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Can the owner of the largest flat in our building be charged a higher service charge?

Reader’s E-mail:

We have a block of 10 flats.
2 x 1 Bed paying 75.00/month
7 x 2 Bed paying 90.00/month
1 x 4 Bed (Penthouse approx twice area of other 2 Beds).
Penthouse owner refuses to pay 100.00/ month. Argues that all 10 should pay the same. We feel he is getting off lightly.Probably should be paying 135.00 min. Is that reasonable assumption ?

Reply from Service Charge Dispute Guide

1. The starting place in finding an answer to this question is the leases of all the residents involved. In order to reach a robust decision on how to handle this situation, whoever is responsible for calculating the apportionment of service chargeable costs will need to carefully consider the wording of each individual lease.

2. The legislation is largely silent on the issue of how service charges should be shared between leaseholders in a block of flat, although there is case law which we shall discuss later in this e-mail, and the way service charge should be apportioned is normally dependent on the contractual terms of the individual leases.

3. It is worth noting from the outset that on occasion the wording of the relevant leases involved is not the same, in which case the correct approach in law would be to apply a different apportionment methods to each individual leasehold property if the terms of the corresponding leases so required.

4. Before we start the substance of our response, we need to deal with one preliminary issue. In your e-mail you refer to fixed amount being charged per month. If the service charge is fixed in this manner by the terms of the lease then a different set of consideration apply to those of a variable service charge, which changes in relation to the actual amount of relevant expenditure.

5. For the purposes of our response we shall assume that your reference to fixed amounts is given to illustrate a point, and that in fact the leases all describe a regime where the service charge is variable, with on account payments collected during the course of the year, and a balancing payment made at the end of the year when the final costs are known.

6. The first reason why a careful consideration of all the leases is required at the outset is because it is not to be assumed that the leases allow the landlord, or an agent on their behalf, to choose how to apportion costs between the flats. This may be set with a method for sharing costs described in the individual leases.

7. There is no standard lease type in England and Wales, and indeed no standard apportionment method. Where the proportions paid are specified by leases in England and Wales, the most common methods for doing so are to compare floor sizes of the individual flats, the number of bedrooms, by reference to now defunct rateable value system, or simply by reference to a fixed percentage or proportion.

8. If any of the ten leases specify such a way of sharing the costs between the flats, then for those leases then the law says that this method must be the one which is used. By law in this instance we mean case law, and a good case to refer to on this point is Schilling v Canary Riverside Development Ltd LRX/26/2005.

9. In order for the landlord at the block of flats in question to have the discretion to devise an apportionment method of their choosing for the service then the lease must either:

i. Be silent on the issue.

Or

ii. Refer to a method of determining the individual apportionments, such as the leaseholder being required to pay a ‘due proportion’ or a ‘reasonable share’ which is open to interpretation as to how that method should be applied in practice.

10. A third formulation of wording, which is also fairly common, is that the lease places the responsibility for determining who pays what share on a third party, typically a surveyor. If this is what any of the leases state then this is the process that must be followed.

11. Assuming that the leases all provide the landlord with discretion to determine the apportionment method used, then the next thing to consider is whether there are any restrictions on the exercise of this discretion and indeed whether an individual leaseholder in the block of flats we are considering might have the legal right to challenge the decisions taken by the landlord.

12. Our approach in this task will be consider three decisions of the Lands Tribunal/Upper Tribunal of the Lands Chamber.

13. It is worth noting that these decisions set binding legal precedents for the County Court and the First Tier Tribunal (FTT) to follow when considering relevantly similar issues.

