Graham Bradley & Anor v Abacus Land 4 Limited

This is an appeal from a decision of the First-tier Tribunal (“the FTT”) in its jurisdiction under section 27A of the Landlord and Tenant Act 1985 to determine whether variable service charges are payable. The appellant tenants, Mr Graham Bradley and Mr Michael Rhodes, hold the long leases of two of the 168 flats in Romney House, 47 Marsham Street, London, where there are also four commercial units and a gym. They applied to the FTT for a determination that service charges paid, or to be paid, by them in respect of the upkeep of the gym were not payable, on the basis that the decision made by the respondent landlord, Abacus Land 4 Limited, to demand those charges of them had been taken in breach of the terms of the lease. The FTT found that the charges were payable and the appellants have permission from this Tribunal to appeal.

The appellants were represented by Mr James Sandham, and the respondent by Mr Tom Morris. I am grateful to both for their helpful arguments.

At the start of the appeal hearing there was some discussion about how many appellants there are. In the FTT the two appellants were the only applicants. 51 leaseholders joined with them in respect of their application under section 20C of the Landlord and Tenant Act 1985, with a view to preventing the respondent from recovering its litigation costs from the leaseholders as part of the service charge, and they were listed in the appellants’ application from as “other people who may be significantly affected by the application.” By the time of the FTT hearing that number had grown to 61. But there remained only two applicants. There can therefore be only two appellants, although I accept that the 61 other leaseholders are party to any application under section 20C in the appeal.

I was not addressed about the physical layout of the property and it is not relevant to the appeal. Suffice it to say that Romney House was constructed in the 1930s as an office block and converted to mixed use by 2006; thereafter it comprised 168 flats, four commercial units and a gym. Long leases of the residential flats were granted. The commercial units are all let. The gym was not initially let; on 23 October 2013 the then Freeholder granted a 999-year lease of the gym to a wholly owned subsidiary, Nash City Limited. Shortly thereafter, the gym lease was assigned to Mr Adam White, who remains the lessee of the gym.

The respondent purchased the freehold of Romney House in 2017.

The appellants’ leases are in materially identical form to the rest of the flat leases. Unsurprisingly they contain provision for the tenants to pay a service charge.

Clause 1(a) of the lease sets out a number of definitions, including the “Estate” (being the landlord’s freehold), the “Building” (at that stage yet to be built) and the “Common parts.” It then defined the service charges payable; because of the mixed composition of the building the lease distinguished costs to be paid (“in whole or in part”) by both commercial and residential lessees and costs payable by the residential lessees (“in whole or in part”):

The lease then imposes covenants on the leaseholder, set out in the Fourth Schedule, of which the relevant ones are as follows:

So the lease prescribes a designation process: the landlord is to designate its expenditure as Residential Service Charge Items or Building Service Charge Items (or Parking charges, with which we are not concerned here). The former are payable in whole or in part by the residential lessees, and the latter in whole or in part by both the residential and commercial lessees. The landlord’s obligations are set out in the Sixth Schedule and include the usual obligations to maintain the building, facilities and common parts.

I pause to note that the repeated use of the phrase “in whole or in part” is odd; but it is clear that a charge payable partly by the residential lessees and partly by the commercial lessees is a Building Service Charge Item, because otherwise the definition of Building Service Charge Item would be superfluous since everything would fall within the definition of a Residential Service Charge Item, being payable “in part” by the residential lessees. That prompts the question: if a charge is designated as a Residential Service Charge Item because the landlord (“acting reasonably”) has decided it is payable in part by the residential lessees, who is supposed to pay the rest? That is a question to which I shall return later.

The appellants’ leases also grant to them:

That “right” is not a very solid one because it is only a right to use such facilities as the landlord may choose to provide. Those facilities have, since 2006, included the use of the gym. From 2006 to 2010 it was open to residents round the clock; in 2010 the landlord and residents agreed that it would be open from 6:00 a.m. to 10:00 p.m. each day, and so it continued until the 2020 lockdown when the gym was closed. However, since 2013 that use has not been exclusive to the leaseholders; the gym has been let to Mr White and his lease entitles him to make the gym available to his own clients provided that the residents of Romney House are not prevented from using it.

The gym lease grants the lessee:

The “Occupiers” there are the residential leaseholders of the building.

The gym lease makes no provision for the gym tenant to pay a service charge. It reserves a rent, with limited scope to increase the rent when reviewed; it requires the landlord to provide heat, lighting, water and electricity for the gym at its own cost, to provide and maintain the gym equipment and replace it when required, and to pay “rates and property outgoings” in respect of the gym as well as “service charges and utility costs for services and utilities consumed” by the gym. On any reckoning the gym tenant has a remarkably good deal. It might well be described as a gift, despite the rent.

