Neutral Citation no. NICh 12
Judgment: approved by the Court for handing down
(subject to editorial corrections)
1. The plaintiff claims as landlord for service charges due by the defendant as tenant, in respect of premises at Andras House, 60 Great Victoria Street, Belfast. The amount remaining in dispute is £36,464.72 which is the balance claimed on the apportionment of 40.8% of the total service charge expenditure for the building which includes the following disputed items –
(a) Entrance hall refurbishment £54,197.92 plus VAT.
(b) Upgrading passenger lift £14,725 plus VAT.
2. The issues are whether the plaintiff has complied with the requirements of the leases between the plaintiff and the defendant as to the calculation and payment of service charges by the defendant and secondly whether the disputed items are properly recoverable as service charges under the leases and if so whether in the amount claimed by the plaintiff.
3. The defendant occupies the second and fourth floors of Andras House under four leases dated 1 December 1988, 22 November 1989, 1 February 1991 and 8 April 1991. The relevant terms of the leases are the same for present purposes and are summarised as follows:-
(1) Clause 5 provides that the defendant pays additional rents calculated and made payable at the times and in accordance with Part I of the Second Schedule.
(2) Clause 7(1) provides that the plaintiff covenants "to maintain, repair, amend, renew, cleanse and so far as appropriate repaint and decorate and otherwise keep in good and tenantable condition" the structure of the building and common parts (entrances, halls, passages, staircases, lift, corridors and landings) with the proviso that the plaintiff is not responsible for rectifying any defect or want of repair without written notice.
Clause 7(2) provides that the plaintiff covenants to maintain in good working order and repair all apparatus equipment, plant and machinery serving the lift.
(3) By Part I of the second schedule the additional rents are a proportionate part of the expenses and outgoings incurred by the plaintiff in the repair, maintenance, renewal and insurance of the building and the provisions of services therein and the other heads of expenditure set out in Part 2 of the second schedule (called "the service charge"). Part 2 of the second schedule includes all costs and expenses incurred in the discharge of obligations under Clause 7(1), (2) and (3) and where necessary replacing any part of the building under those sub-clauses.
(4) Part 1 of the second schedule contains the following terms and provisions:
(a) The amount of the service charge shall be ascertained and certified annually by a certificate signed by the plaintiff or its agents as soon after the end of the plaintiff's financial year as may be practicable and shall relate to such year.
(b) Defines the financial year.
(c) Provides for a copy of the certificate to be supplied to the defendant.
(d) The certificate shall contain a fair summary of the expenses and outgoings incurred during the financial year to which it relates and the certificate "shall be conclusive evidence for the purposes hereof of the matters which its purports to certify".
(e) The annual amount of the service charge payable by the defendant shall be (40.8%) of the expenses and outgoings incurred in the year to which the certificate relates.
(f) The expenses and outgoings incurred are deemed to include not only expenditure actually incurred but also recurring expenditure, including reasonable provision for anticipated expenditure.
(g) The defendant to make an annual advance payment on account of the service charge as specified by the plaintiff or its agents.
(h) As soon as practicable after the end of each financial year the plaintiff to furnish to the defendant an account of the service charge payable for that year with due credit for the advance payment made and the defendant to pay the balance or to receive credit accordingly.
4. In November and December 1995 the plaintiff undertook refurbishment of the reception area at Andras House. The building had a central entrance and the refurbishment involved the creation of a new reception area at one end of the building to serve the upper floors. The accepted tender was in the sum of £72,000 and the work was carried out under the JCT agreement for minor building works. Payment was made on foot of an interim certificate issued on 2 January 1996 and final payment was made on foot of a final certificate issued on 16 January 1997, the total cost being £70,175.84.
The refurbishment of the entrance also extended to the lift which served the upper floors and which was repositioned in the same lift shaft to accommodate the new entrance. This work was carried out by specialist contractors and was also completed in December 1995 at a cost £14,725 (plus VAT) which sum was discharged by the plaintiff by a payment in February and a further payment in May of 1996.
5. By letter dated 23 August 1996 McConnell Martin as agents of the plaintiff furnished an account to the defendant for 40.8% of an estimated cost of the entrance refurbishment and upgrading of the lift (the final certificate not having been issued at that time). The defendant replied by letter of 29 October 1996 indicating that liability for the account was not accepted.
