Q: The managing agents called a meeting of leaseholders on 24 August 2016 and in answer to a query re the proposal to reapportion the service charge on a building by building basis instead of site wide, answered that the freeholder would do this via Clause 5.3 in our lease and would enforce it by legal action if necessary. A number of leaseholders wish to resist this. Their question is what is the proper procedure to do so and what the legal implications to those who wish to do so?
FPRA Legal Adviser Nick Roberts replies:
You ask what the procedure would be for those leaseholders who wish to challenge the proposed ‘re-apportionment’ of the service charges by the landlord. Courts have unlimited jurisdiction to deal with any legal issues; tribunals have only th e powers that have been given to them by the relevant Acts of Parliament. I think here that the First-tier Tribunal (Property Chamber)(hereafter ‘F-tT’) would have sufficient powers to deal with this dispute, and would be the more appropriate forum.
I said in my previous letter that, if there was a dispute as to whether the landlord could re-apportion the service charges, he would need to apply to the F-tT for a ruling on the clause. This could come about in two ways. If he went ahead anyway, and the objectors refused to pay, he would have to try to force those who have flats in the old building to pay the new (higher) contributions; they might defend those claims by challenging the new service charges on the basis that they had not been reasonably incurred. Alternatively, as I mention in the letter, the landlord might instead take the initiative and apply under to the F-tT under s.27A of the Landlord and Tenant Act 1985 for a prospective ruling on whether his proposed re-apportioning of the service charges was fair and reasonable.
I think that the landlord would be setting up a very messy situation if he went ahead with the re-apportionment in the knowledge that it would be opposed, as if service charge demands went out to the owners of the newer units in the expectation that the older units would pay a higher proportion, and the latters’ challenge to the re-apportionment was successful, it would mean that he would need to go back to the owners of the newer units to collect the balance. There is a procedure whereby the landlord may ‘keep his foot in the door’ and do this, but it might cause difficulties in practice.
I think it would also be possible for the leaseholders who were likely to be adversely affected by the re-apportionment to take the initiative and themselves to apply to the F-tT for a prospective ruling under s.27A of the LTA 1985. There are clear authorities from the Upper Tribunal (Lands Chamber) (hereafter ‘UT’) (which hears appeals from the F-tT) on some of the issues that would arise in your case:
(1) most importantly, the UT has decided that the jurisdiction to decide whether a service charge has been ‘reasonably incurred’ does not merely extend to issues as to quantification of the global amount payable by the service-charge payers, but also to the apportionment of those amounts if the leases provide that the proportions are to be decided by the landlord or his surveyor or agent. The Upper Tribunal has, in particular, decided that a provision in a lease which provides for the surveyor etc. to have the final say on this is void (your clause 5.3 does not purport to do this), as it attempts to oust the jurisdiction of the F-tT to determine the reasonableness of service charges. (These points were decided by the UT in the case of Windermere Marina Village Ltd v Wild  UKUT 0163 (LC)).
(2) An earlier decision of the Lands Tribunal, the predecessor of the UT, had decided that the F-tT did not have jurisdiction to entertain an application that the apportionments were unreasonable where they had been clearly set out in the leases (this case was Schilling v Canary Riverside Development Properties Ltd LRX/26/2005). In certain respects this helps the case of the leaseholders in the old building, but it should be stressed that in that case the leases did not contain anything corresponding to your Clause 5.3.
Unfortunately neither of these cases definitively answers the problem that arises in your case, as the first point to be decided is the point of principle whether clause 5.3 allows the Landlord to re-apportion the service charge proportions at any time or whether there is some implication that he can do so only if circumstances change from what was originally foreseeable.
Of course, even if the F-tT were to hold that the landlord is entitled to re-apportion the service charges to take account of the higher repair costs involved with older buildings, the Windermere case would suggest that whatever re-apportionment the landlord decides upon would still be open to challenge.
I do not think it is likely to make any difference to the ultimate outcome of any dispute whether it is brought before the F-tT by the landlord, or by the objecting leaseholders. If the objecting leaseholders are minded to take the initiative on this, it might be better to wait and see what re-apportionment the landlord’s agents come up with, as the F-tT could then consider both the point of principle, and (if that went against the objectors) the fairness of the proposed re-apportionment. However, if the dispute came before the F-tT in this way, it is still possible that the tribunal itself might wish to decide what I have referred to as the point of principle as a ‘preliminary issue’, as it is a point of law which could be dealt with in a preliminary hearing, and, if it went against the landlord, it would not then be necessary for there to be any substantive hearing.
If the objectors were to apply to the F-tT for any form of ruling then obviously the Landlord would be the main party opposing the application. As the ruling would affect all of the leaseholders it is likely, however, that the F-tT would direct that notice of the application be given to everyone else, to allow them to apply to the F-tT to be joined as additional parties to the proceedings, so that they could attend or be represented in support of or in opposition to the landlord’s proposals. As I indicated in my previous letter, the owners of the newer units within the development would appear to have an interest in these proceedings which is contrary to the interests of those with units in the old building.
A dispute of this kind would have the potential to general substantial costs: legal costs, and also the costs incurred by having surveyors as expert witnesses. Normally in tribunal proceedings each party bears his or her own costs. This can result in a hollow victory for objectors, if the landlord can then simply charge his costs to the service charge account, so that all the leaseholders end up paying his costs anyway. To prevent the injustice of this, courts and tribunals have a power under s.20C of the Landlord and Tenant Act 1985 to direct that the landlord’s costs should not be chargeable to the service charge account.
The Upper Tribunal cases which I mention in this letter should be available on the website of the Upper Tribunal (Lands Chamber).
[Submitted September 2016]