After the 2020 lockdown the residents’ access to the gym was considerably reduced by the gym tenant; Mr Rhodes’ evidence was that the residents were allowed access only between 7:00 and 10:00 a.m. and 5:00 and 8:00 p.m. (and not at all on Sundays or bank holidays).

Until 2013 the residential leaseholders were the only people using the gym, and its maintenance and equipment were paid for through their service charge. From 2013 the gym tenant was able to take fees from his own clients, yet was paying no service charge. In 2014 the then freeholder agreed with the residential tenants that the £5,000 per annum rent paid by the gym tenant would be put towards the cost of maintaining the gym, with a corresponding reduction in the amount charged to the tenants by way of service charge in respect of the maintenance of the gym.

In 2019 the gym tenant alleged that the respondent was in breach of its repair and maintenance obligations as landlord under the gym lease. That led to a dispute lasting a year or more. It was settled in September 2021; the respondent agreed to refurbish the gym, and also to take no rent from the gym tenant for three years. Its contribution of the gym rent to the service charge therefore also stopped.

In November 2021 the respondent sent to all the residential leaseholders a notice of its intention to carry out major works to the gym, to be paid for by their service charge. That notice was the first step in the process of consultation required by section 20 of the Landlord and Tenant Act 1985 when a programme of works is going to cost each leaseholder more than £250. The notice stated that the work was being done in order to comply with the landlord’s responsibilities both under the gym lease and under the residential leases. A notice of estimates, served later in the process, indicated that the work would cost over £218,000.

In December 2022 the appellants made an application to the FTT for a determination of in relation to the service charges demanded relating to the gym in the years 2013 to 2021, and to be demanded in 2022 and 2023. The application form stated:

The form went on to say:

I will set out the legal background to the application below, but for now it is important to recognise that this was not a claim based on section 19 of the Landlord and Tenant Act 1985; the appellants were not saying that the costs relating to the gym had not been reasonably incurred or that work was not of a proper standard, nor were they saying that interim charges were not at a reasonable level. This was a challenge to the decisions taken by the landlord pursuant to provisions in the lease, set out above, which require him to decide which charges are payable in whole or in part by the residential leaseholders.

The application form did not state the amount of the service charges in issue; I am told that that was because the appellants were not able to work out what they and the other leaseholders had been paying for the gym until disclosure was given by the respondent in the FTT proceedings. The respondent disclosed its accounts and budget, and from that the appellants were able to construct a helpful spreadsheet, appended to their statement of case filed in March 2023.

The appellants were not represented in the FTT. Their statement of case set out the history of the gym and its availability to the residents and explained the provisions of the lease (which I shall come on to shortly). It sought relief as follows:

The spreadsheet that accompanied the appellants’ statement of case in the FTT indicates that the appellants were arguing:

Thus the “gym costs” comprise both the direct costs of the gym, which the respondent’s accounts showed had been included in the residential service charge, and also what the appellants regarded as the gym’s share of the costs of maintaining the building (insurance, management, cleaning repair etc). In light of the absence of a service charge in the gym lease, the appellants took the view that the landlord should bear the gym costs itself. The spreadsheet alleged, among other things, that:

Obviously, the individual appellants’ challenge was to their share of those headline figures, each being one of 168 residential leaseholders.

Section 27A of the Landlord and Tenant Act 1985 enables the FTT to decide whether service charges are payable by leaseholders:

It is sometimes said that the jurisdiction is to determine the “reasonableness and payability” of service charges, but that is inaccurate as well as inelegant. The jurisdiction is to decide whether a service charge is payable. It might not be payable because, for example, it falls foul of section 19 of the 1985 Act because the cost was not reasonably incurred, or the work or services provided were not of a reasonable standard. Another reason why a service charge might not be payable is because it is not one that the landlord is entitled by the lease to charge, and that is what is said in these proceedings.

As we have seen above, the appellants say that the respondent was not entitled by the lease to designate the gym costs as payable in full by the residential leaseholders. So they are challenging, not the level of a cost or the standard of work done, but a decision taken by the landlord; and that brings the Tribunal back again to the decision of the Supreme Court in Williams and others v Aviva Ground Rent Investors GP Ltd [2023] UKSC 6 (“Aviva”). I am grateful for Mr Morris’ very clear explanation of that decision and of the long line of cases that preceded and followed it, from which I learned a lot and with which, save where I indicate otherwise, Mr Sandham agreed.

