The Court of Appeal has provided welcome clarity on the legal test that applies when allocating costs to a service charge, confirming the circumstances in which a landlord’s decision will be considered unreasonable.
In Bradley & Rhodes v Abacus Land 4 Limited [2025] EWCA Civ 1308, the Court of Appeal overturned the Upper Tribunal’s decision and reinstated the ruling of the First-tier Tribunal (FTT). The Court confirmed that a landlord will only act unreasonably where it makes a decision that no reasonable landlord could have reached, rejecting the application of an objective fairness test.
This judgment will be of particular interest to landlords, managing agents and leaseholders involved in service charge disputes, as it significantly narrows the scope for challenges under the Landlord and Tenant Act 1985.
Background
The case concerned long residential leaseholders of flats within a mixed-use building comprising residential units, commercial premises and a gym.
Under the terms of their leases, the residential leaseholders were granted the right to use the gym. Between 2006 and 2013, that right was exercised exclusively by the residential tenants, and 100% of the costs of maintaining the gym were allocated to them through the service charge. Those charges were not challenged during that period.
In 2013, the landlord granted a lease of the gym to a personal trainer. Although the gym tenant was not required to contribute towards maintenance or upkeep costs, the lease made clear that the residential leaseholders’ rights to use the gym were preserved.
In 2014, the landlord agreed that the rent received under the gym lease would be applied towards the cost of maintaining the gym, reducing the residential leaseholders’ service charge liability by approximately £5,000 per year.
Following a settlement of a dispute between the landlord and the gym tenant in 2019, the landlord agreed to refurbish the gym and grant a three-year rent-free period, removing the £5,000 contribution. After the gym reopened following lockdown, residential access was significantly reduced. The landlord subsequently served notice under the Landlord and Tenant Act 1985 of its intention to carry out major works, estimated to exceed £218,000, to be recovered through the service charge.
Challenging the Allocation of Service Charge Costs Under Section 27A
The leaseholders applied to the FTT under section 27A of the Landlord and Tenant Act 1985, challenging the allocation of 100% of the gym maintenance costs to the residential service charge from 2013 onwards.
They argued that it was unreasonable to continue allocating those costs to residential leaseholders when they no longer had exclusive use of the gym and a commercial tenant was in occupation.
Decisions of the FTT and Upper Tribunal
The First-tier Tribunal dismissed the application, holding that the landlord had acted reasonably when allocating costs to the service charge. The FTT applied the correct contractual test, asking whether the landlord’s decision was one that a reasonable landlord in the same position could have made.
On appeal, the Upper Tribunal disagreed, applying an objective reasonableness test. It concluded that it was not objectively reasonable for residential leaseholders to bear the full cost of maintaining the gym when their use was no longer exclusive.
Court of Appeal Guidance on Allocating Costs to a Service Charge
The Court of Appeal overturned the Upper Tribunal’s decision and restored the FTT’s ruling.
It confirmed that:
- The role of the FTT is to determine whether the landlord has acted in breach of the lease, not to act as the primary decision-maker.
- When allocating costs to a service charge, the correct test is whether the landlord’s decision was one no reasonable landlord could have made.
- A tribunal should not substitute its own view of what would have been a fair or preferable outcome.
In reaching its decision, the Court followed the Supreme Court’s guidance in Aviva Investors Ground Rent GP Ltd v Williams [2023] UKSC 6, reinforcing the principle that contractual discretion rests with the landlord, provided it is exercised rationally.
Practical Implications for Landlords and Leaseholders
The decision provides important clarification on the approach to allocating costs to a service charge, bringing this area of law into line with established principles governing contractual discretion.
For landlords and managing agents
- The judgment confirms that landlords are not required to demonstrate that their service charge decisions are objectively fair.
- Provided a decision is rational and within the scope of the lease, it will not be unreasonable simply because another approach could also have been taken.
- The test mirrors the rationality standard confirmed in Braganza v BP Shipping Ltd [2015] UKSC 17, which applies where contractual discretion is exercised.
For leaseholders
- The scope to challenge service charges under section 27A of the Landlord and Tenant Act 1985 is now more limited.
- A decision that appears unfair will not necessarily be unreasonable in law.
- Leaseholders must demonstrate that the landlord’s approach to allocating costs to a service charge was one no reasonable landlord could have adopted.
Key Takeaway
This judgment reinforces the wide discretion available to landlords when allocating costs to a service charge, provided they act rationally and in accordance with the lease.
While the decision brings greater certainty and consistency, it also raises the bar for leaseholders seeking to challenge service charge arrangements, particularly where disputes are based on fairness rather than contractual breach.
We’re here to help
If you are a landlord or tenant facing a dispute, our Real Estate Litigation Team, led by Director & Solicitor, Josh Unwin-Millichamp, can advise. Get in touch with our team on 0800 118 1500 or complete our form below.
Disclaimer
The contents of this blog or any other published by Talbots Law cannot be considered as legal advice. You should take no action without prior consultation with a qualified solicitor or legal professional. The contents of this blog refers to the process in England and Wales.
This blog was written by Jamie Davies, Trainee Solicitor in our Dispute Resolution Team.