Bradley v Abacus: Court of Appeal confines s.27A review to the “no reasonable landlord” test and clarifies the two‑stage allocation of service charge items

Introduction

This Court of Appeal decision in Bradley & Anor v Abacus Land 4 Ltd [2025] EWCA Civ 1308 addresses, in a mixed-use building context, the proper standard of review the First-tier Tribunal (Property Chamber) and Upper Tribunal (Lands Chamber) must apply under section 27A of the Landlord and Tenant Act 1985 when a landlord is contractually required to act “reasonably” or exercise a “reasonable discretion” in designating expenditure as a service charge item. The core dispute concerned whether the landlord could, after granting a long lease of the basement gym to a third party operator, continue to include 100% of the gym costs in the residential service charge.

The leaseholders (Mr Bradley and Mr Rhodes) argued that post-2013—and especially post-2020 when resident access was curtailed—the landlord could not reasonably designate all gym-related costs as residential. They succeeded in part before the Upper Tribunal, which applied an “objective reasonableness” standard and set aside the First-tier Tribunal’s decision. The landlord (Abacus) appealed. The Court of Appeal allowed the appeal, restored the FTT’s decision, and in doing so laid down two important points of principle:

• Under s.27A LTA 1985, the tribunal’s role is a contractual compliance review, not a primary redetermination: where a lease requires the landlord to act “reasonably” or exercise a “reasonable discretion” in designating costs, the tribunal asks whether the decision is one no reasonable landlord could have made.
• The service charge mechanism in these leases operates in two stages. First, the landlord designates and allocates expenditure into “pots” (Residential, Building, Parking). Second, a separate apportionment among the relevant payers occurs. The “fair proportion” concept applies only to the second stage; it does not govern the stage-one designation decision.

Summary of the Judgment

The Court of Appeal (Lewis, Jeremy Baker and [lead judge]) allowed Abacus’s appeal and restored the FTT’s decision that 100% of the gym costs were recoverable through the residential service charge. The Court held:

• Section 27A LTA 1985 allows tribunals to determine whether charges are contractually payable; it does not transfer to tribunals the landlord’s contractual decision-making power. Aviva Ground Rent Investors GP Ltd v Williams [2023] UKSC 6 applied.
• Where a lease requires a landlord to act “reasonably” or use “reasonable discretion” in making designation/apportionment decisions, the tribunal’s review is whether the landlord’s decision falls outside the range of decisions a reasonable landlord could reach (i.e., whether it is a decision that no reasonable landlord could have made). It is not an “objective fairness” re‑decision by the tribunal.
• The lease sets up a two-stage structure: (1) designation of expenditures into pots; and (2) apportionment within each pot. The “fair proportion” concept applies to stage two only, not to the stage-one designation of what goes into each pot. The Upper Tribunal erred by letting the stages “bleed into each other.”
• The phrase “in whole or in part” in the definition of service charge items does not mean the whole gross spend on a composite project must be placed into a single pot. It authorises splitting a single item between multiple pots (e.g., Parking and Building) in appropriate proportions.
• The FTT asked itself the correct question—whether no reasonable landlord could have made the impugned designation—and its evaluative conclusion was open to it. Given the FTT’s specialist role and the appellate standard of review, the UT should not have interfered.

The Court therefore reinstated the FTT’s determination that the residential leaseholders were liable for the gym costs under the lease. The cross-appeal (Respondent’s notice) arguing the tribunal could substitute its own decision if the landlord’s discretion was flawed did not arise because the appeal succeeded.