6. The defendant had been complaining to the plaintiff for some time prior to the works being undertaken about the unsatisfactory state of the building. By letter of 25 January 1995 the plaintiff complained about the inadequate state of the lift, leaks through the suspended ceiling outside the lift, the overflow of sewers through a manhole to the front of the lift and the generally appalling state of the foyer area. There were meetings between the parties which included discussions on proposals to undertake the repositioning of the entrance to the upper floors and the repositioning of the entrance to the lift in the manner eventually completed by December 1995. The evidence from the parties differed on whether the repositioning proposals emanated from the defendant's side or the plaintiff's side but I find it unnecessary to resolve that dispute because the issue depends upon whether the expenditure on the works falls on the defendant under the terms of the leases and (as I find below) this does not depend upon the defendant having requested the work.
7. On 15 November 1996 the plaintiff's agents issued a service charges certificate for the year ending 31 October 1996. That certificate did not include any item in respect of the refurbishment of the entrance or the lift. At that time the plaintiff had discharged the amount of the invoice for the works to the lift in the sum of £14,725 plus VAT and the interim certificate on the works to the entrance in the sum of £41,800 plus VAT. While the final certificate was not issued until 16 January 1997 the expenditure "incurred" by the plaintiff was deemed to include anticipated expenditure so the projected final account sum could have been included in the certificate as well as the sums actually incurred. The reason the plaintiff's agent did not include any of this expenditure was because the refurbishment works were dealt with directly by the plaintiff whereas routine expenditure was dealt with by the agents. However as noted above the plaintiff's agents had furnished to the defendant a separate account which claimed 40.8% of the refurbishment costs. Attached to the service charges certificate was an account of the service charge payable by the defendant for the purposes of paragraph (h) of Part I of the second schedule of the leases. This account apportioned 40.8% of the service charge to the defendant and then gave credit to the defendant for the advance payment made by the defendant and claimed the balance.
8. There were now parallel demands being made by the plaintiff's agent to the defendant, being on the one hand the service charges certificate and attached account for general service charges and on the other hand the account for the refurbishment of the entrance and lift. In respect of the latter the defendant maintained the position that it did not accept liability for that account but requested a certificate of expenditure with supporting documentation. By letter dated 18 February 1997 the plaintiff's agent furnished a quantity surveyor's certificate in the amount of the final account for the refurbishment of the entrance in the sum £70,175.84 and the defendant's agent continued to deny liability in respect thereof. The service charges certificate for the year ending 31 October 1997 did not include expenditure on the refurbishment of the entrance or lift.
9. By originating summons dated 27 March 1998 the plaintiff sought recovery of a proportionate part of the expenditure on the refurbishment of the entrance and the lift and by Order dated 15 January 1999 it was determined that the defendant was not obliged to pay the plaintiff any additional rent in respect of the refurbishment of the entrance and the lift. I was informed by counsel that Girvan J had dismissed the originating summons on the ground that a certificate under paragraph (a) of Part I of the second schedule of the lease was a condition precedent to any liability on the part of the defendant and the quantity surveyors certificate of 10 February 1997 was not such a certificate. Without determination on the merits the application was dismissed.
10. The plaintiff responded by issuing a service charges certificate dated 22 March 1999 in respect of the year ending 31 October 1998 in which the plaintiff included the expenditure on the refurbishment of the entrance and the lift. The expenditure on the lift was certified at £14,725 but the expenditure on the entrance was certified at £54,197.92 as the plaintiff had apportioned the total cost of £70,175.84 between "general repair/refurbishment", as expenditure for which the tenants would be liable, and "building upgrade/enhancement", for which the tenants would not be liable. An account of the balance payable by the defendant was attached. Perhaps considering that the expenditure on the entrance and lift had not been incurred in the year ending 31 October 1998 the plaintiff's agent issued a further service charges certificate dated 31 January 2000 which was stated to be in respect of the year ending 31 October 1996 and was to be read as an addendum to and in conjunction with the service charge certificate of 15 November 1996 (being the earlier certificate for the year ending 31 October 1996) and without prejudice to the contents of the service charges certificate of 22 March 1999 for the year ending 31 October 1998. This certificate of 31 January 2000 reproduced the calculation of expenditure on the entrance and lift which had appeared in the certificate of 22 March 1999.
