England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION,
CARDIFF DISTRICT REGISTRY
(HIS HONOUR JUDGE MOSELEY
QC Sitting as a High Court Judge)

		Royal Courts of Justice Strand London WC2 Monday, 22nd October 2001

Monday, 22nd October 2001

1. LORD JUSTICE JUDGE: I will ask Lord Justice Jonathan Parker to give the first judgment.
2. LORD JUSTICE JONATHAN PARKER: This appeal raises questions as to the true construction of provisions contained in substantially identical Underleases of two light industrial units at Kingfisher House, Kingsway North, Team Valley Estate, Gateshead in Tyne and Wear, relating to the imposition of a service charge. The appellants are Mr and Mrs Kenyon-Smith, who are the underlessees of Unit B4 at Kingfisher House, and Mr Ilsen, who is the underlessee of Unit A3 at Kingfisher House. So far as material to this appeal, the provisions of the two Underleases are substantially identical.
3. The respondent to the appeal is Wilor Investments Limited, which (as is common ground) is entitled to the reversion on the Underleases. The respondent is now in liquidation, and by an order made by Judge LJ on 10 October 2001 it was ordered that unless the liquidator notified this court otherwise (which, as I understand it, he has not done) a cross-appeal filed by the respondents should be dismissed and the appellants' appeal should proceed in the respondent's absence. Accordingly, only the appellant appears on this appeal; it is represented by Mr Mark Dight of counsel.
4. In procedural terms, the appeal is against an order dated 21 December 2000 made by His Honour Judge Moseley QC sitting as a High Court Judge of the Chancery Division in the Cardiff District Registry, parts of which order reflected the judge's conclusions on preliminary issues which had arisen between the parties as to the true construction of the provisions in question, and which had been argued before him on 30 November 1999.
5. The background to the issues of construction which arose before the judge, and which arise on this appeal, is in summary as follows.
6. The freehold of Kingfisher House is owned by English Industrial Estates Corporation, which on 13 December 1990 granted a Headlease of the whole of Kingfisher House to a company called Enterprise Zone Development Ltd ("EZD"). Kingfisher House is a substantial office block divided into 14 units, with common parts and a car park. EZD was a company set up by a Mr Williams and a Mr Slater as part of a business expansion scheme. The scheme involved the grant by EZD of subleases of individual units to investors in the scheme. The units were then to be sub-under-let to occupational tenants, via an associated company called Enterprise Zone Developments (Management Services) Ltd, which would act as letting agent, collecting the rents from the sub-tenants and paying them over to the investors, subject to a retention in respect of service charges, plus a small commission. The two Underleases with which this court is concerned on this appeal were for terms of 125 years less three days at a peppercorn rent. Mr and Mrs Kenyon-Smith's Underlease is dated 20 December 1990; that of Mr Ilsen is dated 8 January 1991. In each case, the Underlease was granted in consideration of a substantial premium.
7. In 1992 EZD went into administrative receivership, and the receivers sold the residue of the Headlease to the respondent, which thereby became entitled to the reversion immediately expectant on the termination of the Underleases. (It appears that the respondent has since disposed of that interest, but such disposal is not material for present purposes).
8. In due course a dispute arose between the investors (including the appellants) and the respondent, concerning the level of service charges sought to be charged by the respondent. Part of this dispute concerns the true construction of the relevant provisions in the Underleases. It is with that aspect of the dispute alone that this appeal is concerned. I accordingly turn straightaway to the relevant provisions. In the summary which follows, I will refer (as did the judge) to the Underlease of Mr and Mrs Kenyon-Smith although, as already noted, both leases are in effect in a standard form.
9. Clause 2.4.3 of the Underlease provides that, by way of further rent, the underlessee will pay a service charge "to be payable at the times and in the manner specified in the First Schedule." As the judge noted in the course of his judgment (to which I will refer in greater detail in a moment) the First Schedule provides not merely for the times and manner of payment; it contains all the substantive provisions relating to the service charge.
10. I turn then to the First Schedule. Paragraph 1 of the First Schedule is headed "Review of the Service Rent". It is introduced by the words:

"In this Lease unless there be something in the context inconsistent therewith:-"

11. There then follow a number of definitions. The second definition is the definition of the expression "the Annual Expenditure." That expression is defined as meaning:

"(A) all costs and expenses incurred or payable or prospectively payable by the Landlord in securing the performance of the covenants on its behalf contained in Clauses 4.2; 4.3; 4.5; 4.6; 4.7 and 4.8 ('the said Covenants') (excluding any expenditure necessitated by the negligent act or neglect of the Landlord) or its servants or contractors with the addition of 10% of the total of all such costs and expenses in respect of the Landlord's management expenses.

