Bradley, Rhodes v Abacus Land 4 Ltd [2024] UKUT 120 (LC)

21 December 2024

I had hoped that we had emerged from the weeds of trying to work out whether “reasonable” meant “rational” or “objectively reasonable”, but this appeal takes us squarely back to - erm - square one, and it ain’t over yet. This case is destined for the Court of Appeal.

The dispute arose in relation to charges for the repair and maintenance of an onsite gym at Romney House, which was originally an office block constructed in the 1930s.

By 2006, Romney House had been converted to a mixed use development containing 168 flats let on long leases, four tenanted commercial units and a gym.

The long leaseholders were permitted to use the gym. Their leases entitled them:

“… to use such facility (if any) within the Building and the Estate that may from time to time be designated by the Landlord for use (with or without others) by the Tenant (including but not limited to the lift if any serving the Building)”.

Between 2006 and 2010 the gym was open exclusively to residents round the clock.

In 2010, the landlord and residents agreed that it would be open from 6:00 a.m. to 10:00 p.m. each day. Use remained exclusive to the residents, and the residents alone contributed towards the costs of repair and maintenance.

In October 2013, the freeholder of the time granted a 999- year lease of the gym to a wholly owned subsidiary. That subsidiary subsequently assigned the lease to a Mr Adam White.

The gym lease

The terms of the gym lease were far from onerous.

The rent appears to have been modest, and there was no service charge.

Conversely, the landlord was obliged:

• To provide heat, lighting, water and electricity at its own cost,

• To provide and maintain the gym equipment and replace it when required, and

• To pay “rates and property outgoings” in respect of the gym as well as “service charges and utility costs for services and utilities consumed” by the gym.

“On any reckoning”, said Judge Elizabeth Cooke in the Upper Tribunal, “the gym tenant has a remarkably good deal. It might well be described as a gift, despite the rent”.

The gym lease also entitled Mr White to make the gym available to his own clients provided that the residents of Romney House were not prevented from using it.

From October 2013 onwards therefore, the residents’ use of the gym was no longer exclusive. They continued however to be charged 100% of the costs relating to it.

In 2014, the then freeholder agreed with the residential tenants that Mr White’s £5,000 per annum rent would be put towards the cost of maintaining the gym, with a corresponding reduction in the amount charged to the them for the repair, maintenance etc of the gym.

In 2017, Abacus Land 4 Ltd acquired the freehold of Romney House.

In 2020, when the pandemic struck, the gym was closed. When it reopened, the leaseholders said that residents were granted access between 7:00 and 10:00 a.m. and 5:00 and 8:00 p.m. (and not at all on Sundays or bank holidays).

The seeds of the dispute were sprouting.

They burst when the landlord proposed to carry out refurbishment work to the gym and to charge the full £218,000 cost to the residential leaseholders. Remember - the lease of the gym did not require the tenant, Mr White, to pay a service charge.

The residential leases

At the heart of the dispute is the meaning of “acting reasonably”.

It appeared in plenty of places in the leases.

Definitions

“Residential Service Charge Item”: any item of expenditure which is (or is intended) to be chargeable (in whole or in part) to the residential lessees of the Building

“Residential Service Charge Proportion”: such fair proportion as the Landlord acting reasonably shall from time to time determine

“Building Service Charge Item” means any item of expenditure which is (or is intended) to be chargeable (in whole or in part) to the lessees of the Building (both residential and commercial)

“Building Service Charge Proportion” means such fair proportion as the Landlord acting reasonably shall from time to time determine

Leaseholders’ covenants

The leaseholders covenanted:

(a) To pay … the Residential Service Charge Proportion of:

(i) Such of the costs charges and expenses which the Landlord shall incur in complying with its obligations … which the Landlord (acting reasonably) designated as being a Residential Service Charge Item

(ii) The costs charges and expenses which the Landlord shall incur in doing any works or things to those parts of the Building utilised by the residential flat owners and/or occupiers for the maintenance and/or improvement thereof and

(iii) Any other costs charges or expenses incurred by the Landlord which the Landlord designates as a Residential Service Charge Item

(b) To pay … the Building Service Charge Proportion of:

(i) Such of the costs charges and expenses which the Landlord shall incur in complying with its obligations … which the Landlord (acting reasonably) designated as being a Building Service Charge Item

(ii) The costs charges and expenses which the Landlord shall incur in doing any works or things to the parts of the Building for the maintenance and/or improvement of the Building and

(iii) Any other costs charges or expenses which the Landlord designates as a Building Service Charge Item”.

