Hey big spender: court of appeal considers challenges to service charges under s.19 Landlord and Tenant Act 1985

Background and procedural history

The case of Spender v FIT Nominee Ltd [2025] EWCA Civ 1578 started in the First Tier tribunal. The lessees of a large residential estate on the Isle of Dogs sought to challenge the costs of the estate’s security and entry systems on the basis they were unreasonable. The matter continues for the parties involved as last month the Court of Appeal sent the matter back to the tribunal last month to adduce evidence not advanced in the first proceedings. However, their judgment confirms important principles in assessing the reasonableness of a service charge cost.

The service charge dispute

In Spender, the lessees of a large residential estate, sought to use s.19 of the Landlord and Tenant Act 1985 to challenge the reasonableness of the costs arising from the contract entered into in 2000 for the security and entry systems to their estate. That twenty-year contract confirmed with the original developer was binding on the new landlord. At first instance, the landlord accepted that the contract did not necessarily offer the “best deal” to lessees and over the lifetime of the contract, the costs to maintain the system became comparatively high.

The lessees argued that the service charge costs had not been “reasonably incurred” as required under s.19, because the terms of the original contract reflected a “bad deal”. Consequently, the lessees should not have pay the contractual costs from the point at which cheaper alternatives became available.

Tribunal decisions

The lessees were successful at first instance, but that decision was overturned a year later by the Upper Tribunal. The Upper Tribunal judge determined there was no evidence to suggest that the developer who entered the original contract could have made better contract terms back in 2000. It was reasonable for the landlord to incur the ongoing contractual costs for a secure entry system and for that to be recovered from the lessees via the service charge.

The Court of Appeal decision

A group of 70 lessees (of a total of 436) appealed to the Court of Appeal. On appeal, the court reaffirmed the position that the correct test for assessing reasonableness of service charges under s.19 of Landlord and Tenant Act 1985 was one of both process and outcome.

The court rejected the lessees’ argument that the high contract costs should be compared against current market rates when invoiced – the purpose of s.19 is not to put a cap on costs at “a reasonable amount”. However, the court also rejected the landlord’s argument that a cost incurred by the landlord because of a contractual obligation meant it was automatically a reasonable cost. By the court’s reasoning, if that were correct it would deprive s.19 of its purpose.

Evidence and remittal to the tribunal

The court set out that as the landlord had been challenged in respect of this service charge item, it should provide evidence to justify the reasonableness of the costs incurred, including the circumstances surrounding the original contractual agreement. In this case as neither party provided sufficient on that point the court opted to send the matter to the First-tier Tribunal so that evidence could be properly adduced.

Practical implications

Spender serves as a helpful reminder to landlords of the need to carefully consider the terms of long-term contracts when those contractual costs will be sought from the lessees via the service charge.

The outcome of the FTT decision is awaited but landlords should take heed that keeping records or evidence that the cost/benefit of a contract was considered prior to signing mean those costs will be easier to justify both to lessees and the tribunal if challenged. Similarly, existing contracts, particularly longer-term contracts, should be reviewed so the terms can be revisited or the contract ended if necessary.

Lessees should note that any legal challenge to the reasonableness of service charges will have better prospects of success where arguments are supported by contemporaneous or expert evidence.

How we can help

If you are a landlord or lessee facing a challenge to the reasonableness of service charge costs, please get in touch and we can advise on the strength of your position, the evidence required to support it and how best to present your case before the tribunal or courts.