Service Charge: Whether apportionment of service charges between tenants is solely a matter for a landlord (Criterion Buildings Ltd v Mckinsey and Company Inc. United Kingdom and another – 2021)

During a service charge dispute, the High Court considered a number of issues, notably whether the landlord’s apportionment of service charges had been made in accordance with the lease terms, whether the apportionment of service charges was solely a matter for the landlord and whether the landlord was entitled to maintain a sinking fund.

The background

In Criterion Buildings Ltd v Mckinsey and Company Inc. United Kingdom and another [2021], the tenant occupied commercial office premises at One Jermyn Street, London. The landlord, which held a headlease of the premises, brought proceedings in respect of unpaid service charges in the sum of approximately £2.3m plus interest.

The tenant disputed the claim, with four key points at issue:

1. Whether the service charge apportionment had been made by the landlord in accordance with the lease provisions. The tenant argued that the ‘due proportion’ of costs charged did not comply with the lease because it was not ‘fair’, the tenant believing it had paid too high a percentage;
2. Whether the landlord was entitled under the lease to make charges in respect of a sinking fund. The tenant argued that some payments charged by the landlord as contributions to a sinking fund were not contractually due under the lease;
3. Whether works undertaken to the building’s goods lift had been premature; and
4. Set off.

The decision

The High Court found in favour of the landlord and the claim succeeded.

Addressing the apportionment point, the court found that when apportioning service charge between tenants in a building, the decision as to what constitutes a ‘fair proportion’ is very much one for the landlord rather than the court. Whilst the landlord is nevertheless required to act rationally, he enjoys the commercial ability to determine apportionments.

It was for the defendant tenant to establish a case that it has been charged more than a ‘due proportion’ of the service costs, in which case the charges would not be payable. The landlord does not need to prove that it has charged the ‘due proportion’.

With regards to the sinking fund issue, the court found that the tenant had not shown that the landlord had made unreasonable decisions or made manifest error. Following review, the court considered that service charge contributions to sinking funds were to be spent during the following year(s).

Advice and action

With particular focus on the first two issues raised, this is a helpful decision for landlords. The ability to determine a ‘fair proportion’ is rightly a commercial decision, provided that the landlord acts with rationality, and it is for the tenant to demonstrate that it has not been charged a fair proportion in the event of dispute.

Where sinking fund charges are made, provided that these are made in accordance with lease provisions and in respect of costs to be incurred in future years, these were also found to be reasonable and payable.