Service Charges & S.20C Costs Orders: Application of statutory test for reasonableness of service charges relating to long-term agreements
The Court of Appeal considered an appeal from the Upper Tribunal, assessing the reasonableness of costs incurred arising from long-term agreements entered into by the landlord. J B Leitch represented the freeholder landlord.
The background
In Spender & others v FIT Nominee Ltd [2025], the leaseholders brought a s.27A Landlord and Tenant Act 1985 application in the First-tier Tribunal for determination as to the payability and reasonableness of a number of service charges demanded between 2018 and 2020.
At the time the subject property was developed, the developers entered into a number of long-term contracts for the hire of systems such as a video door entry system and other security measures for periods of around 20 years from Countryside Communications Ltd. When the current landlord acquired the reversion of the property in 2014, it also inherited the long-term agreements.
The agreements allowed for RPI rental price increases annually. The landlord sought to recover the hire costs from leaseholders through the service charge. During the disputed period, leaseholders paid around £200,000 rental costs by way of service charge in respect of the long-term Countryside contracts. Contracts were renegotiated in 2022 resulting in a 50% reduction in rental costs.
The leaseholders argued that reasonableness of costs should be assessed in respect of what was reasonable at the time they were incurred, ie. during the disputed period of 2018-2020. The landlord stated that costs should be assumed to be reasonably incurred if it was contractually obliged to pay them under agreements entered into some time previously.
The First-tier Tribunal found in favour of the leaseholders, and a s.20C order was made by the FTT against the landlord. The landlord appealed to the Upper Tribunal in respect of the reasonableness issue, and requesting that the s.20C order be set aside.
The UT overturned the FTT’s decision, finding that the landlord was the more successful party with reference to a percentage of the dispute’s value and that the landlord was entitled to recover legal fees as service charges by way of its contractual rights under the leases. The UT set aside the FTT’s s.20C order and refused the leaseholders’ application for a s.20C order they had made in respect of the UT proceedings.
Permission was granted for the leaseholders to appeal the UT’s decision in the Court of Appeal.
The Court of Appeal decision
The Court of Appeal set aside the UT’s decision and clarified that the Landlord’s decision to enter into a contract is important in order to assess the reasonableness of costs within long-term agreements.
This was the first time that the Court of Appeal has considered how the statutory test for the reasonableness of service charges in relation to residential property is applied in relation to costs that arise from long-term agreements. The Court applied a different test, considering whether it was reasonable for the landlord to commit to incurring the costs under a contract with a term of 20 years. The judgment found that the burden of proof lay with the leaseholders to demonstrate that charges are not reasonably incurred. The burden then moves to the landlord, which must evidence its case to the contrary. Being bound to a long-term agreement is not sufficient to support a landlord’s argument that charges have been reasonably incurred.
The case has been remitted back to the First-tier Tribunal as there are some factors which suggest the Landlord’s decision to enter into the long-term agreements may not have been reasonable.