The story starts with the decision in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, a decision fundamental to administrative law. Lord Greene MR explained at p.233-4 that the court could review decisions taken by a public authority in exercise of statutory powers on two bases:

So the court in reviewing administrative decisions is looking both at process – has the decision-maker taken the right things into account? – and also, in a very limited sense, into outcome in the very narrow sense of what we have come to call Wednesbury unreasonableness. In this context the court cannot substitute its own view of reasonableness; it can intervene only where the decision is “so absurd that no sensible person could ever dream that it lay within the powers of the authority” (Lord Greene MR at p.229).

Turning now from administrative discretion to contractual discretion, Mr Morris explained that the state of the law prior to the Supreme Court’s decision in Braganza was summarised by Rix LJ in Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116 at paragraphs 60 to 66. I need not go through all the cases to which he referred; his conclusion is at paragraph 66:

So a distinction is made between “reasonable” in the very narrow Wednesbury sense and objective reasonableness which is an “entirely mutual” concept – in other words one which takes into account the interests of both parties. It may not be a synonym with “fair”, but an important difference can be captured by saying that an unfair decision might be Wednesbury-reasonable but will not be objectively reasonable. The distinction was illustrated in Paragon Finance plc v Nash and another [2001] EWCA Civ 1466 where a mortgagee had a discretion to vary an interest rate; the question was whether there was an implied term in the contract that the discretion would be exercised reasonably. The answer was yes, Dyson LJ explained, but in a limited, Wednesbury sense, but not in a sense that required the lender to consider the interests and point of view of the borrower. This was not objective, mutual reasonableness:

Those two different senses of reasonableness have been distinguished by referring to the narrower or limited standard as “rationality” – which is something of a relief since much mischief is caused when the same word is used to describe two importantly different concepts. Lord Sumption explained in Hayes v Willoughby [2013] UKSC 17 at paragraph 14:

In Braganza v BP Shipping Ltd and another [2015] UKSC 17 the Supreme Court had to determine the standard of review to be applied to a decision by a shipping company not to pay a death in service benefit to the widow of a sailor, on the grounds that he had committed suicide. That discretion was unqualified in the contract. Baroness Hale set out the issue as follows:

Baroness Hale referred with approval to the conclusion set out by Rix LJ at paragraph 66 of Socimer, quoted above. She then quoted from the decision of Lord Sumption JSC in Hayes v Willoughby [2013] UKSC17, where he distinguished between rationality and reasonableness. In paragraph 14, of which I quoted part above, he went on to describe the test of rationality as a matter of process which

Baroness Hale observed that that characterisation of rationality encompasses only one aspect of the test described by Lord Greene MR in Wednesbury, which examines the decision-maker’s process but also assess whether the outcome of that process is one so absurd that no reasonable decision-maker could have reached it.

The issue the Supreme Court had to decide in Braganza was whether a lower standard is to be applied to contractual decision-making than is applied to administrative decisions; in other words, is it a lower standard than Wednesbury in both its limbs? The answer was no: the decision-maker in that case had to follow a rational process, as well reaching an outcome that was rational in the Wednesbury sense (but did not have to be objectively reasonable in the sense of mutuality or even-handedness between two parties). The issue in Braganza was about process rather than about outcome; but Baroness Hales’ explanation was a useful reminder that rationality is about outcome as well as process albeit in the limited, Wednesbury sense. Baroness Hale concluded at paragraph 30:

Lord Hodge at paragraph 52 and Lord Neuberger at paragraph 103 agreed with that approach.

In Hawk Investment Properties Ltd v Eames and others [2023] UKUT 168 (LC) I referred to Lord Sumption’s analysis and concluded that “rationality is therefore focused on process, while reasonableness is a higher standard focused on the outcome of that process.” That does not quite give the whole picture: as Baroness Hale’s analysis in Braganza demonstrates, there is a limited element of outcome in the analysis of rationality, although the major focus is on process.

But that is to jump ahead. The next milestone on the journey is the Supreme Court’s decision in Aviva. The leaseholders in that case were required by their leases to pay:

Earlier decisions about the apportionment of service charges had led to a position where any provision in a lease for the landlord to make a final determination about the apportionment of service charges was void and that instead the apportionment fell to be made by the FTT in its jurisdiction under section 27A of the Landlord and Tenant Act 1985. The Supreme Court in Aviva put an end to that approach. Lord Briggs said at paragraph 15:

It is clear following the decision in Aviva that where a lease confers on a landlord an unqualified discretion then that provision is not void; the landlord is free to exercise it and the only test to be applied by the FTT is one of rationality.

