Summary of Court of Appeal Opinion
Factual and Procedural Background
The Tenants are leaseholders in a residential development (the "Development"). The Landlords have been the joint proprietors of the freehold of the Development since 2014. Under the leases the Tenants covenant to contribute to specified costs, including costs relating to electronic door systems and related plant and equipment.
In about 2000 Company A (the original developer) entered into a suite of hire and maintenance contracts with Company B for security and related systems for the Development, including a video door entry system (the "Countryside Contracts"). The principal contract for the door entry system was a 20-year "Rental and Maintenance Contract" commencing 6 July 2000. Key contractual features included a fixed first-year rental figure, annual RPI-linked rental adjustments, retention of ownership of the installation by Company B, provisions for repairs and replacements, and substantial exit liabilities for early termination.
Some leases were granted before 6 July 2000 and most were granted after that date. In 2008 a group of leaseholders challenged service charge amounts; that litigation was settled on terms capping charges at 90% of the then level of payment under the Countryside Contracts with no further RPI increases. The charges under the Countryside Contracts were thereafter passed through to leaseholders.
This appeal concerns service charge sums invoiced under the Countryside Contracts in 2018 (£203,293.10), 2019 (£193,624.17) and 2020 (£193,624.17), totalling £590,541.44, of which £398,440.73 related to the door entry system. The Tenants contend those amounts were not "reasonably incurred" within the meaning of s.19 of the Landlord and Tenant Act 1985. The Landlords accept they failed to exercise a contractual right to terminate in July 2020 and conceded a 50% reduction for the second half of 2020; the Landlords later procured a reduced rental arrangement from 2022 following a tender and consultation process.
Procedurally, the Tenants applied under s.27A of the 1985 Act. The First-tier Tribunal (FTT) upheld the Tenants' objection in respect of the Countryside Contracts and, in a subsequent decision, reduced the sums payable by substantial percentages. The Landlords appealed to the Upper Tribunal (Lands Chamber) where Judge Cooke allowed the Landlords' appeal in respect of the Countryside Contracts and concluded the relevant costs were reasonably incurred (accepting a 25% concession relating to 2020). The Tenants then appealed to this Court.
Legal Issues Presented
- Whether costs incurred by a landlord under long-term hire and maintenance contracts are "reasonably incurred" within s.19(1)(a) of the Landlord and Tenant Act 1985, and if so whether the assessment of reasonableness should be made by reference to the market at the time the costs were invoiced or by reference to the circumstances when the landlord assumed the contractual liability (the time of contracting).
- Where the burden of proof lies on an application under s.27A of the 1985 Act challenging that particular service charge items were not reasonably incurred (i.e., the allocation between evidential and legal burdens and the effect of a tenant establishing a prima facie case).
Arguments of the Parties
Tenants' Arguments
- The relevant test under s.19 requires inquiry into both process and outcome; for outcome the proper comparison is with market rates at the time the costs were incurred (i.e. when invoices were presented in 2018–2020).
- Evidence showed a new replacement door entry system could be purchased outright for significantly less than the amounts charged for 2018–2020 and that maintenance at a comparable local development cost far less; accordingly the charges in 2018–2020 were unreasonably high.
- The Tenants framed their case as a two-stage test (rationality of the original decision and reasonableness of the outcome) and asserted that the outcome in 2018–2020 showed unreasonableness.
Landlords' Arguments
- The correct focus for s.19 in this case was the position in 2018–2020: the Landlords had no practical choice but to pay the amounts invoiced because they were contractually bound under the long-term Countryside Contracts.
- The Landlords argued (as a fall-back) that where a landlord is contractually obliged to pay sums under a long-term agreement it would be difficult for tenants to show those sums were not reasonably incurred and the existence of the contractual obligation is a significant factor in assessing reasonableness.
