Graham Bradley & Anor v Abacus Land 4 Ltd

Where a lease gives a landlord a discretion to designate expenditure as a service charge item and requires the landlord to act reasonably, the tribunal is not the primary decision-maker. It must decide whether the landlord acted in breach of contract. The decision is impermissible only if it is one that no reasonable landlord could have reached in the circumstances. That is distinct from the objective assessment required when determining whether costs were reasonably incurred under Landlord and Tenant Act 1985, section 19. The precise contractual wording remains decisive. A tribunal may not substitute its own view merely because it would have made a different allocation.

Leaseholders challenged the landlord’s recovery through the service charge of the full costs of a gym in a residential and commercial building. The gym had been let to a gym operator, while the flat leases preserved the leaseholders’ rights to use it. The First-tier Tribunal dismissed the challenge, holding that the charges were payable and that the landlord’s allocation was reasonable.

The Upper Tribunal allowed the leaseholders’ appeal in part, holding that the landlord’s contractual obligation to act reasonably required objective reasonableness and that charging the whole cost after the leaseholders’ access had been reduced was manifestly unfair: [2024] UKUT 120 (LC). The landlord appealed. The central issue was the proper standard for reviewing the exercise of the contractual discretion.

Appeal allowed. The Court of Appeal, in the judgment of Nugee LJ with which Lewis LJ and Jeremy Baker LJ agreed, restored the FTT’s decision. The cross-appeal concerning the tribunal’s power to remake the landlord’s decision did not arise.

1. Contractual structure. The leases created a two-stage process. First, expenditure was allocated to the Residential, Building or Parking Service Charge pot. Secondly, the relevant pot was apportioned among those liable to contribute. The appeal concerned only the first stage. If the gym costs could properly be put into the Residential pot, their division between the residential leaseholders was not challenged.
2. Reviewing the discretion. Section 27A of the Landlord and Tenant Act 1985 gives the tribunal jurisdiction to determine whether a service charge is payable under the lease and the amount payable. Section 27A(6) does not transfer the landlord’s contractual discretion to the tribunal. Following Aviva Ground Rent Investors GP Ltd v Williams [2023] UKSC 6, the tribunal reviews contractual and statutory lawfulness; it does not decide the allocation afresh.
3. The words requiring the landlord to act reasonably, read with the requirement to exercise a reasonable discretion, have substantive effect. They require more than rationality, but do not make the tribunal the primary decision-maker. The landlord breaches the lease only where its decision is outside the range of permissible decisions: it must be a decision that no reasonable landlord could have reached in the circumstances. The wording of the particular contract may require a different analysis.
4. This standard differs from the objective assessment under section 19(1) of the Landlord and Tenant Act 1985, where the tribunal decides for itself whether costs were reasonably incurred or works and services were of a reasonable standard.
5. The FTT had asked whether the decision was one that no reasonable landlord could have made. Its conclusion was an evaluative assessment of unusual facts and was open to it. The gym operator did not have exclusive use. The leaseholders retained rights of use, and the landlord remained obliged to maintain the gym. The FTT could reasonably regard the operator’s rent and services as contributing to the gym’s running costs and could conclude that charging the costs to the leaseholders was not outside the range of decisions open to a reasonable landlord. The UT was not entitled to substitute its own view of fairness or reasonableness.

• Court of Appeal (Civil Division): Appeal allowed and the decision of the First-tier Tribunal restored.
• Upper Tribunal (Lands Chamber): The leaseholders’ appeal was allowed in part and the FTT’s decision was set aside: [2024] UKUT 120 (LC).
• First-tier Tribunal: The leaseholders’ challenge was dismissed. The service charges for gym maintenance and litigation costs for 2013–2023 were held payable and reasonable in amount.