11. The defendant submits that the plaintiff cannot rely on the additional certificates. It is not submitted that time is of the essence, but rather that the scheme of the leases requires that there should only be one certificate in respect of any financial year. Accordingly if a mistake is made the certificate cannot be set aside, although, the defendant submits, if a party has sustained loss as a result of that mistake the certifier may be liable in negligence. The Court of Appeal in England considered this issue in Universities Superannuation Scheme –v- Marks and Spencer Plc (1999) O4 EG 158. The lease provided for the landlords recovery of a proportion of service charges in a manner similar to that which applies in the present case, but the landlord's agents miscalculated the amount of service charges payable by the tenant and the landlord sought to recover the shortfall in a subsequent year. A preliminary issue was tried as to whether the service charge for earlier years could be re-opened. The Court of Appeal held the landlord was entitled to recover the correct amount of the service charge payable by the tenant for the earlier years.
12. There were two limbs to the Court of Appeal's approach. First, the certificate was divorced from the tenants obligation to pay. The clause providing for the service charge certificate did not make reference to the amount of the service charge "payable by the tenent". The obligation on the tenant was to pay a part of the service charge incurred by the landlord rather than to make payment of the amount certified. The certificate specified the total expenditure of the landlord and not the liability of the tenant. Accordingly payment of a lesser sum than the appropriate part of the amount incurred by the landlord was not performance of the tenant's obligation (unless there was a provision in the lease which had contrary contractual effect). The same situation arises in the present lease where paragraph (a) of Part 1 of the second schedule provides for the certificate, but does not make reference to the amount of the service charge payable by the tenant and paragraph (e) deals with the amount of the service charge payable by the tenant by reference to the expenditure incurred by the landlord.
13. Secondly, the Court of Appeal in the Universities case noted that it was not provided that the certificate should be binding final or conclusive, but rather there was an arbitration clause relating to challenges by the tenant to the service charge certificate. The tenant's right to challenge the certificate was restricted by the arbitration clause, but there was no restriction on the landlord's right to recover the correct amount of service charge payable by the tenant. The Court of Appeal criticised the presentation of the issue in terms of the "re-opening" of certified demands for past years and stated:
"The correct approach is to construe the lease in order to identify the nature and extent of the contractual obligation of the tenant to pay the service charge. The next step is to determine whether that obligation has been fully performed."
14. In the present case paragraph (d) provides that the certificate shall contain a fair summary of the landlord's expenses and outgoings and that the certificate "shall be conclusive evidence for the purposes hereof of the matters which it purports to certify." Parties to a contract may provide for the reference of differences to an arbitrator or for decisions on certain matters to be made by an expert or determined by one of the parties or an agent. Where the contract provides that such decisions shall be final the extent of such finality depends upon the true construction of the contract. In Concorde Graphics Limited –v- Andromeda Investments SA (1982) 265EG 386 the lease contained a service charge provision that any dispute as to the tenant's contribution was to be settled by the landlord's surveyors decision which was to be final and binding on the parties. It was held that as the demand for the tenants contributions was made by a firm who were both the landlord's managing agents and the landlord's surveyors they could not make a final and binding decision and the landlord would have to appoint other surveyors for the purpose.
