Anonymised Summary of the Court of Appeal Opinion

Factual and Procedural Background

This appeal concerns a dispute between the freehold owner of a residential block ("Company A", the Appellant) and two long leaseholders of flats in the same block (the Respondents). The block ("Building A") in The City was converted into residential flats with a gym identified as part of the building's communal facilities when the flat leases were granted in 2006. The flat leases required lessees to pay service charges and gave the landlord a contractual power, to be exercised "acting reasonably" or "in its reasonable discretion", to designate which items of expenditure fell to be charged to the residential service charge pot as opposed to other pots (e.g., building or parking).

From 2006 until 2013 leaseholders had exclusive use of the gym and the landlord charged 100% of the gym costs to the residential service charge. In October 2013 the freeholder (Company B) granted a long lease of the gym unit to Company C (the Gym Lease), subsequently held by an individual who operates a personal training business ("the Gym Tenant"). The Gym Lease expressly preserved the rights of flat occupiers to use the gym and contained obligations by the landlord to provide and maintain gym equipment at its cost, but the Gym Lease did not impose a service-charge contribution obligation on the Gym Tenant.

For a period the rent from the Gym Lease was credited to the service charge account. After a dispute between Company A and the Gym Tenant was settled, Company A undertook refurbishment and also agreed to take no rent for a period; the contribution of rent to the service charge therefore ceased. Company A thereafter served notices indicating its intention to carry out major works to the gym, with estimates exceeding £218,000.

The Respondents applied to the First-tier Tribunal (FTT) under s.27A of the Landlord and Tenant Act 1985 challenging the inclusion from 2013 onwards of the entirety of gym-related costs in the residential service charge. The FTT dismissed the application and held that the service charges in respect of gym maintenance and litigation costs for 2013–2023 were payable and reasonable. The Respondents appealed to the Upper Tribunal (Lands Chamber) (UT). The UT (Judge Cooke) allowed the appeal in part, holding that the requirement to act "reasonably" required objective reasonableness and that it was manifestly unfair and therefore not objectively reasonable to charge residential leaseholders 100% of the gym costs after 2020 when their exclusivity had ended. Company A obtained permission to appeal to the Court of Appeal. This Court heard arguments and allowed Company A's appeal, restoring the FTT decision.

Legal Issues Presented

1. Whether, under the leases, the landlord was required to exercise its contractual power to designate service-charge items by reference to an objective reasonableness standard (such that the tribunal must itself decide what is objectively reasonable) or whether the relevant standard meant that the tribunal's role is to determine whether the landlord's decision was one that a reasonable landlord could have made (i.e., whether the landlord had acted within the range of decisions open to a reasonable decision-maker).
2. Whether the tribunals (FTT and UT) had jurisdiction under s.27A Landlord and Tenant Act 1985 to remake the landlord's designation decision (i.e., substitute their own decision) rather than simply review whether it was contractually lawful.
3. Whether, applying the correct legal test, Company A acted in breach of the lease by designating the entirety of gym-related costs as Residential Service Charge Items and charging those costs 100% to residential leaseholders for the periods in question.

Arguments of the Parties

Appellant's Arguments (represented by Attorney Morris)

• The lease provisions which require the landlord to act "reasonably" when designating service charge items should be read as qualifying the landlord's discretion, but they do not convert the tribunal into the primary decision-maker. The correct test is whether the landlord's decision was one that a reasonable landlord could have reached.
• S.27A(6) L&TA 1985 (as interpreted by the Supreme Court in Aviva) limits the tribunal to reviewing lawfulness and contractual compliance, not to substituting its own judgment in place of the landlord's discretion.
• The First-tier Tribunal applied that correct test and its factual evaluation that a reasonable landlord could have designated the gym costs as residential was open to it on the facts, given the terms of the Gym Lease (which preserved occupiers' rights), the landlord's obligations to maintain common parts, and the commercial arrangement whereby the gym tenant's rent had been treated as a contribution.

Respondents' Arguments (represented by Attorney Walsh and Attorney Barry)

• The UT correctly held that the phrase "acting reasonably" in the flat leases imposed an objective reasonableness test. Under that test the tribunal can and should determine whether it is fair or objectively reasonable to charge the whole of the gym costs to the residential leaseholders, particularly after the leaseholders' practical access to the gym was reduced following the pandemic.
• The tribunals have power under s.27A to determine whether the service charge claimed accords with the lease, and where a lease requires the landlord to act reasonably the tribunal may assess reasonableness by reference to objective standards and remit or substitute decisions where the landlord's conduct is not objectively reasonable.

