Provisions in residential leases enabling landlords to determine each tenant’s service charge proportion may be void.
Windermere Marina Village Ltd v Wild [28 April 2014] concerned a lease of a flat in a development. The relevant service charge provision required the tenant to pay a fair proportion of the landlord’s expenses on communal services. The proportion was to be determined by the landlord’s surveyor, whose decision was to be final and binding. This Upper Tribunal decision highlights that in a residential lease context such wording, if challenged, is likely to be regarded as void by the courts.
Section 27A(6) of the Landlord and Tenant Act 1985 provides that a residential tenant’s agreement is void if it has the effect of providing for a determination of any question which could be the subject of an application to the Leasehold Valuation Tribunal for a determination whether service charge is payable and, if so, as to the amount.
This section empowers the tribunal to determine how much a tenant should pay, which involves consideration of the proportions of service charge contributions for each tenant. Its purpose is to render void agreements excluding the jurisdiction of the tribunal on questions which could otherwise be referred to it for determination. At risk are residential leases where the parties have not agreed the apportionment of liability at the start of the lease, but have left the apportionment to be determined by a third party at a later date. Also at risk is the situation where more than one method of apportioning charges is identified, but the choice of which method is to be adopted, either generally or in relation to particular categories of expenditure, is left to the landlord or a third party. Arrangements of that type are quite commonly encountered, often in local authority leases.
If the section applies (as happened in this case), the contractual mechanism empowering the landlord’s surveyor to select the method used and stating that the surveyor’s decision is final, is void and the tribunal is entitled to substitute its own apportionment.
Even though in this case the landlord had used an apportionment method in line with the guidance contained in the RICS Code of Practice on Residential Service Charges, this did not save the landlord. The 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 the surveyor’s binding decision.
This section does not apply in respect of matters that have already been agreed by tenants, for example, the lease provides that the apportionment of service charge expenditure between different parties is in accordance with a fixed proportion or percentage or an agreed formula (such as by reference to floor area, bed spaces or rateable value).
This decision is worrying for landlords of existing residential leases where the parties have left the question of apportionment to be determined by the landlord or a third party. Such determination provision may be held to be void if challenged and the tribunal can substitute its own apportionment.
The case also highlights the potential importance of a residential lease expressly providing for the tenant to contribute through the service charge to costs incurred by the landlord in connection with legal proceedings including proceedings before the Leasehold Valuation Tribunal or Upper Tribunal (Lands Chamber). However, even with such a provision, section 20C of the 1985 Act may still prevent such costs being recovered through the service charge.