Challenging 'reasonableness' of landlord service charge decisions

Background

The case concerned a mixed-use building which included a gym and residential flats. The landlord sought to recover from its residential tenants the entirety of the costs for gym maintenance works. However, whilst the residential leaseholders had rights to use the gym, their access had been restricted since the landlord had granted a long-term lease of the gym facility to a personal trainer business. The lease required the landlord to act reasonably. The key question before the court was whether or not it was 'reasonable' in these circumstances, for the landlord to continue to allocate the full cost of gym maintenance works to the residential leaseholders under the residential lease service charge provisions, following the introduction of the third-party sharing arrangement.

The Court’s ruling: What does 'reasonable' really mean?

The court held that when a lease requires a landlord to act 'reasonably' in designating service charge items, what is key is whether the landlord’s decision is one that "no reasonable landlord could have reached". In particular, the court accepted that if the landlord could not recover the maintenance costs from the service charge, it would have to bear the costs itself despite deriving no benefit from the gym, which may lead to degradation of this facility, to the detriment of the leaseholders. It was also key that the residents still had shared use of the gym. The court reasoned that the landlord's decision was therefore within the permissible range.

Key take-aways

In lease agreements, the word 'reasonably' is often used to caveat landlord and tenant obligations, and for both landlords and tenants, it is therefore crucial to understand how 'reasonableness' clauses in leases can be interpreted.

For landlords, this ruling provides reassurance that a leaseholder cannot challenge a decision as unreasonable, simply because another, possibly fairer alternative existed. Where leases grant landlord discretion to allocate service charges reasonably, that discretion is broad. Nevertheless, prudent landlords would be wise to still ensure that they have clear documentation and a solid rationale to justify any discretionary decisions.

However, for leaseholders, this decision provides a stark warning that a challenge to a landlord’s service charge allocation on grounds of reasonableness can be a difficult argument to pursue. Leaseholders must tread carefully and seek legal advice before challenging service charge allocations. Where possible, prospective leaseholders in lease negotiations should seek to negotiate service charge terms which offer more extensive leaseholder protections and curb otherwise potentially broad discretion which could then be applied onerously.

This decision does not change the 'objective' standard of reasonableness applied under section 19 of the Landlord and Tenant Act 1985 (which contains a statutory restriction on recovering service charges only to the extent that those charges are reasonably incurred).

If you require assistance with navigating the complexities of service charges or other lease provisions, please do not hesitate to get in touch with Jen Wilson in our Property Litigation team.