Service Charge: Whether a new method of apportionment of service charge was “just and equitable” (Hawk Investment Properties Ltd v Diana and Christopher Eames and others – 2023)

Where the landlord’s surveyor put forward a new method of apportionment of service charge, which saw sizeable increases for the respondent leaseholders, was it just and equitable such that the service charges were payable.

The background

In Hawk Investment Properties Ltd v Diana and Christopher Eames and others [2023], the subject development comprised commercial units and residential maisonettes held under long leases, each of which contained a method for the calculation and apportionment of service charge. The leases reserved a right for the landlord to change the apportionment where the existing method was ‘inoperable or manifestly inequitable’. Any new method of apportionment was to be a ‘just and equitable method to be conclusively determined by the Landlord’s Surveyor’.

An earlier calculation determined an apportionment of 9.74% to residential leaseholders, with commercial leaseholders responsible for the remaining 90.26%. The new method of apportionment meant that residential leaseholders would be responsible for 34%.

The residential leaseholders were advised of the new method of apportionment. The appellant freeholder made an application in the First-tier Tribunal for determination as to the reasonableness and payability of interim service charges for the year. Leaseholders had not challenged the amounts demanded, but the FTT considered whether the new method of apportionment was valid.

The FTT determined that the apportionment method contained in the lease was neither ‘inoperable, nor manifestly inequitable’. The new method of apportionment was, concluded the FTT, not just and equitable, and the freeholder appealed.

The decision

The Upper Tribunal dismissed the appeal, finding that the new method of apportionment proposed by the landlord’s surveyor was not just and equitable.

The Upper Tribunal considered a number of issues. In assessing whether the FTT had jurisdiction to determine whether the new method of apportionment was just and equitable, the appellant freeholder had argued that the FTT was restricted to assessing the rationality of the decision only. The UT concluded that, under the lease terms, the parties had intended any new apportionment to be just and equitable. If the FTT was only able to assess rationality, this contractually agreed provision would be made unnecessary. In order to assess the reasonableness and payability of the service charges as per the application, it was necessary to for the FTT to determine whether the new method of apportionment was just and equitable.

The FTT had considered relevant factors in reaching its decision, including participating in a site visit and gaining a deeper understanding of the property and each of its subject residential and commercial parts, the significant increase in service charges faced by the leaseholders, and the lack of weighting given in the method of apportionment to how different parts of the property were used: in particular, the difference between commercial and residential uses.

The UT found no evidence that the new apportionment would benefit the freeholder, nor that the current commercial tenants objected to the existing method such that there were rental voids. The FTT had not erred in its decision to find that the new apportionment method was not just and equitable, and the FTT’s decision in this regard was upheld. The interim service charges demanded on the basis of this method of apportionment were not payable.

Advice and action for landlords

Landlords and their agents are advised to be aware of the impact of this decision, and to ensure that new methods of service charge apportionment are devised and implemented in line with provisions contained in the lease.

In this instance, there were no discernible benefits for the freeholder in changing the apportionment method, the commercial tenants had not raised concerns such that the freeholder was disadvantaged through a lack of occupiers, yet the residential leaseholders stood to incur significantly increased charges. In order to reach a decision in the application before it, the FTT needed to consider whether the apportionment method was just and equitable.