15. The present certificate is stated to be conclusive evidence of the matters which it purports to certify. The certificate purports to certify the items of expenditure and the cost of each item. Whether each item qualifies for inclusion in the certificate is a question of law and the value of the item is a question of fact. The parties may agree that a question of law shall be referred to the final decision of an expert. In Re Davstone Estates Limited Leases (1969) 2 Ch 378 it was held that on the true construction of the particular leases the surveyor's certificates, which were stated to be final and not subject to challenge in any manner whatsoever, did not result in those certificates being conclusive as to whether expenses had been incurred in performance of the lessor's covenants. In addition Ungoed-Thomas J stated that the purported finality of the surveyor's certificate was void as contrary to public policy, although it would appear that that proposition is no longer correct. In Nikko Hotels (UK) Limited v MEPC Plc (1991) 28 EG 86 it was not accepted that there was such a rule of public policy. Knox J, following Jones v Sherwood Computers Services Limited (1992) 1 WLR 277, held that if parties agree to refer to the final and conclusive judgment of an expert an issue which either consists of a question of construction or necessarily involves the solution of a question of construction, the expert's decision will be final and conclusive and therefore not open to review or treatment by the courts as a nullity on the ground that the expert's decision on construction was erroneous in law, unless it can be shown that the expert had not performed a task assigned to him. Woodfall's Law of Landlord and Tenant at paragraph 7.180 submits that there is no rule of public policy which prevents parties from agreeing to refer to an expert a decision which involves questions of construction or other questions of law and adds:
"However a provision in a service charge clause making a certificate of a surveyor or accountant final and binding is likely to be construed in the absence of clear words as referring only to matters within the certifier's field of experience." (Citing Re Davstone Estates Leases).
On the other hand Halsbury's Laws of England 4th Edition Volume 27 (1) at paragraph 300 puts the matter in this way:
"Any attempt to oust the court's jurisdiction by making the determination of a third person, such as the landlord's agent, final and conclusive as to the amount of the service charge is void insofar as it seeks to make the person's decision final as to questions of law and construction (such as whether specific services can be charged for under the provisions of the lease), as opposed to referring to him the calculation or arithmetic involved in assessing the service charge."
I prefer Woodfall's statement of the position as more accurately reflecting the state of the authorities.
16. In the present case the certificate may be issued not only by the plaintiff's agent but also by the plaintiff itself. Further the certifier is not resolving differences which have already emerged between the parties as to the matters to be included in the certificates. Further the certificate does not purport to provide an expert assessment of matters to be included. While the parties may agree a mechanism which provides for finality for the determination of questions of law, it cannot have been the intention of the parties that a certificate which might be issued by the landlord should be final and binding in respect of the items of expenditure included in the certificate, particularly when a mistake might be made to the detriment of the landlord or the tenant. In any event I find that on the true construction of paragraph (d) the certificate is not final in relation to the items to be included in the certificate.
17. Accordingly on this first issue I adopt the approach of the Court of Appeal in Universities Superannuation Scheme Limited v Marks and Spencer Plc and construe the lease in order to identify the nature and extent of the contractual obligation of the tenant to pay the service charge and then determine whether that obligation has been fully performed.
The landlord is entitled to recover the correct amount that the tenant is under an obligation to pay. The provision that the certificate shall be conclusive evidence does not contradict that approach for the reasons set out in the preceding paragraphs. Further, the items in issue were "incurred" for the purposes of the leases in the year ending 31 October 1996 and were included in the certificate dated 31 January 2000 in respect of the year ending 31 October 1996. I reject the argument that only one certificate can be issued in respect of any year. I accept that a mistake as to the full extent of the items of expenditure to be included in a particular year may result in the issue of a second certificate and account for that year or an addendum to the original certificate and account issued for that year. The plaintiff has achieved that by the issue of the certificate dated 31 January 2000.
18. It therefore remains to determine whether under the terms of the leases the defendant is obliged to pay a proportionate part of the items claimed. The relevant verbs are to repair, maintain, renew, amend, (where necessary) replace and otherwise keep in good and tenantable condition. Credit Suisse v Beegas Nominees Limited (1994) 4 All ER 803 involved similar obligations which required a landlord to deal with longstanding problems with the cladding on the building by replacing that cladding with a newly designed system to comply with the obligation to put the building into a good and tenantable repair and to amend and renew the structure. Lindsey J (from page 821C) reviewed the position which I summarise as follows:
(1) The covenant "to keep" in a specified state includes an obligation "to put into" that state.
(2) Good and tenantable condition is such condition as having regard to the age, character and locality of the property would make it reasonably fit for the occupation of a reasonably minded tenant of the class who would be likely to take it.
(3) It is not necessary to demonstrate a state of disrepair in order to trigger a need for activity as all that is needed is that the subject matter be out of the specified condition.
(4) The obligation to put and keep in a given condition is not affected by the cost of the work.