- The Landlords also relied upon the lack of evidence about the circumstances of contracting in 2000 and argued it would be stale or an abuse for leaseholders to impugn the developer's original decision after many years.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Waaler v London Borough of Hounslow [2017] EWCA Civ 45 |
Established principles for s.19: protection from unnecessary or excessive costs; distinction between rationality (process) and reasonableness (outcome); two-stage approach and that outcome as well as process matters. |
The Court treated Waaler as the leading authority on the meaning of "reasonably incurred", adopting its emphasis on both process and outcome and using it to frame the available approaches to long-term contract cases. |
| Daejan Investments Ltd v Benson [2013] 1 WLR 854 |
Purpose of s.19 to protect tenants from paying for inappropriate works or paying more than appropriate. |
Cited as authority for the statutory purpose underpinning s.19 and to support the observation that tenants must be protected from excessive costs. |
| Hayes v Willoughby [2013] 1 WLR 935; Socimer International Bank Ltd v Standard Bank London Ltd; Braganza v BP Shipping Ltd |
Legal distinction between rationality (review of decision-making process) and reasonableness (external assessment of outcome). |
Used to explain the difference between tests of rationality and reasonableness and to support Waaler's two-fold approach. |
| Forcelux Ltd v Sweetman [2001] 2 EGLR 173 |
Illustrated that proper process does not guarantee reasonable outcome; market testing relevant to reasonableness of amount. |
Relied upon to show that even where a landlord followed appropriate processes, the amounts charged can still be unreasonable when tested against market evidence. |
| Burr v OM Property Management [2013] EWCA Civ 479; [2013] 1 WLR 3071 |
Costs are "incurred" for ss.18–20 purposes, at the earliest, when an invoice is rendered to the landlord. |
The Court accepted that the relevant costs in this case were incurred when Company B invoiced the Landlords in 2018–2020 and discussed whether the reasonableness assessment should be tied to that point in time. |
| Auger v London Borough of Camden (2008) LRX/81/2007 (Lands Tribunal) |
Considered the protection s.19 affords tenants where local authority entered long-term partnering agreements; commented on practical difficulty of challenging costs once agreements are in place. |
The Court treated Auger as not generally authoritative: its reasoning was tied to procurement and public law contexts and did not establish a universal rule that contractual obligation alone prevents a s.19 challenge. |
| London Borough of Lewisham v Rey-Ordieres [2013] UKUT 14 (LC) |
Consideration of reasonableness in long-term agreements entered via regulated procurement; quoted Auger but did not follow it. |
Cited to show that authority does not support a general proposition that tenants cannot challenge costs under long-term contracts. |
| Radcliffe Investment Properties Ltd v Meeson [2023] UKUT 209 (LC) |
Discussed relevance of historical neglect and delay between default and cost incurrence to the reasonableness assessment. |
Used to reject an argument that historic causes of a cost are always irrelevant; the Court observed the principle is flexible and context-dependent. |
| Yorkbrook Investments Ltd v Batten (1986) 18 HLR 25 (CA) |
Guidance on burden of proof: tenant must establish a prima facie case; court decides on whole of the evidence. |
Applied to explain the evidential/legal burden framework: tenants must raise a prima facie case of unreasonableness before the landlord must justify costs. |
| Schilling v Canary Riverside Development Ptd Limited (LRX/26/2005) (Lands Tribunal) |
Applied Yorkbrook: tenant must establish a prima facie case of unreasonableness. |
Relied on to support the approach that the tenant bears the obligation to put the matter in issue and establish a prima facie case. |
| Enterprise Home Developments LLP v Adam [2020] UKUT 151 (LC) |
Reaffirmed Yorkbrook: tenant must establish a prima facie case before the FTT should adopt a sceptical approach. |
Used to support the pragmatic approach to evidential burdens in s.27A proceedings. |
| 32 St John's Road (Eastbourne) Management Company Ltd v Gell [2021] EWCA Civ 789; [2021] 1 WLR 6094 |
Confirmed that tenants should plead s.19 objections and establish prima facie case; courts will not investigate reasonableness absent a properly pleaded defence. |
Cited as endorsement of Yorkbrook and as authority that a tenant must plead a defence challenging service charge reasonableness. |
| Brendon International v Water Plus [2024] 1 WLR 2434 |
Explained distinction between legal (ultimate) burden and evidential burden. |
Used to clarify the Court's discussion of burdens of proof and evidential obligations. |
Court's Reasoning and Analysis
The Court began by identifying three possible approaches to assessing whether costs under a long-term contract are "reasonably incurred":
- Assess reasonableness by reference to the market at the time the costs are incurred (the invoice date).