(B) such sum as the Landlord shall in its absolute discretion provide for the cost of the future performance (whether during the term created by the Lease or later) of such obligations in the said Covenants as are by their nature to be carried out less frequently than annually with the object (so far as reasonably possible) of attaining a constant Annual Expenditure in real terms."

12. Paragraph (B) in that definition, which concerns the establishment of a sinking fund, is not in issue for present purposes.
13. The covenants referred to in paragraph (A) in the definition of "the Annual Expenditure" relate to the following matters: 4.2 the insurance of the building; 4.3 payment of rent under the superior lease; 4.5 the repair of the building; 4.6 the painting of the exterior of the building; 4.7 the maintenance of the common parts of the building.
14. The covenant in Clause 4.8 of the Underlease I should quote in full. It is headed "Provision of Part A Services and Part B Services". Under that heading, the covenant reads as follows:

"Subject to the Tenant paying the Service Charge to procure that throughout the term the Part A services shall be provided and (at the Landlord's sole discretion) to provide the Part B services or such of them as it shall deem necessary."

15. The expression "the Part A Services" is defined in Clause 1 of the Underlease as meaning "the services specified in Part A of the second schedule". The expression "the Part B Services" is similarly defined as "the services specified in Part B of the second schedule". Part B of the second schedule is headed "Services which the Landlord may provide". Paragraph 2 under that heading reads as follows:

"Provision of such staff for the servicing maintenance and cleaning of the Common Parts as the landlord may reasonably consider necessary including the provision of a manager."

16. I need not, I think, refer to any other provisions in the Underlease.
17. The immediate cause of the dispute which has given rise to the issues of construction was the employment by the respondent of an associated company called Campus Property Services Ltd as manager or managing agent of Kingfisher House. The respondent claims that it is entitled, under the provisions of the Underlease relating to the service charge, to recover the fees charged by that company as consideration for the provision of management services as being: "Costs and expenses incurred or payable... by [the respondent] in securing the performance of the [specified covenants]..." within paragraph (A) of the definition of the expression "the Annual Expenditure" to which I have already referred. On that basis it is contended on behalf of the respondent that it is entitled both to recover that fee in full as costs and expenses under the first part of paragraph A of the definition of "the Annual Expenditure", and also to charge "10 per cent of the total of all such costs", that is to say, such costs including the management fee charged by Campus.
18. This construction of the relevant provisions is disputed by the appellants. The appellants' case in summary is that the respondent's entitlement in respect of its costs and expenses of management, whether it carries out its management function in-house or by means of a managing agent or otherwise, is limited to 10 per cent of the costs referred to in the first part of paragraph (A), which in turn do not include management costs.
19. This dispute led to the hearing before His Honour Judge Moseley QC on 30 November 1999. At that hearing, the judge, faced with a number of claims and crossclaims going well beyond the issues of construction, considered that it would be appropriate to treat the issues of construction as preliminary issues and to deal with them in advance of the remaining issues before him. He accordingly conducted a hearing on that date limited, as I understand it, to the issues of construction. Later hearings followed at which additional issues were raised and evidence was called, but it is not necessary for present purposes to look any further into the procedural history of the various disputes between the parties. Suffice to say that in his order dated 21 December 2000 the judge incorporated his conclusions on the issues of construction. I must refer to parts of that order. Paragraph 1 of the order contains a number of definitions as follows:

"(1)'claimant' means Wilor Investments Ltd [the respondent].

(2) 'defendants' means Henry Ilsen

(3) 'the Underlease' means [then there is reference to Mr Ilsen's underlease]

(4) 'costs and expenses' means all costs and expenses incurred or payable or prospectively payable by the claimant in securing the performance of the covenants on its behalf [it then refers to the specified covenants].

The term 'costs and expenses' does not include the costs on any accountancy services which have been or may be incurred by the claimant in connection with any of the claimant's obligations under the Underlease.

(5) 'the landlord's management expenses' means the 10% of costs and expenses which the claimant is entitled to recover from the defendants in respect of costs and expenses by virtue of the Underlease first schedule, definition of 'the annual expenditure' paragraph A.

(6) 'the fees of a managing agent' means such of the fees of a managing agent providing management service for the claimant as fall within the definition of 'costs and expenses' as defined in (4) above.

(7) 'the relevant period' means the period from 31 December 1933 to 30 March 1997."