Factual Background in Brief

• Romney House is a 1930s office block converted in 2006 into 168 residential flats and four ground-floor commercial units. A basement gym formed part of the Common Parts for residents’ use.
• From 2006–2013, residents had exclusive access; 100% of gym costs were charged to residential service charges without dispute.
• In October 2013, the then freeholder granted a 999-year lease of the gym to a third party (assigned to Mr White), with explicit preservation of residents’ rights to use the gym and equipment. The landlord covenanted, inter alia, to provide and maintain equipment, utilities and towels at its own cost; the gym tenant had to staff certain hours.
• From 2014, rent received under the gym lease (initially £5,000 pa) was credited against the service charge as an offset to the gym costs.
• Post‑2020, residents’ access windows were restricted (typically 7–10am and 5–8pm, Mon–Sat) after Covid-related closures. Separately, a repair dispute between the landlord and gym tenant settled in 2021 with a 3‑year rent holiday and a landlord commitment to refurbish, with section 20 consultation and a budget exceeding £218,000.
• The leaseholders challenged the inclusion of 100% of gym costs (plus certain indirect/common costs and litigation costs) from 2013 onwards before the FTT under s.27A. The FTT dismissed the application; the UT partially allowed it on the core standard-of-review point; the Court of Appeal has now reinstated the FTT outcome.

Key Issues

1. What standard does the FTT/UT apply under s.27A when reviewing a landlord’s contractual discretion to designate expenditure as a service charge item where the lease requires the landlord to act “reasonably” or exercise a “reasonable discretion”?
2. How do the lease’s service charge provisions operate—particularly the two-stage structure (designation into pots vs apportionment among payers) and the meaning of “in whole or in part”?
3. On the facts, could a reasonable landlord designate 100% of gym costs as residential items notwithstanding the post‑2013 gym lease and post‑2020 access restrictions?

Detailed Analysis

1) Precedents and authorities considered

• Aviva Ground Rent Investors GP Ltd v Williams [2023] UKSC 6, [2023] AC 855
  • Clarifies that s.27A(6) LTA 1985 does not void contractual discretion clauses and does not transfer the landlord’s discretionary powers to the tribunal. The FTT’s role is to review for contractual/statutory lawfulness, not to substitute its own decision.
  • Lord Briggs referred to a Braganza-type rationality review in general terms but, when applying the clause in Aviva, focused on whether the landlord’s re-apportionment was “reasonable.” The present Court reconciles these by emphasising that where a lease says “acting reasonably” or “reasonable discretion,” the question remains whether the decision is within the range of decisions a reasonable landlord could make.
• Oliver v Sheffield City Council [2017] EWCA Civ 225 (overruled by Aviva)
  • Before Aviva, Oliver suggested s.27A(6) displaced the landlord’s contractual discretion; Aviva corrected this, and the present decision applies that correction.
• Socimer International Bank Ltd v Standard Bank Ltd [2008] EWCA Civ 116
  • Explains the difference between: (i) cases where the court is the “primary decision-maker” on wholly objective standards (e.g., reasonable price/time), and (ii) cases where the contract gives one party a discretion, constrained by honesty, good faith and avoidance of irrationality.
• Braganza v BP Shipping Ltd [2015] UKSC 17
  • Confirms that where contracts confer a decision-making power, an implied term restrains abuse: decisions must be made in good faith, for proper purposes, and rationally (akin to public law rationality), with a focus on the process and the outcome’s rationality.
• Waaler v Hounslow LBC [2017] EWCA Civ 45
  • Under s.19 LTA 1985, “reasonably incurred” is an objective standard the tribunal determines as primary decision-maker; but when assessing a landlord’s contractual choices among repair/improvement options, Braganza-type rationality constraints apply.
• Hawk Investment Properties Ltd v Eames [2023] UKUT 168 (LC)
  • UT dicta on interpreting clauses requiring a “just and equitable” method of apportionment, illustrating that the precise wording of the contract determines the nature and intensity of the tribunal’s review.
• Regent Management Ltd v Jones [2010] UKUT 369 (LC) and Woodfall (text)
  • Tribunals must afford a landlord a “margin of appreciation.” There may be multiple reasonable ways to manage; the landlord’s choice is not unreasonable merely because the tribunal would have preferred a different one.
• Ashworth Frazer Ltd v Gloucester CC [2001] UKHL 59; Pimms Ltd v Tallow Chandlers Co [1964] 2 QB 547
  • In withholding consent cases, the test is whether the landlord’s conclusion is one that a reasonable landlord could reach. The Court borrows this well-known formulation for the service-charge designation context.
• ISDA cases: Peregrine Fixed Income Ltd v Robinson Dept Store [2000] CLC 1328; Fondazione Enasarco v Lehman Brothers Finance SA [2015] EWHC 1307; Lehman Brothers Special Financing Inc v National Power Corp [2018] EWHC 487 (Comm)
  • These cases examine clauses requiring a “reasonable” or “commercially reasonable” determination. Most align with a “range of reasonable outcomes” test, though specific wording can point to an objectively reasonable result standard in some forms.
• Ullah v SSHD [2024] EWCA Civ 201
  • Affirms appellate restraint toward specialist tribunals on evaluative questions; the UT should not interfere unless the only reasonable conclusion contradicts the FTT’s determination.
• Campbell v Daejan Properties Ltd [2012] EWCA Civ 1503
  • No general principle that landlords always recover all expenditure through service charges; recovery depends on the lease. Cited by the leaseholders; the Court recognised the point but did not find it determinative of the contractual review here.