14. The first of our trio of cases is Re Rowner Estates Ltd LRX/3/2006 (LC).

i. In this case the Lands Tribunal considered what the correct approach might be in deciding whether the apportionment method selected by the landlord met the requirements of the leases concerned that the leaseholders paid a ‘fair proportion’ of the costs attributable to the building as a whole.

ii. The Re Rowner Estate case may be relevant because the wording used in the leases being considered (‘fair proportion’) is very common used, and similar in meaning to other frequently used terms, such as ‘reasonable proportion’, and most likely the term ‘due proportion’.

iii. The use of such a term in a lease is an important restriction on the exercise of a landlord’s discretion as to the type of apportionment method adopted: the apportionment must be fair or reasonable if that is what the lease says.

iv. What the Lands Tribunal decided is:

a) The fairness of the apportionment method is to determined by considered by the actual amount paid by each leaseholder in relation to the circumstances of the situation.

b) The situation may change over time, and what is fair at one point in time, may not be in another

v. This is decision is very important because it was decided that, as point in law, there is no presumption that one method is fair and another not. It can vary depending on factors such as the condition of the building or its repair requirements.

vi. The implication is that if ‘fairness’ is required by the leases in your block of flats then the key thing for the landlord to do is to demonstrate that the apportionment method selected is an appropriate one in relation to the building to which it relates.

15. The second case we feel it would be useful for you to consider is Shersby v Greenhurst Park Management Ltd [2009] UKUT 0241 (LC).

i. Two points arising from the decision are particularly pertinent to your enquiry:

a) Where a lease allows a landlord the discretion to choose an apportionment method, the law entitles the landlord to choose from a range of ‘reasonable options’. So long as the method adopted falls within that range then it does not matter that an individual leaseholder might prefer that the landlord adopted a different method.

b) It was in this case important that the landlord could demonstrate that they had considered the choice of method carefully and that they could demonstrate that the decision making process was itself reasonable. The consultation carried out with residents, whilst not a decisive point, was considered helpful in the landlord winning their case in this instance.

ii. Some aspects of the Shersby decision are specific to the wording of the leases involved, as they are in all Court and Tribunal cases, however there is a good case for arguing that this decision is persuasive as to there being a general point in law that where a landlord has some discretion to decide the precise details of the apportionment method there is no requirement for them to demonstrate that they have adopted the ‘best’ possible method, the requirement is the lessor one that they adopt a method which is reasonable and meets the requirements of the lease.

16. The third and final of our trio of cases is Windermere Marina Village v Wild [2014] UKUT 163 (LC).

i. Our reason for mentioning this case is that it is a key decision in respect of determining the rights of a leaseholder to apply to the FTT to challenge the apportionment method.

ii. Prior to this case many Courts and Tribunals took the view that if a lease gave the landlord, or a surveyor on their behalf (this was the situation in the Windermere Marina Village case), the discretion to decide what apportionment method to use then, as a point of law, neither the Tribunal or courts had the jurisdiction to interfere.

iii. The Upper Tribunal in the Windermere Marina Village case thought differently, and ruled that Section 27A of the Landlord and Tenant Act 1985 implied that whatever a lease says a Court or Tribunal can assess the reasonableness of an apportionment method in every case unless the lease specifically states what apportionment method is used.

iv. The relevance of this case to the situation described in your e-mail is that if the landlord does indeed have the discretion to introduce an apportionment method, because it is not specified in the individual leases, any of the leaseholders may apply for a determination as to the reasonableness of that apportionment method at the FTT.

17. Therefore, our advice is that in this situation before pressing on with a demand for payment whoever is managing this should check the leases, then consider the points raised above in respect of the case law we refer to if the leases do not specify an apportionment method, and once this has happened write a clear and detailed letter to the complainant setting out the facts and the reasons for the adoption of a particular apportionment method.

18. Often a good explanatory letter is all it takes to resolve these types of situations, and the absence of such correspondence can be held against a landlord if it comes to litigation.

19. Where a landlord has the discretion to select the apportionment method a good way to structure the explanatory letter would be to start with a discussion of the lease, then the case law, a consideration of other options such as equal apportionment (and why they were rejected), and finally an explanation of why a particular method has been chosen. This would also be a good approach were the matter to be considered by the FTT.

Click on the link to read more Reader’s Questions and Answers on Apportionment Issues

Click on the link to read more Reader’s Questions and Answers on Billing and Refunds