The bold text is my addition - an attempt to keep my sanity in all those whirling words.

The FTT’s decision

The years in dispute before the FTT were 2013 to around 2023, I think. The end date is not clear.

At paragraph 21, the FTT said this:

21. Currently, the service charges for the gym area are apportioned in accordance with the terms of the lease under which the Respondent landlord has a discretion as to the inclusion and allocation of charges. This is not therefore a matter over which the Tribunal has jurisdiction under this application which concerns only the payability and reasonableness of service charges. This issue would need to be dealt with by an application to vary the leases. In granting the gym lease the landlord was not under any obligation to act reasonably or even rationally towards the existing lessees. It was free to make a gift if it wanted to, as is any freeholder of property that is not already subject to a lease.

In case it was wrong about its power to determine whether the leaseholders’ service charge was payable, it continued.

It determined that the leaseholders had admitted the service charges for the gym by reason of uncontested payments between 2013 and 2020.

As to the years following 2020, it said:

“28. In the present case the landlord appears to have had two options from 2013 onwards: to continue to charge the gym expenses to the tenants as before or to bear part of the charges itself to reflect the shared use of the gym between the residents and the gym tenant. The Respondent landlord chose the first option which it was entitled under the terms of the lease to do. That choice, though unpalatable to the residential tenants, cannot therefore be said to be unreasonable. It was not a decision of the type where it could be said that no reasonable landlord in a similar position could ever have made it.”

The leaseholders appealed.

The appeal

The Upper Tribunal dismissed the first limb of the leaseholders’ appeal against the finding that they had admitted the service charges that they had paid between 2013 and 2020.

The second limb, for costs after 2020, was tricky.

Judge Elizabeth Cooke summarised the position:

The [residential leaseholders] say that the [landlord] was not entitled by the lease to designate the gym costs as payable in full by the residential leaseholders. So they are challenging, not the level of a cost or the standard of work done, but a decision taken by the landlord; and that brings the Tribunal back again to the decision of the Supreme Court in Williams and others v Aviva Ground Rent Investors GP Ltd [2023] UKSC 6 (“Aviva”). I am grateful for [Counsel for the landlord] Mr Morris’ very clear explanation of that decision and of the long line of cases that preceded and followed it, from which I learned a lot…

In terms of process, Judge Cooke agreed that the residential leases contemplated a two-stage decision-making process.

1. First the landlord, acting reasonably, must allocate charges between the Residential Service charge and the Building Service Charge;

2. Secondly it must determine a “fair proportion” for each leaseholder to pay.

The question however was the meaning of “acting reasonably”.

The authorities

Judge Cooke cited from a series of cases of high authority.

Associated Provincial Picture Houses

The story started, she said, with the decision in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, a decision fundamental to administrative law. Lord Greene MR explained at p.233-4 that the court could review decisions taken by a public authority in exercise of statutory powers on two bases:

“[1] The court is entitled to investigate the action of the local authority with a view to seeing whether they have taken into account matters which they ought not to take into account, or, conversely, have refused to take into account or neglected to take into account matters which they ought to take into account. [2] Once that question is answered in favour of the local authority, it may be still possible to say that, although the local authority have kept within the four corners of the matters which they ought to consider, they have nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it. In such a case, again, I think the court can interfere.”

The principles of reasonableness in administrative law have unsurprisingly come to be known as “Wednesbury reasonableness”.

