The Court of Appeal handed down judgment on 18 January 2021 in Aviva v Williams. The case concerned a discrete but important point, namely whether the Upper Tribunal had incorrectly determined that s.27A(6) Landlord and Tenant Act 1985 rendered void a provision within a residential long lease which entitled the landlord to vary the initial fixed service charge proportions payable by leaseholders. The outcome has significant implications for many developments up and down the country that have leases drafted in a similar form.
The leases provided for the apportionment of service charges using fixed percentages, with a residual mechanism to alter each of those percentages by the use of the words “or such part as the Landlord may otherwise reasonably determine”.
The respondent leaseholders had argued (and the Upper Tribunal had held on appeal) that the effect of s.27A(6) was that all of the words “or such part as the Landlord may otherwise reasonably determine” were to be deleted entirely so that only the fixed percentages in the leases remained and such that the tribunal had no jurisdiction to determine the apportionment (because it was a matter that had been agreed as per s.27A(4)). The appellant argued that the lease should be read so as to substitute the tribunal in place of the landlord such that the tribunal had jurisdiction to consider the apportionment.
The Court of Appeal allowed the appeal. Section 27A(6) was concerned with no more than removing the landlord’s role (or that of another third party) from the decision-making process in relation to the reapportionment. To delete the provision from the lease entirely would “leave the contract emasculated and, in practical terms, unworkable”. There was no objection in principle to a degree of flexibility in the apportionment of a service charge, provided the decision was taken by the Tribunal. The lease was to be read so that the function of redetermining the apportionment was transferred from the landlord to the tribunal.
The court further held that in leases with such provisions, both landlords and leaseholders were entitled to refer the question of what a different reasonable percentage should be to the Tribunal (if the same cannot be agreed), even where the contractual machinery as drafted only provides for the landlord to have the option to re-apportion.
Whilst it has been clear for a number of years now that any apportionment of service charges by a landlord will not bind leaseholders (unless formally agreed), and that only the Tribunal could reach a determination in a binding manner, the effect of the Upper Tribunal’s decision in this case had been to wholly delete the ability to vary initial fixed percentages in leases of this type.
The Court of Appeal’s decision in this case provides reassurance for landlords and managers who have leases drafted with similar provisions that the ability to re-apportion service charges remains in tact. That flexibility can often be invaluable, particularly given a lease variation application (under ss35-38 Landlord and Tenant Act 1987) is not always possible e.g. where percentages already add up to 100%.
Significant care should always be taken when seeking to re-apportion, particularly where leases are drafted with a ‘trigger mechanism’ that must be invoked prior to re-apportioning as the decision to exercise the ‘trigger’ also seemingly vests in the Tribunal in light of this decision. A formal determination by the Tribunal as to whether, and if so how, to re-apportion is likely to be the most secure route, albeit the best way of / time for doing this (in the absence of a declaratory jurisdiction in the Tribunal) is perhaps yet to be worked out given in most instances any re-apportionment determination by the Tribunal where there is an initial fixed percentage will not be retrospective.