However, the lease in Aviva expressly stated that the landlord’s discretion was to be exercised “reasonably” in determining the service charge proportion. Again the provision conferring the discretion is not, as was thought before Aviva, void; but what is the effect of that express term qualifying the discretion? That is the issue in the present case although it was not the focus of Aviva and therefore the issue was not clearly addressed. Lord Briggs said this at paragraph 33:

Mr Morris argued that the word “reasonably” in the lease in Aviva meant “rationally”; in his skeleton argument he explained:

This is where I part company with Mr Morris’ analysis of the law. Mr Sandham also disagreed. I do not accept that when he used the word “reasonable” in paragraph 33 Lord Briggs meant “rational”, as I said in Hawk Investment. In that case the landlord argued that where the lease required the landlord’s surveyor to produce a “just and equitable” apportionment of the charges the FTT was nevertheless able to conduct only a rationality review. The argument was subtly different from that in the present case; it was in effect that the express contractual term had to be ignored so far as the FTT’s review was concerned and that only a rationality review was permissible whatever the contract said. That required consideration of what Lord Briggs said in paragraph 33 in Braganza when he decided that the landlord had acted reasonably. I said this:

I stand by that view. The contract in Aviva used the word “reasonably” and if Lord Briggs took the view that that meant “rationally” he would have said so.

I do not agree that comparisons with the law relating to fully-qualified covenants relating to consent (not to assign the lease for example, with the landlord’s consent, such consent not to be unreasonably withheld) have any relevance here; the meaning of the word “reasonable” in that context has been analysed by the courts in the light of that specific factual context which is very different from the context of contractual discretions relating to service charges and their apportionment.

In my judgment if the parties to the lease in the present appeal, or in any lease where a discretion is required to be exercised “reasonably”, meant “rationally”, they would have said so, or would simply have left the discretion unqualified. Their use of the word “reasonably” meant something; it did not simply duplicate the term that would otherwise have been implied. Moreover, it is unlikely that leaseholders would intend the landlord to act without consideration of the outcome for them, in the absence of special circumstances that would make them content with that approach. And in ordinary language the word “reasonable” does not mean Braganza rationality, which is very much a lawyers’ construct; I do not believe that in ordinary language a decision taken by a landlord without objective consideration of the fairness of the outcome to the tenants would be described as “reasonable”. We say: “be reasonable!” when people are being unfair. Therefore if the parties really intended rationality rather than objective reasonableness they would have used the word “rational”, or “rationally”, rather than “reasonable” etc; if that was really what the parties meant then the landlord in drafting or approving the drafting of the lease would have taken great care to make sure that ambiguity was avoided.

Therefore in my judgment an express requirement in a lease or to act “reasonably” in exercising a discretion refers to objective reasonableness. By contrast where a landlord’s discretion is unqualified then the test to be applied is one of rationality only.

I stress that I am considering only an express requirement to exercise a discretion reasonably, and my decision is purely about the meaning of the word “reasonable” in that context – which has not been the subject of a determination above FTT-level since the Supreme Court’s decision in Aviva. The law relating to fully-qualified covenants relating to consent has been the subject of many years of analysis by the courts and what I have decided is not relevant to that context.

The FTT conducted a hearing on 7 June 2023 at which the applicants were represented by Mr Rhodes and the respondent by Mr Morris. I am told that witnesses were cross-examined (Mr Rhodes had made a witness statement, and the applicants also called Mr Calum Watson), but there is no mention of any evidence in the FTT’s decision. The FTT set out the facts, rather more briefly than I have done but in similar terms. One difference was that the FTT said that the hours when the gym was available to the residents was reduced in 2013; at the hearing of the appeal the parties agreed that that was a misunderstanding and that although there was an agreed reduction in 2010 there was no further change in until 2020.

The FTT summarised the applicants’ case as follows:

Next the FTT found that it had no jurisdiction to make a determination about the charges from 2013 to 2020, because it found that in paying without demur from 2013 to 2020 the applicants had agreed the service charges, referring to Cain v Islington [2015] UKUT 542 (LC) (which I explain below).

As to the charges beyond 2020, and indeed for the earlier years in case it was wrong in concluding that it lacked jurisdiction, the FTT considered the terms of paragraph 10 of Schedule 4 to the lease. It quoted from Woodfall’s Law of Landlord and Tenant paragraph 7.193, which is about whether costs, in respect of which a service charge is demanded, were reasonably incurred. At its paragraph 28 it said:

The FTT went on to say that the applicants had produced no quotations to show that the amounts charged were unreasonable.

The FTT made a finding, which is not appealed, that the consultation process for the major works was carried out correctly.

The FTT found at its paragraph 37 that the litigation costs of the respondent, allocated to the residential service charge, were payable by the residential tenants.