The dispute between the leaseholders at Romney House and their landlord was an administrative law dispute, but there has been some osmosis, as we shall see.

Socimer International Bank

In Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, Rix LJ set out his conclusion on the exercise of a contractual discretion at paragraph 66:

“… a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria: as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time. In the latter class of case, the concept of reasonableness is intended to be entirely mutual and thus guided by objective criteria.”

Judge Cooke summarised:

Those two different senses of reasonableness have been distinguished by referring to the narrower or limited standard as “rationality” – which is something of a relief since much mischief is caused when the same word is used to describe two importantly different concepts.

Hayes v Willoughby

Next up is Lord Sumption JSC in the Supreme Court in Hayes v Willoughby [2013] UKSC17.

Lord Sumption JSC distinguished between rationality and reasonableness, describing the test of rationality as a matter of process which:

“applies a minimum objective standard to the relevant person’s mental processes”, importing “a requirement of good faith, a requirement that there should be some logical connection between the evidence and the ostensible reasons for the decision and (which will usually amount to the same thing) an absence of arbitrariness, of capriciousness or of reasoning so outrageous in its defiance of logic as to be perverse.”

Braganza

In Braganza v BP Shipping Ltd and another [2015] UKSC 17, a shipping company had decided not to pay a death in service benefit to the widow of a sailor because it considered that the sailor had taken his own life.

The contract under which the benefit may have been payable gave the shipping company an unqualified discretion in its decision-making.

The issue the Supreme Court had to decide was whether a lower standard is to be applied to contractual decision-making than is applied to administrative decisions; in other words, is it a lower standard than Wednesbury in both its limbs?

The answer was no: the decision-maker in that case had to follow a rational process, as well reaching an outcome that was rational in the Wednesbury sense (but did not have to be objectively reasonable in the sense of mutuality or even-handedness between two parties). The issue in Braganza was about process rather than about outcome; but Baroness Hales’ explanation was a useful reminder that rationality is about outcome as well as process albeit in the limited, Wednesbury sense.

Judge Cooke cited Baroness Hale:

“It is clear, however, that unless the court can imply a term that the outcome be objectively reasonable - for example, a reasonable price or a reasonable term - the court will only imply a term that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose. For my part, I would include both limbs of the Wednesbury formulation in the rationality test.”

Aviva

Finally, Judge Cooke touched on last year’s Supreme Court appeal in Williams and others v Aviva Investors Ground Rent GP Ltd [2023] UKSC 6, and said:

It is clear following the decision in Aviva that where a lease confers on a landlord an unqualified discretion then that provision is not void; the landlord is free to exercise it and the only test to be applied by the FTT is one of rationality.

The Upper Tribunal’s decision

In my judgment, said Judge Cooke, an express requirement to act “reasonably” in exercising a discretion conferred by a lease is likely to refer, and should be understood to refer to, objective reasonableness. Otherwise the word is redundant; otherwise the interpretation runs counter to what Lord Briggs said in Aviva.

Turning to the leases of Romney House, she concluded that if, when agreeing the terms of the leases:

… the parties really intended rationality rather than objective reasonableness they would have used the word “rational”, or “rationally”, rather than “reasonable” etc; if that was really what the parties meant then the landlord in drafting or approving the drafting of the lease would have taken great care to make sure that ambiguity was avoided.

The landlord’s actions therefore had to measured against the higher standard of objective reasonableness:

• If therefore the FTT intended to apply a Braganza rationality test, it was wrong.

• If on the other hand the FTT intended to apply a test of objective reasonableness, it reached the wrong outcome.

It is manifestly unfair, and therefore not objectively reasonable, for the residential leaseholders to pay the whole of the gym costs after 2020 when they no longer have exclusive use of the gym.

The outcome of the appeal

The appeal failed for the years 2013 - 2020: the leaseholders had admitted the service charge.

On the other hand, for the years following 2020 - and presumably therefore the £218,000 gym refurbishment costs - it succeeded. The FTT’s decision on those years was set aside.