Where a lease requires the landlord to act reasonably in apportioning service charges, it will only be deemed to be in breach if the landlord comes to a decision that no other reasonable landlord could have reached.
Background
In Graham Bradley and Michael Rhodes v Abacus Land 4 Ltd [2025], the residential leaseholders of a mixed-use building had paid, via the service charge, the landlord's costs associated with maintaining an onsite gym, which until 2013 was available for their exclusive use. Under their long leases, these costs were to be apportioned between the leaseholders in “such fair proportion as the Landlord acting reasonably shall from time to time determine.”
In 2013, the landlord granted a long lease of the gym to a third party to operate its personal training business. The gym was still available for use by the leaseholders. Under the gym lease, the landlord was responsible for the repair and maintenance of the gym, but the lease contained no provisions for the gym tenant to contribute to the service charge. The landlord continued to recover the entire costs of maintaining the gym from the leaseholders under the service charge, although the £5,000 per annum rent received from the gym tenant was credited to those costs.
In 2021 a dispute between the landlord and the gym tenant was settled on terms where the landlord agreed to refurbish the gym and charge the gym tenant no rent for 3 years. The costs of the proposed refurbishment were estimated at over £218,000 and the landlord served notice on the leaseholders of its intention to carry out major works to be paid for in full by the leaseholders through the service charge.
In 2022, the leaseholders sought to challenge the landlord's decision under s27A of the Landlord and Tenant Act 1985. They argued that it was not fair or reasonable for them to be responsible for the entirety of the costs from 2013 – 2020, given that the gym tenant also benefitted from that expenditure. They also argued that no costs from 2020 ought to be recoverable, as the gym had been closed during lockdown and, when the gym reopened, their access was severely reduced.
Reversing the decision of the FTT, the Upper Tribunal decided that the landlord's apportionment of the charges from 2020 onwards had been "manifestly unfair" and therefore objectively unreasonable. The landlord appealed.
Key issues for the Court of Appeal
- What was the correct test to apply to determine whether the landlord's decision was reasonable?
- Was the FTT right to conclude that the landlord acted reasonably in re-charging to the leaseholders 100% of the costs of repairing and maintaining the gym?
The Court of Appeal's Decision
In deciding which test to apply, the Court of Appeal reiterated the Supreme Court's decision in Aviva Ground Rent Investors GP Ltd v Williams [2023] and confirmed the FTT is "limited to deciding whether the landlord acted in breach of contract" and has no jurisdiction to decide itself what is reasonable. Further, in a service charge dispute brought under s27A, where a standard of reasonableness is imposed by the lease, the landlord will only have acted in breach of contract if the decision is one that no reasonable landlord could have reached.
While the Court of Appeal had sympathy with the leaseholders' objection and could see why the Upper Tribunal judge considered the apportionment unfair, that was not the question: "The question is whether the FTT could properly have taken the view that a reasonable landlord could charge the costs to the leaseholders".
The Court considered that putting in place the gym lease and applying the rent to defray some of the landlord's costs of maintaining the gym could be seen as reasonable and in the interests of leaseholders. Further, the Court could also see that it might not serve the leaseholders' interests if the landlord was not able to recover costs from them, since the landlord would be inclined to spend the very minimum it could on the gym.
Accordingly, the Court found the FTT was entitled to conclude that the landlord's decision to recharge all costs associated with the gym to the leaseholders was "not a decision of the type where it could be said that no reasonable landlord in a similar position could ever have made it" and reinstated the decision of the FTT.
This is a positive ruling for landlords who will only fall foul in these circumstances if they make a decision no other reasonable landlord would have made.