The applicants asked for an order under section 20C of the Landlord and Tenant Act 1985, for their own benefit and also for the benefit of 61 other leaseholders who they said supported their application, to prevent the respondent from recovering the costs of the present litigation from the service charge; the FTT declined to make that order.

The appellants appeal on a number of grounds. I take them out of order for simplicity.

First, at ground 5, the applicants appeal the finding that the litigation costs incurred by the respondent in its dispute with the gym tenant and were payable as a service charge by the residential tenants. That ground is conceded and the respondent confirmed at the appeal hearing that it would refund the relevant payments made by all the residential leaseholders, not just the appellants.

Second, at ground 6, the appellants appealed the finding that the FTT had no jurisdiction so far as the years 2013 to 2020 were concerned.

Grounds 1 to 4 then go to the FTT’s decision at its paragraph 28. It is said that the FTT (1) misinterpreted the provisions of the lease, (2) failed to apply the correct test following the Supreme Court’s decision in Aviva, and (3) and (4) failed to have regard to relevant considerations when considering the reasonableness of the respondent’s apportionment. By ground (4) it is said that the FTT failed to apply section 19 of the Landlord and Tenant Act 1985.

In what follows I therefore look first at ground 6 and then at the remaining grounds which go to the substance of the FTT’s decision at its paragraph 28.

For these eight years the residential lessees paid the gym costs, without protest once the arrangement about the rent, recorded in paragraph 17, had been put in place. The respondent relies upon section 27A(4) of the 1985 Act, which states:

Sub-section (5) then says:

In Cain v Islington the Tribunal (HHJ Nigel Gerald) held that that proviso referred only to single payments, and that if more than one payment had been made then from that alone it could be inferred that the leaseholders had agreed the charge in question.

In G & A Gorrara Ltd and others v Kenilworth Court Block E RTM Co Ltd [2024] UKUT 379 (LC), published since the FTT’s decision, I expressed respectful disagreement with that decision; section 27A(5) is relevant as much to repeated payments as to single payments; payment alone is not enough to indicate agreement. At paragraph 44 of that decision I said:

With that in mind I turn to the FTT’s decision and the appeal on this point.

The FTT said this:

There is some ambiguity there about the scope of that finding, but I take it to be a finding in respect of the years 2013 to 2020 only. Some of the leaseholders (including the two appellants), withheld part of their service charge from 2021 onwards in protest at the requirement to pay the gym costs, and in saying “at least insofar as it relates to charges levied up to 2020” it seems that the FTT accepted that things changed after 2020.

Even so, the FTT’s finding that the payments had been made “without demur” during that period is not right; it is not in dispute that the leaseholders did “demur” soon after the gym lease was granted and that as a result the respondent agreed to contribute to the service charge the £5,000 per annum that the gym tenant paid by way of rent. So the matter had been discussed and the residents’ concerns made known.

The appellants in their grounds of appeal said that nevertheless they could not be taken to have agreed the gym charges for that period because they did not know how much they were paying – and indeed did not know until after the commencement of the FTT proceedings, when the respondent disclosed its service charge accounts. Mr Sandham also argued that the FTT’s finding was not founded on the evidence, because the FTT did not analyse what the two appellants themselves had done.

Mr Morris in response argued that this ground of appeal is a challenge to the FTT’s findings of fact, and that therefore there is only very limited scope for an appeal. I do not think it is as simple as that; there was a finding of fact that the appellants had “paid without demur”, but the challenge is to the inference the FTT drew from that.

However, in my judgment this ground of appeal fails. From 2013 to 2020 the two appellants paid their service charge, which they knew included their share of the whole of the gym costs less the respondent’s contribution of £5,000 per annum. That contribution was agreed following discussion with the leaseholders. It was open to the appellants and to any of the leaseholders to challenge the service charge, informally or by issuing proceedings, at any time during those eight years and they did not do so. They did not need to know the amount they were paying for the gym in order to make that challenge and indeed (as Mr Morris pointed out) the present proceedings were commenced while the appellants still did not have the requisite figures; their application form in the FTT simply said that it was “not fair and reasonable for the Freeholder to recover 100% of the gym costs in aggregate from the residential leaseholders.”

That was not what the respondent was doing before 2021; it was contributing the £5,000 rent and thereby reducing what the leaseholders were paying. That was an arrangement with which the residential leaseholders agreed and it was not challenged until these proceedings were commenced. It could have been challenged earlier, without the need for actual figures. That indicates that the appellants agreed to pay that element of their service charge that included the Gym costs, from 2013 to 2020; the FTT drew the right conclusion. This ground of appeal fails.