Service Charges: Court of Appeal considers the meaning of “contractual reasonableness”
J B Leitch represented our landlord client in its appeal to the Court of Appeal which assessed the interpretation of contractual reasonableness. The Court of Appeal’s decision carries industry-wide interest, with widespread implications for landlords.
This summary updates our earlier report on this case.
The background
Bradley and Rhodes v Abacus Land 4 Ltd [2025] concerns a mixed-use building comprising 168 residential flats, four commercial units and a gym. The gym was let to a third party, who paid an annual rent but whose lease contained no service charge payment provisions. The gym was made available to leaseholders as well as external users.
The landlord agreed with leaseholders that it would use rental income from the gym as a contribution towards the costs of maintaining the gym and its equipment.
The landlord notified residential leaseholders of its intention to carry out major works to the gym, the costs of which were to be recovered through the service charge. The leaseholders applied to the First-tier Tribunal for determination as to whether the service charges demanded relating to the gym were fair and reasonable.
The leaseholders also sought a determination as to “what would be a fair and reasonable apportionment of the Gym costs to the residential leaseholders in light of the grant of the Gym Lease on 25 October 2013”. They argued that they had not had exclusive access to the gym since 2013, and that a reasonable apportionment would be no more than 50% of the Gym costs incurred in 2013 to 2020, reduced to 0% thereafter following restriction of access to the gym from July 2020. The leaseholders further argued that the terms of their leases did not entitle the landlord to designate gym costs as payable by them in full, challenging the charges on the basis of a decision taken by the landlord, rather than on the basis of the costs charged or the work undertaken.
The First-tier Tribunal decision
The First-tier Tribunal found that leaseholders had made service charge payments without challenge or objection for seven years, thereby accepting the service charges as payable in the apportionments paid.
For the period following 2020, the FTT found that the landlord’s decision had been rational and that it was entitled to recover 100% of the gym maintenance costs from leaseholders by way of service charge.
The Upper Tribunal decision
The Upper Tribunal agreed with the FTT that the leaseholders had accepted the earlier charges paid from 2013-2020, but upheld the appeal in respect of later charges.
The UT stated that the landlord’s decision as to how it apportioned costs must be “objectively reasonable”, finding that it was manifestly unfair, and therefore not objectively reasonable, for leaseholders to pay the whole of the gym costs after their access to the gym had been restricted from 2020 onwards.
The decision raised a number of issues relating to the law on contractual reasonableness, and permission to appeal to the Court of Appeal was granted to the landlord.
The Court of Appeal decision
The Court of Appeal was asked to consider important issues of principle, including:
- The meaning of clauses requiring landlords to act reasonably when determining service charges and the approach of the First-tier Tribunal in reviewing the resultant charges;
- Whether a landlord’s decision in this context must be made in a way that is different from a decision to grant consent to assignment or change of use;
- The Upper Tribunal’s decision in Braganza v The Riverside Group Ltd and the role of the First-tier Tribunal following Aviva Investors Ground Rent GP Ltd v Williams; and
- The apparent divergence in approach in recent decisions of the Upper Tribunal.
Given that the approach of the Upper Tribunal had differed in earlier decisions, permission was granted to the landlord in order to give the Court of Appeal opportunity to address this.
The Court of Appeal unanimously allowed the landlord’s appeal. The decision has widespread implications for landlords, and maintains the status quo as regards the interpretation of contractual reasonableness.
The FTT was entitled to conclude that the landlord's decision to recharge 100% of costs associated with the gym to the leaseholders was "not a decision of the type where it could be said that no reasonable landlord in a similar position could ever have made it", meaning that the decision was within the range of decisions a reasonable landlord could have made.
This Court of Appeal decision also clarifies the scope of the FTT’s jurisdiction, highlighting that the FTT did not err in law.
Advice and action for landlords
Landlords will welcome the important Court of Appeal judgment in Bradley and Rhodes that, provided a landlord’s decisions can be shown to fall within the range of decisions a reasonable landlord may make, apportionments and service charges can be successfully defended.
Leaseholders should be aware that decisions regarding apportionment remain with landlords, and that challenges must be able to demonstrate that no reasonable landlord could have reached a decision made.
