Service charge apportionment – what is acting reasonably?

Landlords, lessees and managing agents should take note of the Court of Appeal (“CA”) decision in Bradley and Rhodes v Abacus Land 4.

The case concerned the familiar topic of service charge apportionment, in this case at a mixed-use property comprising residential flats, commercial units and a gym. In the usual way, the lessees had to pay the landlord service charge for maintaining the property, which included the cost of maintaining the gym, being “such fair proportion as the landlord acting reasonably shall… determine”. This is fairly standard wording which is why this case will be of interest. 

The lessees had a right to use the gym, which was leased to a gym provider, at specified times but it was not an exclusive right. Unusually, the gym provider’s lease made no provision for it to pay any service charge and instead the landlord was liable for maintenance of the gym, including replacing gym equipment. 

In 2021, the landlord sought to refurbish the gym at a cost of over £200,000 and looked to the residential lessees for full recovery these costs.  The lessees challenged whether the landlord had acted reasonably in passing 100% of the costs to them to shoulder. The lessees lost at the First Tier Tribunal (“FTT”) but won on appeal to the Upper Tribunal (“UT”) leaving the landlord to appeal to the CA, which considered what is meant by “acting reasonably” when determining service charge allocations. 

In finding for the landlord, the CA held that a landlord will have acted unreasonably only if it made a decision that no reasonable landlord could have made.  It is not for the FTT to substitute their own judgment of what it would consider “fair” but to consider whether the landlord’s decision falls within a range of reasonable outcomes. Whilst the court recognised why the lessees might see this as unfair, the gym was a facility from which they benefitted and, if the landlord was unable to recover the costs, it might choose to keep future maintenance to a minimum which would not serve their best interests. 

Landlords will be pleased with this clarity. Going forward they should record their reasoning when making such decisions, and show what factors were considered so that this can be demonstrated in the event of challenge. 

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