Trowers' property litigation weekly update
In this week's bulletin we report on the outcome and practical impacts of Aviva Investors Ground Rent GP Ltd and another v Williams and others (2023). We also look at an update on landlord's certificates under the Building Safety Act 2022, and a new consultation regarding service charge transparency requirements. As usual, this is accompanied by our positive news and insights from around the firm.
To what extent is a landlord's right to re-apportion service charges in a lease limited by section 27A(6) of the Landlord and Tenant Act 1985?
The Supreme Court recently determined that landlords are permitted to make discretionary management decisions affecting service charges. This is provided the lease provisions do not attempt to make those decisions final and binding such as to deprive the leaseholder of a right to challenge them in the First Tier Tribunal (Property Chamber) (the FTT) on the basis that they are unreasonable.
Residential leaseholders in a mixed residential and commercial block in Southsea entered into standard form leases with their landlord. These provided for percentage allocations for the cost of insurance, building and estate services, reserving to the landlord the right to reapportion those percentage contributions. The operative wording in the leases was "as the Landlord may otherwise reasonably determine".
Section 27A of the Landlord and Tenant Act 1985 (the 1985 Act) allows for applications to be made to the FTT to determine the manner in which service charge payments are payable. Furthermore, Section 27A(6) renders void any lease terms which purport to fetter the FTT's discretion to determine service charge payments.
The landlord sought to reapportion the percentage contributions between leaseholders. The leaseholders initially applied to the FTT, arguing that terms in the leases which purported to grant the landlord its discretion to reapportion were void under Section 27A(6) of the 1985 Act. The FTT disagreed with the leaseholders and held that the landlord was entitled to vary the apportionment.
The Upper Tribunal (UT) allowed an appeal agreeing with the leaseholders. The UT determined that the provisions allowing variation of the apportionment were void under Section 27A(6) meaning that the percentages were fixed to those expressly stated in the leases and could only be changed with permission from the individual leaseholders.
The landlord took the case to the Court of Appeal which found that Section 27A(6) had the effect of transferring the authority to determine reapportionment from the landlord to the FTT.
On appeal, The Supreme Court, held that the role of the FTT was generally to review the decision of the landlord to reapportion the service charge in order to consider whether they had done so correctly under the terms of the lease and whether the costs were reasonable under Section 19. Section 27A(6) does not deprive the landlord of its right to make management decisions allowed under the lease.
Landlords may now look to reserve their right to exercise discretionary management decisions concerning service charge payments in lease terms, such as varying apportionments of service costs.
If landlords are looking to revise the apportionment of service charge percentage contributions between leaseholders (where the terms of the lease permit them to do so) they would be wise to fully document the basis for their decisions, to limit the scope of a challenge regarding those decisions.
Update on Landlord's Certificates under the Building Safety Act 2022
The Building Safety (Leaseholder Protections) (England) Regulations 2022 (the Regulations) prescribed the form and circumstances in which landlords are to provide information to tenants to determine whether the tenants will be required to contribute towards the costs of remedial works through a service charge payment. The certificates are annexed in a prescribed form to the Regulations.
On 9 February 2023 the Government brought into force the Building Safety (Leaseholder Protections) (England) (Amendment) Regulations 2023, which further modified the definition of Landlord Group in the Regulations. They underpin the provisions in section 116-125 of, and Schedule 8 to, the Building Safety Act 2022. The definition of Landlord Group as amended has:
- retained the exclusion for companies merely associated through having a common director; but
- now includes parent and sister companies.
This is an important amendment to the Regulations as it widens the definition of the Landlord Group for the purpose of landlord certificates and will increase the burden on landlords to provide information in respect of the wider corporate group of which they are part.
Landlords and building owners of higher-risk residential buildings are required to keep their building safe in accordance with the Building Safety Act 2022. The costs that are associated with this, may be passed to leaseholders through the service charge.
New consultation: service charge transparency requirements
On 2 February, The Department for Levelling Up, Housing and Communities issued a new consultation in respect of service charge transparency requirements for landlords. The proposal is to create a legal requirement whereby landlords must identify the element of the service charge that is spent on the ongoing costs of complying with the new building safety regime, in the service charge demands and annual service charge statements issued to leaseholders.
The consultation and call for evidence seek views on:
- the proposed transparency requirements associated with the ongoing costs of the new building safety regime
- the administrative and operational changes needed to implement the new transparency requirements
- the cost of and time taken to adjust existing systems or to implement new systems to meet the transparency requirements
- the impact of different commencement timings and sequencing
The consultation and call for evidence will last for 8 weeks until 31 March 2023.
Further information on the consultation, and how to respond to it, can be found here.
Insights from around the firm
- A critically endangered primate, nicknamed the dancing lemur because of the way it moves, has been bred for the first time in Europe