Matthew Cotton, Solicitor and Dispute Resolution specialist at Hedges
A recent landmark ruling from the Supreme Court in the case of ‘Aviva Investors Ground Rent GP Ltd v Williams & others’, has sided with landlords when it comes to changes in service charges for leaseholders and tenants. Now, where permitted by a lease, landlords can reapportion service charges in a “fair and reasonable” way, clarifying part of The Landlord and Tenant Act 1985 which had been disputed.
In this specific case, Aviva owns the freehold of a block of flats. Under the terms of the leases for these properties, the company is required to maintain the structure and common parts. In return, the flat owners are required to pay a service charge. As is the case with many lease agreements. Each lease sets out the proportion of service charges which each leaseholder is liable to pay, expressed as a percentage or other proportion “as the landlord may otherwise reasonably determine”.
When Aviva reapportioned the leaseholders’ service charges by varying the set percentages, a group of leaseholders filed an application at the First-Tier Tribunal (FTT) arguing that Aviva was not able to exercise the clause due to section 27A(6) of the Landlord and Tenant Act 1985.
The Tribunal rejected the claim, which the tenants then appealed, and the Upper Tribunal overturned the FTT’s decision. This then pushed the case to the Court of Appeal before finally being passed to the Supreme Court, which overruled the previous decisions, and several previous cases which had been decided on the same point, siding with the landlords. This means that, in the eyes of the Supreme Court, landlords have the right to reapportion service charges, and to decide what the new percentage or proportion should be, as long as the reapportionment is fair and reasonable.
What this clarification to the Act means for residential landlords?
This right to distribute service charges to a “fair and reasonable” proportion may also extend to residents’ management companies, right-to-manage companies, or property managers depending upon the wording of the lease.
The FTT maintains power to determine whether the landlord (or other party, as determined by the lease) is exercising that power in a manner that is contractually valid.
Changes we may see for landlords following this ruling
Landlords have the flexibility to determine what a fair and reasonable proportion looks like, or to divide up service charges, without any concern that the service charge will be seen as invalid.
However, this can still be disputed if leaseholders consider that the landlord has not acted in accordance with the terms of the lease, or the new service charge proportions are not in fact fair and reasonable.
This clarification also means that owners of leasehold properties may now be more willing to actively consider purchase of their freehold rather than face ever-increasing service charges.
Other parts of the Act which could change
Amongst other things, future legislation changes to The Landlord and Tenant Act 1985, promise to:
- Reform and simplify the process for extending a lease or purchasing the freehold
- Abolish marriage value, otherwise known as synergistic value, which is the increase in the value of the property following the completion of the lease extension or purchasing the freehold of a residential property held on a ground lease
- Give leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”
- Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue, “subject to existing safeguards and compensation”
- Enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term
This landmark case will come as a relief to many landlords who have been given assurance and flexibility when it comes to service charges for their properties. It means landlords retain control and has long-reaching implications for both residential landlords and their tenants. However, the mechanism for calculating the fairness of service charges has now changed, and landlords must work to ensure they comply with this, otherwise they could see decisions go against them should their tenants raise a dispute.
It’s always a good idea to seek legal advice when implementing changes to charges for tenants – that way landlords can ensure that any changes are deemed fair and reasonable, and can help to avoid any potential disputes.