Aviva Investors Ground Rent GP Ltd v Williams [2023] UKSC 6

8 December

The Supreme Court (no less) heard this appeal on 08 December 2022, and exactly two months later, on 08 February 2023, handed down its judgment.

The case is one of those which brings tingles of excitement to the spine of the nerdy lawyer, but may not have had quite the same impact in the real world of practicality.

Lord Briggs gave the judgment of the court, and began thus:

The levying of service charges by landlords under leases of residential property in respect of their expenditure upon repairs and the provision of other services has for long been controversial. This is both because of its propensity to generate disproportionately expensive and time-consuming litigation and because of the tendency of some landlords to seek to minimise that risk by the imposition of contractual restrictions in residential leases upon what would otherwise have been the tenants’ rights to have disputes about service charges resolved in court, or in an appropriate tribunal. Section 27A of the Landlord and Tenant Act 1985 (the “1985 Act”) was an attempt by Parliament to alleviate what was perceived to be the unfair restriction of residential tenants’ access to justice inherent in such restrictions. This appeal raises the question just how far section 27A goes in restraining what would otherwise be the parties’ freedom of contract.

Section 27A(6)

The point at issue was the wording of section 27A(6), which reads:

(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).

Section 27A(1)

Section 27A(1) reads:

An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to—

(a) the person by whom it is payable,

(b) the person to whom it is payable,

(c) the amount which is payable,

(d) the date at or by which it is payable, and

(e) the manner in which it is payable.

Section 27A(3)

Section 27A(3) reads:

(3) An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to—

(a) the person by whom it would be payable,

(b) the person to whom it would be payable,

(c) the amount which would be payable,

(d) the date at or by which it would be payable, and

(e) the manner in which it would be payable.

The issue before the Supreme Court

The question on this appeal is how far (if at all) section 27A(6) cuts down a contractual provision in a lease that provides for the tenant to pay a fixed proportion of common costs “or such part as the landlord may otherwise reasonably determine”.

The leases

The leases required the payment of a service charge. Each leaseholder’s contribution was described in this way:

• “your share of the insurance costs is 0.7135% or such part as the Landlord may otherwise reasonably determine;

• “your share of building services costs is 0.7135% or such part as the Landlord may otherwise reasonably determine; and

• “your share of estate services costs is 0.5427% or such part as the Landlord may otherwise reasonably determine.”

The adjustment

The dispute arose because the landlord issued service charge demands with different apportionments to those set out in the leases.

The landlord’s position was that the leases entitled it to demand “such part as the Landlord may otherwise reasonably determine”.

The leaseholders countered that the landlord was not entitled to adjust the apportionments because the clause in the lease on which the landlord relied was void pursuant to section 27A(6).

The FTT’s decision

The FTT determined that the clause was not void, because it did not prevent the leaseholders from applying to the FTT for a determination of the reasonableness of their service charges.

The Upper Tribunal

The Upper Tribunal (Lands Chamber) reversed the FTT’s decision. She decided that the whole of the clause permitting adjustment of the percentages was void.

The Court of Appeal

The Court of Appeal held that the provision for re-apportionment was void to the extent that only the landlord could exercise it, but that either party to the relevant lease could apply to the FtT for a re-apportionment under section 27A(1).

The Supreme Court

Lord Briggs observed that:

All three of the courts below correctly regarded themselves as bound by the decision of the Court of Appeal in Oliver v Sheffield City Council [2017] EWCA Civ 225; [2017] 1 WLR 4473 in which, following Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); [2014] L & TR 30 and Gater v Wellington Real Estate Ltd [2014] UKUT 561 (LC); [2015] L & TR 19, I held (with the agreement of Longmore and Lewison LJJ) that a provision which gave contractually determinative effect to a discretionary decision of the landlord about service charges was avoided by section 27A(6) whether or not it provided expressly for the landlord’s decision to be final and binding.

Aviva Ground Rents GP argued that the Court of Appeal was wrong, both in this case, and in Oliver v Sheffield City Council because if a landlord’s power to decide the proportions payable by leaseholders were to be made void, it would leave the lease without any mechanism at all for setting the appropriate proportion payable.

That would mean that no service charge at all would be payable, and the only way to make a service charge payable would be to apply to the FTT for a determination, even if there was no dispute between the landlord and the leaseholder.

