Aviva v Williams Landlords welcome Supreme Court clarity on service charge reapportionment

Landlords and managing agents of mixed-use commercial and residential properties can breathe a sigh of relief following the Supreme Court's unanimous decision in Aviva v Williams handed down on 8 February 2023.

The appeal concerned the validity of a service charge re-apportionment provision which can be found in numerous residential leases across the country and, as such, the potential commercial implications of this case for landlords were considerable.

The provision provided for the leaseholders to pay a fixed percentage of estate maintenance costs by way of a service charge but also allowed the landlord to revise that proportion, subject to such revision being reasonable. The leaseholders argued that the re-apportionment made by the landlord was unreasonable and, in any event, the effect of s 27A(6) of the Landlord Tenant Act 1985 was that the provision was void.

The Supreme Court affirmed the validity of the provision and found that the landlord's apportionment in this case was reasonable. We have provided detail below on the previous decisions in this case as well as the Supreme Court's reasoning.

Previous decisions

The Supreme Court overturned the different (but equally concerning) decisions of the Upper Tribunal (UT) and Court of Appeal (CoA), restoring the decision and reasoning of the First-Tier Tribunal (FTT):

• The FTT found that the provision was not voided by s27A(6) as the leaseholders could challenge the reasonableness of any re-apportionment in the FTT and, in this case, the re-apportionment by the landlord was reasonable.
• The UT conversely found that the provision was void and so the fixed percentages were locked in for the duration of the lease term unless and until the parties agreed otherwise.
• The CoA agreed with the UT that the provision was void, however this was only to the extent that it provided that the landlord could determine the re-apportionment. The effect of s27A(6) was to transfer this discretionary power from the landlord to the FTT. Therefore, the fixed percentage applied unless and until the landlord or leaseholder applied to FTT for re-apportionment.

Supreme Court's reasoning

Lord Briggs, giving judgment on behalf of the Court, stated that the UT's decision provided for a "commercially unattractive result" which was "a far cry from the bargain the parties had apparently intended when attempting to provide for variation of the proportion" ; and that the CoA's decision would open a "Pandora's box of disputes about allocation" and produce "the most bizarre and surely unintended results" .

The Supreme Court recognised that landlords of long residential leases (in this case 125 years) may understandably want to include service charge reapportionment provisions which allow them to reasonably revise the initial allocation for each leaseholder to reflect changes which may occur during the term (such as the removal or addition of further residential units in the building or estate). This was neither offensive to nor in contravention of s27A(6).

Furthermore, the suggestion by the Court of Appeal that s27A(6) transfers the landlord's discretionary management powers in respect of service charge to the FTT would: (i) significantly increase the ambit of the FTT's jurisdiction; (ii) create an overwhelming administrative burden on the FTT and; (iii) make it impossible for a landlord to safely incur relevant costs without first making an application to the FTT for clearance of the proposed service charges. As noted above, these were considered bizarre, unintended consequences.

Closing Comment

The Supreme Court's judgment is welcomed as a commercially sensible decision which reinforces the principle of freedom to contract and aligns with the purpose and natural reading of s. 27(A).
The decision has clarified the narrow ambit for dispute over re-apportionment and so landlords and managing agents can now be confident when incurring service charge costs that they will be able to re-apportion service charge in accordance with agreed lease provisions, subject only to a review by the FTT. The FTT will not be able to substitute in its own reapportionment exercise.

Author: Debbie Eliad, Junior Associate