- Treat the landlord's contractual obligation (i.e. lack of choice at the invoice date) as determinative of reasonableness.
- Adopt the approach of the Upper Tribunal Judge: assess whether it was reasonable for the landlord to assume the contractual commitment in the first place (i.e. judge outcome by reference to the circumstances at the time the landlord took on the liability), while still recognising outcome and process both matter.
The Court rejected the first approach as an exclusive test: outcome at the invoice date is a relevant consideration but, for long-term contracts, it must be read in light of whether it was reasonable to assume the contractual liability at the time of contracting. The Court also rejected the second approach (that contractual obligation alone suffices) because that would deprive s.19(1) of practical effect and finds no principled support in the authorities relied upon by the Landlords. Instead, the Court adopted the third approach: when costs arise under a long-term contract the proper inquiry includes an examination of the circumstances in which the landlord entered into the contractual commitment and whether, judged at that time (taking account of market alternatives and contract terms then available), it was reasonable to have committed to incur those costs.
On burden of proof the Court analysed the distinction between legal (ultimate) burden and evidential burden. It summarised the established, pragmatic approach: the tenant must identify in pleading the cost elements challenged and must establish a prima facie case that they were not reasonably incurred. If the tenant does so, the evidential burden shifts to the landlord to adduce evidence to justify the costs; the tribunal then decides on the whole of the evidence. The Court relied on Yorkbrook, Schilling, Enterprise and Gell in articulating this framework.
Applying these principles to the present case, the Court observed that neither party had advanced the correct legal test before the FTT or the Upper Tribunal, and that there was a paucity of evidence about the circumstances in which the Countryside Contracts were entered into in 2000, varied in 2008, or novated in 2014. The Court found that the Upper Tribunal Judge was correct in principle to focus on the reasonableness of entering into the commitment, but erred by concluding there was "no evidence whatsoever" that the contracts might have been a bad deal in 2000. Equally, it was improper for the FTT to decide the matter on the basis of findings about 2000 when the Tenants had not advanced that case below and the Landlords had not had the opportunity to adduce evidence in response.
Accordingly, the Court concluded that justice required remittal to the FTT so that the parties could be directed to plead and adduce evidence on the correct legal test (i.e. the reasonableness of the landlord's decision to assume the contractual liability judged at the time of contracting), consistent with the Yorkbrook prima facie framework. The Court therefore allowed the appeal and remitted the dispute for fresh determination by the FTT on that basis.
Holding and Implications
DISPOSITION: The appeal was allowed and the matter remitted to the First-tier Tribunal for determination under the legal test identifying whether it was reasonable, at the time the landlord assumed the contractual commitment, to incur the relevant costs (subject to the established requirement that a tenant must first establish a prima facie case of unreasonableness).
Implications
- The Court clarified that, for costs arising under long-term agreements, the s.19(1)(a) inquiry properly includes consideration of the circumstances in which the landlord entered into the contractual obligation (i.e. reasonableness of committing to the contract at the time), as well as the outcome when invoices are presented.
- The pragmatic evidential framework remains: a tenant must plead and establish a prima facie case that particular costs were not reasonably incurred before the landlord is required to justify those costs; the tribunal decides on the whole of the evidence.
- In the present case the direct consequence is that the FTT will re-open the matter, with directions allowing the Tenants to plead a case that the 2000 contracts were unreasonably entered into (if they wish) and allowing the Landlords an opportunity to respond and to adduce evidence. No final factual determination on reasonableness was made by this Court; the factual questions are to be resolved by the FTT on the correct legal test.
- The decision refines the application of s.19 to long-term contracts but does not produce a categorical rule that contractual obligation alone bars a tenant's s.19 challenge.
Disposition and Next Steps
The case is remitted to the FTT for rehearing on the basis identified by the Upper Tribunal Judge but conducted with the parties addressing that test and with appropriate evidence and pleadings. The Tenants are to formulate any case that the Countryside Contracts were unreasonably entered into; if a prima facie case is made, the Landlords will be required to adduce evidence in response.
Panel
Opinion delivered by Judge Zacaroli; Judge Snowden and Judge Nugee agreed.