The statutory scheme

Lord Briggs embarked on a (slightly wobbly) review of the Landlord and Tenant Act 1985, including its various amendments.

Section 19 limits the landlord’s costs to those that are reasonably incurred for works and/or services of a reasonable standard.

Section 20 requires the landlord to consult in relation to “qualifying works”.

Section 20A obliges a landlord to give credit for grant-aided works.

Section 20B sets an 18 month time limit on the recoverability of service charges.

Section 20C restricts the exercise of a landlord’s power to recover its costs through the service charge.

Section 21, according to Lord Briggs, requires landlords “to supply upon request summaries of relevant costs, with a right, on a default, for tenants to withhold payment of service charges demanded”.

Just for the record: there is no right to withhold payment if the landlord does not provide the summary/ies requested. That section of the 1985 Act has not yet come into force.

All of the above were introduced into the Landlord and Tenant Act 1985 before section 27A, which vests the FTT with the power to determine - amongst other things - the amount of service charge payable, or whether a service charge would be payable if specified costs were incurred.

Lord Briggs continued:

Although there is detail about payability in terms of payer, payee, amount, timing and payment method, and in subsection (4) about when the FtT’s jurisdiction may not be invoked, nothing is said expressly about the principles which the FtT is to apply in determining payability. The natural assumption is that the FtT would decide by reference to common law principles of contractual liability, subject to the detailed scheme for statutory control laid down in the immediately preceding provisions of the 1985 Act.

Looking at the way in which a building is managed and money spent, Lord Briggs said:

Generally speaking, the making of a demand upon a tenant for payment of a service charge in a particular year will have required the landlord first to have made a number of discretionary management decisions. They will include what works to carry out or services to perform, with whom to contract for their provision and at what price, and how to apportion the aggregate costs among the tenants benefited by the works or services.

In his view, that was not a job for the FTT:

… the jurisdiction of the FtT under section 27A(1) to decide whether a service charge demand is payable will extend to the contractual and/or statutory legitimacy of these discretionary management decisions… It would not be a part of the FTT’s task to make those discretionary decisions itself, let alone for the first time.

In other words, the FTT cannot be asked questions about how to manage - or how to apportion a costs in a service charge: it can only be asked questions about the contractual or statutory legitimacy of that management.

If section 27A(6) operated to remove the mechanism by which a service charge can be apportioned, reasoned Lord Briggs:

• the FTT’s powers would be significantly expanded;

• landlords with leases that offended section 27A(6) would be unable to demand service charge payments without applying first to the FTT for a decision about apportionment unless all leaseholders agreed to the proposed apportionment, and

• the bargain between landlord and leaseholder would be radically altered, thereby opening a “veritable Pandora’s box of disputes … not contemplated by the lease, under which the key to the box lay firmly with the landlord, for obviously good reasons in terms of estate management…”

That could not be right.

Further, the natural language of section 27A(6) simply protected the FTT’s power to decide questions that were within its jurisdiction, rather than to expand that jurisdiction.

The outcome of the appeal

All of the above led Lord Briggs, who had been one of the Court of Appeal judges in Sheffield City Council v Oliver, to say “with embarrassment and contrition”, that Oliver was wrong on this point, although to be fair to him, the point was not argued before the Court of Appeal in Oliver.

And so we reach Supreme Court’s application of all of the above to the leases held by Mr Williams and his fellow leaseholders. Lord Briggs said:

… in the present case, the construction which I now consider to be correct applies as follows. Those provisions gave the landlord two relevant closely related rights:

• first to trigger a re-allocation of the originally agreed contribution proportions and

• secondly to decide what the revised apportionment should be.

In both respects the landlord is contractually obliged to act reasonably. The FtT decided that the landlord had acted reasonably in making the re-apportionment which was challenged, and it is not suggested that it fell foul of any part of the statutory regime, apart only from section 27A(6). But that subsection did not avoid the power of the landlord to trigger and conduct that re-apportionment, because the jurisdiction of the FtT to review it for contractual and statutory legitimacy was not in any way impeded. The original question, whether there should be a re-apportionment and if so in what fractions, was not a “question” for the FtT within the meaning of section 27A(6). The question for the FtT was whether the re-apportionment had been reasonable, and that question the FtT was able to, and did, answer in ruling on the tenants’ application under section 27A(1).