(5) It may be that the obligation to put and keep in tenantable condition cannot require the provision of something which is of a wholly different character from that which has been let.
(6) The required condition falls to be determined by reference to the requirements, as to condition, of the hypothetical reasonably minded tenant of a class likely to take the building at the date of the demise and not by reference to the actual state of the building at the date of the demise.
19. Such hypothetical tenant would have required an appropriate access to the demised premises by way of the entrance area and the lift which would have required an access which was watertight and with secure drains and sewers and finished to a standard which was suitable for such a letting. It is apparent that the access was not in a good and tenantable condition in 1995 and that the landlord was obliged to put the access into such a condition. The achievement of an access in such a condition could not require that the access should necessarily remain of the same size or shape or route or even location. The obligation to amend clearly contemplates the alteration of the existing arrangements. The obligation to repair may involve reconstruction to a different design and a different manner and not necessarily in the identical position. This must also be the position in relation to the obligation to put into good and tenantable condition. In each case the assessment as to whether the work undertaken complies with or extends beyond the obligations imposed by the lease is a matter of degree and the test is whether the action taken has been reasonable and whether it results in a wholly different thing from that which was demised as stated in Ravenseft Properties v Davstone (Holdings) (1979) 1 All ER 929 at 937a (at least as far as the obligation to repair is concerned).
20. I consider the repositioning of the reception area and the lift to have been a reasonable means of addressing the obligations imposed by the lease and that the result was not a wholly different thing from that which was demised.
The defendant submitted that the creation of the new entrance and lift access was not "necessary". It is common case that it was necessary to undertake works which would put the entrance area in good and tenantable condition. From that starting point it cannot be the position that it has to be established that every item of work was itself necessary. There must be a range of reasonable responses that might be undertaken by a landlord in complying with the obligations under the lease. In the present case the plaintiff claims to have included within the items of work in the service charges certificate only those items which would have been included had the refurbishment been undertaken on the site of the original entrance. In the event the plaintiff says only such necessary works are charged to the defendant's account. I consider below whether that was in fact the case. Further the defendant submits that the plaintiff was not given written notice of any defect or want of repair as required by Clause 7(1) of the leases. As appears from the Credit Suisse case the obligation to put the premises in good and tenantable condition arises independently of any defect or want of repair and accordingly would not require written notice to the plaintiff. In any event such written notice of defects and want of repair was given to the plaintiff by the defendant's letter of 25 January 1995.
21. As outlined above the plaintiff has not included in the service charges certificate all items of expenditure on the refurbishment of the entrance to the building. The total cost of £70,175.84 has been apportioned so that a cost of £54,197.92 plus VAT has been included in the certificate as representing only the cost which would have been incurred in any event in refurbishing the old entrance. Objection is taken by the defendant to certain further items that do not fall within the permitted expenditure covered by the lease and I find as follows:-
(a) Roof/canopy £1,845.60. This is retained as an item on the evidence that leaks in the existing canopy required its replacement.
(b) External walls £896.02 and £623. These are retained as items on the evidence that they related to the construction of the canopy.
(c) External doors £2,138.20. This is excluded as an item on the evidence that new doors were not required at the old entrance.
(d) Internal walls/linings £2,263.94. This is excluded as an item on the evidence that the old internal walls/linings were intact and it could not be stated whether any work was required.
(e) Floor finishes £8,906.02. This is retained as an item on the evidence that this was largely carpeting of the entrance and stairs.
(f) All other items are retained as being within the provisions of the lease.
22. The deletion of the two items at (c) and (d) above involves a reduction of £4,404.14 with a corresponding apportionment of preliminaries. In relation to the lift refurbishment the sum of £1,015 should be excluded as a cost relating to the repositioning of the entrance so that the total expenditure on the lift refurbishment should be £13,710 plus VAT. The service charge certificate of 31 January 2000 which sets out in the schedule the summary of expenses and outgoings for the building for the year ended 31 March 1996 should be amended so as to exclude the two items for entrance hall refurbishment and the item for upgrading the passenger lift as set out above, and with any consequential amendments the account for the service charge payable by the defendant in respect of the premises for the year ending 31 October 1996 should be adjusted accordingly.