The Court of Appeal (CoA) reaffirms the broad landlord’s discretion to decide ‘reasonable’ service charges.

Facts:

Abacus Land 4 Ltd. is the landlord of Romney House, a building in Westminster containing one hundred and sixty-eight residential flats, four commercial units, and a basement gym. Mr. Bradley and Mr. Rhodes hold long leases for two flats that require them to pay service charges based on costs designated by the landlord "acting reasonably". From 2006 to 2013, the leaseholders had exclusive use of the gym and paid 100% of the maintenance costs through the service charge.

In October 2013, the landlord granted a 999-year lease of the gym to Nash City Ltd., which was shortly thereafter assigned to a Mr. White, who runs a personal training business, creating a shared-use arrangement with the residential leaseholders. Crucially, the gym lease contained no provision for the gym tenant to pay a service charge contribution. Following this, the landlord continued to charge 100% of the gym costs to the residential leaseholders but partially offset this by crediting them with the £5,000 annual rent received from the gym tenant.

Access for residents was later limited after the 2020 lockdown. In 2019, there was a dispute between Mr. White and Abacus. Mr. White complained that Abacus was in breach of its repair and maintenance obligations under the gym lease. This dispute was settled in 2021 on terms that Abacus would refurbish the gym and would also take no rent for a period of 3 years.

In 2021, Abacus served notices on the leaseholders under the provisions of the Landlord and Tenant Act (LTA) 1985, indicating its intention to carry out major works to the gym to be paid for through the service charge. The estimated cost of these works was over £218,000.

The leaseholders applied to the First-tier Tribunal (FTT) under s.27A LTA 1985 to challenge the inclusion of the entirety of the gym costs from 2013 onwards, arguing the 100% allocation was not fair and reasonable due to the shared use. The FTT dismissed the challenge, finding that the 100% allocation was a decision that a reasonable landlord could have made. The leaseholders successfully appealed to the Upper Tribunal (UT), and Abacus subsequently appealed to the CoA

Decision: 

The CoA allowed the Abacus appeal and restored the decision of the FTT. The Court noted that the lease gave the landlord primary discretion to determine service charge allocations, subject only to the requirement that such decisions be reasonable. The Court rejected the UT's view that the landlord's discretion, though qualified by the phrase "acting reasonably," required a standard of objective reasonableness or fairness. The FTT is not the primary decision-maker and thus cannot substitute its own view of what is objectively fairest. The Judge concluded that when a lease requires a landlord to act "reasonably" in exercising a discretion (as opposed to setting a price or time), the landlord is in breach of contract only if the decision is one that no reasonable landlord could have reached. This test is analogous to the long-established principle for determining whether a landlord has unreasonably withheld consent for an assignment or subletting.

Implications:

The key implication of this ruling is that, when a lease grants the landlord the discretion to decide a service charge allocation by "acting reasonably," the Court's power to interfere with that decision is greatly limited.

For landlords, the case provides a significant measure of deference and protection for their commercial decisions. The decision confirms that the landlord holds the primary decision-making power. Their decisions, especially those regarding how costs should be allocated—even those that seem subjectively unfair—will be upheld unless they are deemed so flawed that no reasonable landlord could have made them. A tribunal cannot simply substitute its own view of what is "fair" or "objectively reasonable" for the landlord's decision. In effect, this means landlords have a wider range of acceptable options when allocating service charge costs.

Leaseholders cannot win a challenge merely by arguing that the landlord's allocation is "unfair" or that another method would have been "more reasonable". The test is not whether the outcome is objectively fair, but whether the landlord's decision was so unreasonable as to be irrational.