12 Days of Christmas – Day 5

As the festive season is now upon us, our team of Real Estate Litigation elves have been searching through the archives for the most interesting and important legal developments this year. In our "12 Days of Christmas" feature, we take you on a whistlestop tour of the most interesting of developments that haven't made it into our new blog.

On day 5, we look at the Upper Tribunal's decision in Fitzroy Place Residential Ltd & Ors v Lovitt & Ors. This case was primarily concerned with a question of interpretation as to whether a landlord could choose to depart from the primary specified method of dividing service charge costs between tenants.

The background

Tenants in a mixed-use development near Oxford Street, London were obliged by their leases to pay a Block Service Charge and an Estate Service Charge. The “Tenant’s Proportion” of each was to be ascertained “primarily” on a comparison, in relation to the Block Service Charge, between the floor area of the tenant’s premises and the aggregate floor area of the lettable areas of the Block. In relation to the Estate Service Charge, this was a comparison between the floor area of the tenant’s premises and the aggregate floor area of the lettable areas of the Estate, including its commercial parts. The leases provided the landlord with a discretion to adopt “such other method of calculation of the proportion of the expenditure to be attributed to the Premises as is fair and reasonable in the circumstances”.

In practice, the landlord had not used the primary method of apportionment specified but had instead divided total costs between the residential and commercial parts on a gross external area basis and then divided the residential element between tenants based on the gross internal area of each tenant’s flat. This meant that no comparison was made between a tenant’s flat and the aggregate floor area of the lettable areas of the Estate. This approach slightly favoured the residential tenants over the commercial tenants but was it permitted by the leases?

The decision

The Upper Tribunal focused on the use of the word “primarily” in the basis of apportionment mentioned above. Martin Rodger KC said: “In this context, ‘primarily’ means more than just ‘originally’ or ‘first’, it means ‘mainly’ or ‘mostly’, and indicates that the parties intend the Tenant's Proportion to be calculated, for the most part, in the manner described ." The decision stated that the discretion to adopt a different method only arose if to do so was fair and reasonable, it did not give the landlord the freedom to adopt a wholly new basis of apportionment. The service charge was a major commitment in relation to high-value accommodation. The interests and objective expectations of parties entering into this sort of relationship supported a limited interpretation of the ability of the landlord to use the discretion. The landlord’s approach was not in accordance with the leases.

It is important to note that one reason why the landlord in this case had not used the primary method of service charge allocations was because it was considered defective. The building was a mixed-use building and required proportions to be assessed on the basis of relative net internal areas as defined by the RICS Code, which does not define net internal area for residential property as it is not a recognised basis for the measurement of residential units. Experts in the case had agreed that gross internal area measurements, in accordance with RICS Code, would be the nearest alternative and the First-tier Tribunal had therefore determined that, as a matter of interpretation, gross internal area comparisons should have replaced net internal area comparisons.

The key take-away being, where service charge proportions are to be allocated “primarily” on one basis, there must be a fair and reasonable reason for adopting a different basis.

If you have managed to read this far, here is your reward of a festive joke to get you in the Christmas spirit: What could you call an elf who has just won the lottery? Welfy.