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Challenging the validity of service charge apportionment

21st August, 2014

Aaron & Partners’ success at appeal in the Upper Tribunal (Lands Chamber)

Summary

Aaron & Partners Property Litigation team successfully represented the respondent tenants in an appeal at the Upper Tribunal (Lands Chamber) case of Windermere Marina Village Ltd v Wild and others [2014] UKUT 163 (LC).

The appeal held that section 27A (6) of the Landlord and Tenant Act 1985 renders void a contractual provision that provides for apportionment of a service charge by a third party whose decision is final and binding, the effect being that the tribunal (then the Leasehold Valuation Tribunal (“LVT”) but now the First Tier Tribunal (Property Chamber) (“the FTT”) ) was entitled to substitute its own apportionment of the service charge.

The Law

It is common in residential leases for service charge apportionments not to be dealt with by set fixed percentages, but to provide for a third party determination to take place which is final and binding.

Where there is a residential service charge dispute, either the landlord or the tenant can make an application to the FTT under section 27 (A) of the Act for a determination as to whether a service charge is payable and, if a service charge would be payable, for any costs incurred.

In certain circumstances, the FTT can determine:

1. Who must pay the service charge
2. The person who the service charge is paid to
3. When it is payable
4. The amount that is payable
5. The manner in which it is payable

The Facts

Windermere Marina Village (“the Marina”), situated at Bowness on Windermere, is a mixed development of moorings, flats, boathouse apartments, holiday cottages, houses, a marina with offices for boat sales, a boatyard, car parking and other facilities. The boathouse apartments were built in the 1960’s when the remainder of the Marina was largely undeveloped. They are all held on 99 year leases for terms commencing on 1st July 1962.

The long leases under which the tenants of dwellings occupied the Marina contained a covenant to pay a fair proportion of the service charge to be determined by the Marina’s surveyor whose determination was final and binding as follows:

To pay 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…

Up until 2007, the Marina had sought minimal expenses from the tenants which related to sewerage and drainage services.

The Marina had been the subject of significant growth and development since many of the leases had been entered into. This led to a re-assessment by the Marina of the apportionment of service charges and it instructed a surveyor (“the Landlord’s surveyor”) to advise on a fair apportionment scheme which was first implemented in 2008.

The tenants disputed the service charge apportionment in relation to ground maintenance and security. In 2011, the tenants of 25 dwellings at the Marina made an application to the LVT under s27 (A) of the Act seeking a determination of their liability to pay service charges for ground maintenance and security from 2008 to 2011. The Marina made a cross application for a determination of the tenants’ liability for service charges.

The LV T heard evidence from the landlord’s surveyor and a surveyor appointed as an expert witness on behalf of the tenants. The LVT decided that the tenants were liable for the service charge charges for ground maintenance and security from 2008 to 2011 but the LVT adjusted the apportionment of the service charge as it had been decided by the Landlord’s surveyor.

The Marina appealed the decision to the Upper Tribunal (Lands Chamber). One of the issues which was raised in the appeal was that the LVT had no jurisdiction to vary the Landlord surveyor’s apportionment of the service charge and that it was not entitled to substitute its own apportionments.

The Appeal

Mr Martin Rodger QC, Deputy President, decided in favour of the tenants, upholding the decision of the LVT on the following basis: s27(A)(6) of the Act makes void an agreement (other than a post-dispute arbitration agreement) between the landlord and tenant which provides for a determination of service charge in a particular manner or on particular evidence of any question which may be the subject of an application. Since apportionment is a question which can be the subject of an application, the Upper Tribunal held that the provision for third party determination by a surveyor was void and that it is within the jurisdiction of the LVT to decide what is a fair proportion of service charges.

The Implications

Since the provision for third party determination of service charge apportionment in the leases in this case is common, the appeal decision has wide reaching consequences for both landlords and tenants of residential leases.

Landlords can no longer be confident that their own surveyor’s decision will conclusively determine service charge apportionment as the decision is open to challenge by the tenants and may be subject to a variation by the FTT. If landlords require certainty, then leases must specify the proportion or percentage of service charge payable by the tenant to avoid applications for a determination. For existing leases with third party determination provisions, expert advice should be sought.

If you are a landlord or a tenant who requires advice in relation to service charges then please contact Richard Forrester or Elizabeth Corcoran on 01244 405 555 or by email [email protected] / [email protected] .

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