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Lawbite: Landlords decide what’s “fair” when it comes to service charge proportions

  • United Kingdom
  • Litigation and dispute management
  • Real estate
  • Real estate litigation - LawBite

10-03-2021

Criterion Buildings Ltd v McKinsey & Company Inc [2021] EWHC 216 (Ch)

The High Court has recently found that where the service charge must be divided amongst several tenants, what is a “fair proportion” is a subjective question for the landlord.

The Claimant, Criterion Buildings Ltd (“Criterion”) issued a debt claim against its former tenant McKinsey & Company Inc (“McKinsey”) for the sum of £2.2 million in connection to withheld service charge payments under the lease of its flagship office premises at One Jermyn Street, Piccadilly Circus. McKinsey occupied part of the premises with various other tenants occupying the other parts.

Under the lease McKinsey was to pay the “due proportion” of the service charge which was defined as a “fair” proportion to be determined by the landlord, taking into account the use made and benefit received by McKinsey.

There were various elements to the dispute, but the key question was whether McKinsey was charged a “fair” apportionment of the total service charge cost.  McKinsey’s case was that it paid too high a percentage of the service charges for the whole of the building and that the apportionment favoured other tenants.  It argued that Criterion had not therefore charged them a “fair” proportion on an objective standard.

The High Court held that where there are several tenants amongst whom the service charge must be divided, and it makes no financial difference to the landlord how this is done, it is not sensible to see this as an objective standard that would allow any tenant to simply reject the decision as “unfair”. Instead, in order to give effect to the service charge provisions in such cases the decision as to a “fair proportion” is a subjective decision for the landlord.

The High Court held that McKinsey, as tenant, had the burden of establishing that the apportionment adopted by Criterion, as landlord, was irrational or otherwise on a proper construction of the terms of the lease did not amount to a fair proportion. It was held that McKinsey had failed to discharge the requisite burden of proof.

Key points

  • a great decision for landlords during what is a difficult market and one in which commercial tenants are exploring legitimate ways to withhold payments due under leases
  • The High Court has confirmed that where a “fair” proportion due by each tenant under leases is to be determined by the landlord, this is a subjective matter for the landlord, and the Court will not interfere save for in specific circumstances
  • it was confirmed that the role of the Courts is to see that the terms of the particular lease are observed. Commercial tenants should consider expressly agreeing objective standards for determining service charge proportions and/or limiting landlord’s discretion in new commercial leases

 

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