2) The Court’s legal reasoning

a) The two-stage service charge structure

The Court carefully disaggregated the service charge mechanism into two discrete stages:

• Stage 1: The landlord identifies and designates “items of expenditure” into one of three pots—Residential, Building, or Parking Service Charge Items (see paragraph 10 of Schedule 4). For Residential and Building items, the lease requires the landlord to act “reasonably” and exercise a “reasonable discretion” in making the designation. For Parking, certain costs automatically flow into the Parking pot; designation discretion is narrower.
• Stage 2: The landlord then determines the “Proportion” that each relevant payer bears within a given pot. For Residential/Building, the lease refers to a “fair proportion” to be determined acting reasonably; for Parking, the proportion is a fixed arithmetic division among space-holders.

The Court rejected the Upper Tribunal’s view that these stages “bleed into each other.” The “fair proportion” language governs Stage 2 only. The issue in this appeal was Stage 1—whether it was contractually open to designate all gym costs as Residential items.

b) Meaning of “acting reasonably” and “reasonable discretion” in Stage 1 designations

The Court held that where a lease expressly requires the landlord to act “reasonably” or exercise a “reasonable discretion” in the designation decision, the tribunal’s review under s.27A asks whether the landlord has acted in breach of that contractual standard. That, in turn, means asking whether the decision is outside the range of decisions open to a reasonable landlord in the circumstances. Put starkly:

• The decision is permissible if it is one that a reasonable landlord could reach.
• The decision is flawed only if it is one that no reasonable landlord could reach.

The Court emphasised that this is not the same as the tribunal making a fresh, objective assessment of the “right” or “fairest” answer. The tribunal is not the primary decision-maker on Stage 1 designation. Aviva precludes the s.27A jurisdiction morphing into a wholesale transfer of the landlord’s contractual decision-making function to the tribunal.

c) “In whole or in part” and splitting of composite costs

The UT placed weight on the definitions of “Residential/Building/Parking Service Charge Item” as expenditure “chargeable (in whole or in part)” to the relevant group, suggesting the whole gross cost may still count as a single “Item” even if only part is chargeable to a pot. The Court rejected this, explaining that the function of “in whole or in part” is to permit splitting a single composite item between pots, in appropriate proportions (e.g., £90,000 to Building and £10,000 to Parking), rather than loading the entire gross amount into each relevant pot. This reading aligns with the structure of the Parking Proportion (which must arithmetically sum to 100%) and avoids logical inconsistencies.

d) Applying the test to the facts

The FTT found that, despite the gym lease to a commercial operator and later access restrictions, the residents’ leases continued to contemplate the gym as part of the Common Parts, with the landlord contractually obliged to maintain it and entitled to charge the costs as Residential items. The gym lease itself preserved residents’ rights to use the equipment; rent had been credited against gym costs for a time; and the landlord remained under dual obligations (to the residents and under the gym lease) to maintain equipment and the facility.

