Follow the terms of the lease terms when setting a service charge

Facts:

The Meadowings and Sheepfoote Hill in Yarm was built in the 1970s and comprises 138 residential properties, one of which was originally a caretaker's flat. There are 10 freehold houses and 128 flats located in several blocks. Of the flats, 31 are the subject of long leases granted under the "right to buy" provisions of the Housing Acts of 1980 and 1985. Out of those 31, Howe is the long leaseholder of 4 properties. The remaining 97 are let to social tenants on assured tenancies. There are also some communal grounds and facilities. 

This appeal concerns service charges in relation to properties on the estate and, more precisely, whether the terms of the Leases entitle Accent, the landlord which manages the estate, to levy an annual service charge which includes a fee for management services which is set by it on a standardised basis in respect of all its properties nationwide. Indeed, Accent adopted a tiered system for charges based on the type of property and level of service provided. The charges vary between £100 and £420 per annum. Howe's Properties all fall within "tier 3" and are charged at a rate of £300 per annum.

The First-tier Tribunal (FTT) ruled in favour of Accent and held that the fees were reasonable. The Upper Tribunal (UT) took a more nuanced approach.

Decision:

The issue relates to the pure interpretation of the leases. Lord Justice Snowden first looked at the definition of service charge found in Section 18(1) of the Landlord and Tenant Act 1985 (as amended). The Judge then analysed the meaning of clause 5(1) of the lease. He ruled that “I do not consider that the ordinary and natural meaning of the expressions "a proportionate part" or "a fair proportion" in clause 5(1) is necessarily limited to an "equal part" or an "equal proportion". Proportionality or fairness is often synonymous with equality, but that is not necessarily so”.

He disagreed with the UT’s conclusion that the costs of the types identified in clauses 5(2)(a), (b), (c) or (e) should be divided on an equal basis, as well as the costs identified in clause 5(2)(d). In his opinion, it would not be fair or proportionate in every situation to divide all costs falling within clause 5(2) equally across all properties. He noted “I do not see why it must be the case that in determining a "proportionate" or "fair" component of the total that a particular tenant should pay, the nature of the individual services or the identity of the individual properties benefitting from the provision of such services going to make up the whole, have necessarily to be disregarded”. 

While it might be easier and simpler to divide the costs of providing services equally among all properties and it might well be the default position, it can be departed from with good reasons. The collective burden sharing was displaced by clause 5(1). That clause allowed for the landlord to require the tenants of the flats affected by a defect to bear a higher proportion. 

Despite disagreeing with the UT Judge, Lord Justice Snowden noted that Accent was not allowed to determine the annual service charge on an entirely subjective basis. Instead, the division must be objectively justified due to the wording of clause 5(1). The clause also did not permit Accent to decide the proportion of the annual service charge payable by a particular tenant by reference to factors that are irrelevant to the provision of services to that tenant. The Court concluded that Accent was not permitted to charge the leaseholder for longer to make up for the limited amount it can lawfully charge assured tenants. 

Implication:

The judgement acknowledges the implication not only for the tenants on the estate but also for the landlord and the administration of its business due to the large number of properties it possesses. 

The Court of Appeal clarified that a landlord could charge different annual service charges as long as it is justified in doing so, but cannot simply charge more to make up for the limited amount which they can lawfully charge assured tenants.