlord’s surveyor.)

This decision has now been followed and amplified in the case of Jeanna Gater and others v Wellington Real Estate Limited and LCP Commercial Limited where it was decided that section 27A(6) equally applies where there is an intermediate landlord between the residential owner occupiers and the ultimate freeholder. Where the intermediate lease allows the freeholder’s surveyor to determine the apportionment of service charge within the building, that provision will be void even though the freeholder has no direct contractual relationship with the residential end user tenants.

Background

The tenants held long leases of apartments on the third and fourth floors of a mixed commercial, retail and residential building. The eight residential subleases were held under an intermediate lease. That lease stipulated that the total service cost expenditure for the building would be apportioned between the relevant areas of the building, with one portion allocated to the third and fourth floors (such proportion to be determined by the freeholder’s surveyor). Under the terms of the residential subleases, that portion of expenditure should then be allocated between the individual tenants of the eight flats in the fixed proportions stipulated by their individual sub-leases, in addition to their contribution to the costs of services to the third and fourth floors that they owed direct to the intermediate landlord.

In practice, as the freeholder and intermediate landlord were members of the same group of companies there was some coordination in the provision of services between the two and a joint summary of the different items of expenditure was produced, albeit set out into separate schedules relating to different areas of the building. The apportionment of liability for the different areas was determined by the freeholder’s surveyor based on the net internal floor areas of lettable space within the building.

The residential sub-tenants sought to challenge the apportionment exercise undertaken by the freeholder’s surveyor and took their complaint to the First Tier Tribunal (“FTT”).

The FTT considered that its task was to satisfy itself that the apportionment undertaken by the surveyor was fair; it was not to determine what the apportionments should be. Ultimately, the FTT decided that each of the apportionment decisions made by the surveyor had been reasonable. The FTT made its decision before the Upper Tribunal Lands Chamber (“UTLC”) had made its decision in Windermere.

The residential sub-tenants appealed to the UTLC.

Appeal

The Deputy President of the UTLC applied the case of Ruddy v Oakfern Properties Ltd (2007) and confirmed that any service charge paid by an intermediate landlord to a freeholder of residential premises was a service charge that could be challenged by an ultimate residential sub-tenant even though he had no contractual relationship with the freeholder.

He then applied the reasoning in the Windermere case and agreed with the residential tenants' argument that the contractual provision in the intermediate lease which allowed the freeholder’s surveyor to determine the apportionments of the service charge under the head lease was void, even though the residential sub-tenants were not a party to the headlease.

Accordingly, any freeholder who currently has the right to determine (through their surveyor or other third party) the apportionment of service charges in a mixed use development must be aware that where they are apportioning service charges in respect of the residential element the apportionment provisions in their lease are void (at least until a higher court decides otherwise).

Practical Points

  • Headleases of mixed use schemes may now have to consider separate service charge mechanisms for the residential and commercial elements.
  • Time will tell whether this case will allow previous apportionments by freeholders to be challenged by leaseholders.
  • Rather than drafting open ended provisions relying on a surveyor or other third party to determine a fair apportionment at some point in the future, more detailed provisions may need to be set out in the lease from the outset to avoid disputes arising at a later date. In carrying out an apportionment a 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 therefore survived the intervention of s.27A(6).

Case: Jeanna Gater and others v Wellington Real Estate Limited and LCP Commercial Limited [2014] UKUT 0561 (LC).

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