The FTT concluded that a reasonable landlord could still designate all gym costs as Residential items. The Court of Appeal held that the FTT asked the correct question and that its evaluative assessment was open to it. The UT erred in effectively substituting a view of “objective fairness” for the correct “range of reasonable outcomes” review.

3) Impact and implications

a) Standard of review under s.27A

This decision consolidates the post-Aviva landscape: tribunals reviewing the contractual lawfulness of a landlord’s designation/apportionment decisions under s.27A are not primary decision-makers. Where the lease requires the landlord to act “reasonably” or to exercise a “reasonable discretion,” the tribunal will uphold the landlord’s decision if it is one that a reasonable landlord could make, even if the tribunal would have reached a different decision.

b) Two-stage framework matters

Parties must distinguish:

• Stage 1: designation into pots (the landlord’s reasonable discretion), and
• Stage 2: apportionment within a pot (the “fair proportion” concept among the relevant payers).

Many disputes conflate these. This decision underscores that the “fair proportion” language is not a license to revisit Stage 1 designations under the banner of “objective fairness.”

c) Mixed-use and amenity-sharing scenarios

In buildings where shared amenities (gyms, pools, concierge desks) are enjoyed by both residential occupiers and commercial users or third-party operators, landlords may, depending on the lease wording, designate the entirety of certain amenity costs to the Residential pot. That will withstand a s.27A challenge unless no reasonable landlord could have done so on the facts. Leaseholders wishing to shift cost burdens in such scenarios may need to rely on:

• s.19 LTA 1985 (reasonably incurred / reasonable standard) to challenge the level or quality of spend,
• enforcement of their own rights of use/access (if restricted contrary to the lease),
• lease variation routes (e.g., LTA 1987, in appropriate cases), or
• careful argument that a particular designation is outside the range of reasonable decisions because it is inconsistent with the lease’s purpose or ignores material considerations.

d) Drafting lessons

• Precision at Stage 1: If parties intend certain amenities to be funded wholly by residents or shared with commercial tenants, say so expressly in the designation rules. Avoid relying solely on generic “reasonable discretion” if a specific funding model is intended.
• “In whole or in part”: This formulation enables splitting composite costs across pots; it does not mandate including whole gross sums in a pot regardless of benefit.
• Absolute vs reasonable discretion: Here the leases used both “reasonable discretion” (designation) and an “absolute discretion” elsewhere (paragraph 10(d)). Drafters should appreciate that an express “reasonable” constraint invites a “range of reasonable outcomes” review; “absolute” discretion narrows implied constraints (though good faith and proper purpose still apply).

e) Appellate deference to the FTT

The decision reiterates that the UT should not disturb the FTT’s evaluative findings unless the only reasonable conclusion contradicts the FTT’s determination. This is a significant practical reminder in service-charge litigation: parties should marshal their factual and evaluative case at first instance, where the “margin of appreciation” is most impactful.

Complex Concepts Simplified

• Section 27A vs section 19 LTA 1985:
  • s.27A: Tribunal decides whether charges are contractually payable, and in what amount/manner, but does not become the landlord’s decision-maker. It polices compliance with the lease and service charge statutes.
  • s.19: A separate, objective control of costs—are they reasonably incurred and of a reasonable standard? Here the tribunal is the primary decision-maker.
• Two-stage allocation:
  • Stage 1 (designation into “pots”): Which expenditures go into Residential/Building/Parking? This is a landlord decision constrained by “reasonable discretion.”
  • Stage 2 (apportionment within each pot): How much does each payer contribute to that pot? “Fair proportion” (Residential/Building) or arithmetic division (Parking).
• “No reasonable landlord” standard:
  • The tribunal asks whether the landlord’s decision falls outside the range of choices a reasonable landlord could make. If a reasonable landlord could have made that decision, the tribunal will not interfere—even if it prefers another option.
• Braganza rationality:
  • When a contract confers decision-making power, the decision must be made in good faith, for proper purposes and rationally. It is akin to, but not identical with, judicial review in public law. It is different from an objective “what would be fairest” test.
• “In whole or in part”:
  • Allows splitting a single expense across pots in proportion to benefit (e.g., part to Parking, part to Building). It does not require every pound of a composite expense to be loaded into each pot to which any part relates.

