Landlords Freedom to Apportion Service Charges

The recent landlord and tenant case of Criterion Buildings Ltd v McKinsey & Company Inc (UK) & Anor [2021] EWHC 216 (Ch) left the tenant liable to pay more than £2.2 million in service charge arrears, as a result of a lease reference to "the due proportion" of the service charge payable even in circumstances where the lease term had expired in 2018.

The lease stated that the tenant was to pay a due proportion of the services charges. Due proportion was defined as “a fair proportion to be determined from time to time by the landlord or the landlord’s surveyors taking into account the use made of and the benefit received from the services and expenses and each of them…”.

The tenant argued the percentage of service charges for the whole building allocated to them was too high and not fair. It was claimed the apportionment favoured another tenant, the Criterion Theatre and Restaurant, at their expense. Although it was denied, the tenant argued the landlord had refused all requests to consider the more standard method of apportionment of using internal floor space.

The Judge held the Court was not the appropriate body to determine the fair proportion, this was for the landlord. Whilst it was able to determine if the lease terms were observed, it could not undertake the calculation. It was decided the landlord was permitted to use a subjective standard on the division of service charges as "a landlord could be trusted because it had no axe to grind". The apportionment would also make no financial difference to the landlord. However, this decision must be subject to rationality and the burden of proof is on the tenant to establish a prima facie case to prove otherwise. In this case the landlord had an established method of apportionment which it could explain and justify and which had been applied for many years and without challenge.

The tenants arguments failed on all grounds.

This case calls attention to the importance of unambiguous drafting of the service charge provisions in a lease. Perhaps future questions will revolve around which tenant is in a better position to pay the service charges in a timely manner - will the landlord favour one tenant over another based on their means to pay?

Practical Take-Away

The decision is one which will impact landlords and tenants equally. When entering into leases it will be important for parties to consider the decision when drafting service charge provisions.

As a Tenant:

1. Ensure there is clear drafting of apportionment within a lease for a mixed-used scheme. If not, the landlord will likely have control over division of costs where the obligation is fair and reasonable – this is so long as the landlord can demonstrate some rationale to the calculations; and
2. Ensure further enquiries are made to fully understand the landlord's methodology behind the apportionments before entering into the lease.

As a Landlord:

1. Ensure rationale is behind the calculations used for the apportionment of service charge and retain evidence of such findings; and
2. Be aware that the court will apply a subjective test taking into account the building in question.

 For advice on commercial landlord and tenant matters please contact Caitlin Spence or Bhavini Patel.