Table of Precedents Cited

Court's Reasoning and Analysis

The court proceeded through a structured analysis, grounded in contractual interpretation and established authorities on contractual discretion and the tribunal's role under s.27A L&TA 1985:

1. Contractual structure and two-stage process. The court analysed paragraph 10 of schedule 4 in the flat leases and explained that the leases contemplate a two-stage process:
   • First, the landlord must decide which expenditure items fall into which "pots" (Residential, Building or Parking Service Charge Items).
   • Second, the items in each pot are apportioned among those liable (the "Proportions").
   The court emphasised that the central question in the appeal was the first-stage decision by Company A to place the entirety of gym costs into the Residential pot.
2. Interpretation of the wording "acting reasonably" and "in its reasonable discretion." The court read paragraph 10(a)(i) together with paragraph 10(f) and concluded these phrases must mean the same thing: the landlord must exercise a discretion qualified by a requirement to act reasonably.
3. Role of the tribunal under s.27A L&TA 1985 and effect of Aviva. The court held that Aviva clarified the scope of s.27A: the tribunal's role is to review contractual and statutory lawfulness — i.e., to ask whether the landlord acted in breach of contract in making the designation — rather than to remake the landlord's discretionary decision. The FTT does not become the primary decision-maker whenever a lease confers a discretion on the landlord.
4. Distinction between objective reasonableness and rationality review. The court reviewed authorities (including Braganza and Waaler) explaining that where a contract confers an unqualified discretion there are implied constraints (honesty, good faith, absence of arbitrariness) often scrutinised by a rationality-style review. However, where a lease expressly requires the landlord to act "reasonably" or to exercise a "reasonable discretion", the court concluded the proper legal test in this contractual context is that the landlord's decision will only be in breach if it is one that no reasonable landlord could have reached.
5. Application of the test to the facts. The court considered the factual matrix: the Gym Lease expressly preserved occupiers' rights, the landlord remained contractually obliged to maintain the gym and its equipment (benefitting leaseholders as well), and there had been an established practice of treating the gym rent as a contribution to costs. The FTT had asked whether Company A's decision was one that no reasonable landlord could have made and concluded it was not. The Court of Appeal held that question was one of evaluative fact for the FTT and that its conclusion was open to it; accordingly the UT was not entitled to substitute its own view.
6. Deference to specialist tribunal fact-finding and limited appellate role. The court applied the principle that appeals from the FTT to the UT (and further) are limited to points of law and that evaluations by a specialist tribunal deserve deference. The Court found no error of law in the FTT's approach or in its factual/evaluative conclusion.

Holding and Implications

Holding:

The Court allowed the appeal and restored the decision of the First-tier Tribunal.

Implications:

• Direct effect on the parties: Company A's designation of the entirety of gym-related costs as Residential Service Charge Items (and the consequent charging of those costs to the residential leaseholders for the periods in question) is restored as payable. The cross-appeal (Respondents' challenge to the UT's remedial approach) does not arise because the appeal was allowed.
• On legal principle: the court clarified that where a lease expressly requires the landlord to act reasonably or to exercise a reasonable discretion, the tribunal's role under s.27A is to determine whether the landlord's decision was outside the range of decisions open to a reasonable landlord — that is, whether it was a decision that no reasonable landlord could have reached. This formulation distinguishes (i) an objective reasonableness test that would make the tribunal the primary decision-maker (deciding what is objectively fair) from (ii) the review function preserved by Aviva. The decision therefore endorses deference to the landlord's contractual discretion unless the choice falls outside the bounds of reasonable conduct.
• No novel legal rule was created: the opinion applies and clarifies existing authorities (including Aviva, Braganza and related jurisprudence) to the particular contractual wording and factual matrix before the court.

Administrative and Other Notes

Anonymisation notes: company names and individuals in the source opinion have been replaced with consistent placeholders in this summary (for example, "Company A" for the landlord who appealed, "Company B" and "Company C" for predecessor and gym lessee entities, "Building A" for the property, "Gym Tenant" or "Individual A" for the gym operator, and "Judge [Last Name]" and "Attorney [Last Name]" for referenced judges and counsel). Citations to authorities have been preserved as they appeared in the original opinion because they are legal precedents cited by the court.