Application to the Gym Facts: Why the FTT’s conclusion stood

The leaseholders’ fairness concerns were understandable: residents lost exclusive use and saw a third-party trainer’s clients contribute to wear-and-tear and utilities; rent credits ceased during a rent holiday; refurbishment costs were substantial. However, the contractual scheme still contemplated the gym as a Common Part benefiting residents, with the landlord obliged to maintain facilities “benefiting the Building/Estate” and to provide facilities as it “acting reasonably” determines (Schedule 6, Part I, paragraphs 4–7).

The gym lease preserved resident use rights, and the arrangement could be seen as a shared-use model with ancillary resident benefits (supervised hours, equipment provision/maintenance). On those unusual facts, the FTT was entitled to find that a reasonable landlord could still designate the gym costs as Residential Service Charge Items. The UT’s substitution of a “manifestly unfair” yardstick was therefore an error in principle.

Notable Nuances and Open Points

• Different Residential Proportions for different items? The Court noted an earlier FTT decision at Romney House where VRV system costs were borne only by the seven benefiting flats, suggesting practical flexibility, but the Court did not decide the point here.
• “Indirect” gym costs: The leaseholders complained of common costs they said should be re-allocated to the gym tenant. The Court treated this as raising no distinct contractual issue separate from the Stage 1 designation question.
• Litigation costs: The UT recorded a concession on the recovery of litigation costs relating to the landlord-gym tenant dispute; that issue was not argued on the appeal. The Court’s order restores the FTT decision; parties may need to consider the scope of that restoration relative to any concession already made before the UT.

Practical Takeaways

• For landlords:
  • When your lease says you must act “reasonably” or use “reasonable discretion” in service charge designations, record the rationale for your decision so that it can be shown to be within the range of reasonable outcomes.
  • Keep Stage 1 (designation into pots) separate from Stage 2 (apportionment among payers). Be prepared to split composite costs between pots where appropriate.
  • In mixed-use/shared-amenity settings, ensure the lease language matches commercial reality—if the intent is to recoup all amenity costs from residents, say so clearly; otherwise, expect arguments for split designations.
• For leaseholders:
  • A s.27A designation challenge now carries a high threshold: you must show the landlord’s choice is outside the range a reasonable landlord could make. Disagreement or perceived unfairness is insufficient.
  • Consider parallel or alternative routes: s.19 (reasonably incurred/standard), enforcement of access rights where use is curtailed, or lease variation where the charging model no longer reflects the building’s operations.

Conclusion

Bradley v Abacus consolidates the post-Aviva approach to service charge disputes under s.27A LTA 1985. Where a lease confers a Stage 1 designation power constrained by “acting reasonably” or “reasonable discretion,” the tribunal’s function is to police the limits of that discretion, not to re‑decide the allocation on an objective fairness basis. The correct question is whether the landlord’s choice is one no reasonable landlord could have made. The decision also clarifies the two‑stage structure of service charge provisions and the proper understanding of “in whole or in part” within item definitions.

In practical terms, tribunals will accord a margin of appreciation to landlords’ designation decisions, especially where the lease’s design and building history support the chosen allocation. Leaseholders seeking to resist particular charges may find greater traction under s.19 or by enforcing their substantive rights of use, rather than by seeking a wholesale reallocation under s.27A. For drafters, the case is a reminder to align service charge drafting with intended amenity use and cost recovery models to avoid future litigation.