20. I can then go to paragraph 4 of the order, which reads as follows (so far as material):

"The fees of a managing agent which the claimant is entitled to recover in respect of the relevant period is an amount equal to 10% of the costs and expenses excluding for the purpose of calculating those fees and expenses in this paragraph the fees of the managing agent...

5. There shall be deducted from the fees of a managing agent which the claimant is entitled to recover from the defendants in respect of the relevant period an amount equal to the landlord's management expenses.

6. So long as the standard of management service provided by the claimant to the defendants continues to be as provided during the relevant period, the claimant shall not be entitled to recover from the defendants in respect of the fees of a managing agent an amount exceeding an amount calculated in accordance with paragraphs 4 and 5 above, this paragraph having no application in respect of any period past or future in which management services are provided to a higher standard than those which were provided during the relevant period."

21. I confess that I have not found the meaning of those provisions of the order to be at all clear. What cannot, however, be disputed, is that they were intended to give effect to the judge's answers to the preliminary issues raised and argued before him as to the construction of the service charge provisions. I turn, therefore, to the conclusion of the judge's judgment delivered on that day, where he states how he answers each of those preliminary issues. (I take it up at page 9G of the transcript of the judgment).

"The three questions that are posed by the parties by agreement for my consideration have consequently to be answered thus. The first question is: whether Wilor Investments, in calculating the service charge payable by the defendants under clause 2.4.3 of the underleases, in the terms and in the manner provided in the first schedule thereto, is entitled, on a true construction of the provisions, to recover in respect of the landlord's administration and management costs and expenses a sum greater than 10 per cent of the costs and expenses incurred by the landlord in providing the service referred to in clauses 4.2 to 4.8 of the underleases. The answer to that is yes.

The second question is: whether, on the true construction of the underleases, the landlord is, if it engages a managing agent to procure the performance of the covenants in clauses 4.2, 4.3 and 4.5 to 4.8 of the underleases, entitled to recover fees of that managing agent as being costs and expenses incurred or payable, or prospectively payable, by the landlord in securing performance of those covenants. The answer to that question is also yes.

The third question is whether, on the true construction of paragraph 2 of part B of the second schedule, the landlord is entitled to incur the cost of the provision of a manager, and, if so, whether the cost of such provision is to be included within the 10 per cent of the total of all such costs and expenses in the landlord's management expenses, as defined in clause A of the annual expenditure, set out in part 1 of the first schedule to the underleases. The answer to that is rather longer than the others. The landlord is entitled to incur the cost of the provision of a manager, but the cost of such provision is not to be included within the 10 per cent provision at the end of the definition in the first schedule, paragraph 1A."

22. The effect of the judge's answers to those questions is accordingly as follows. If the landlord employs a managing agent to procure the performance of the relevant covenants, then the fees charged by that managing agent are costs and expenses falling within the definition of "the Annual Expenditure". Hence, it would appear, the landlord is (in the judge's view) entitled to recover (a) 100 per cent of that fees, plus (b) 10 per cent of all the costs including that fee. In other words, the employment of a managing agent will enable the landlord to recover 110 per cent of its fee from the tenant. If, on the other hand, the landlord employs a manager in-house (as it were) then, in the judge's view, the cost of so doing is to be excluded from the calculation of the 10 per cent payable to the landlord in respect of management services.
23. Addressing the preliminary issues in the course of his judgment, the judge expressed his reasons for his conclusions as follows. (I take it up at page 8A of the transcript of the judgment):

"I mentioned in starting that the point is a short one, but it is not a matter of first impression. The approach I adopt is as follows. Firstly, the landlord is only entitled to recover from the tenant payments which the landlord is authorised by the lease or otherwise to recover.

Secondly, in my view the fees of a managing agent appointed by the landlord falls within the words 'all costs and expenses incurred or payable, or prospectively payable, by the landlord in securing the performance of the covenants on its behalf contained in...' and so on, unless the prima facie meaning is altered by anything else in the lease. The lease must be construed as a whole.

Thirdly, an important question is whether that prima facie meaning is altered by the words 'with the addition of 10 per cent of the total of all such costs and expenses in respect of the landlord's management expenses.'

In my view, the omission in that part of the paragraph of the word 'costs' in the phrase 'in respect of the landlord's management expenses' is significant. What, in my view, is envisaged by that part at paragraph A is that the landlord's own overheads [the transcript then includes the words 'costs', but in a later judgment the judge suggested that that word should be omitted] - telephones, office expenses, travelling to meet any managing agent, banking expenses, and matters of that kind - are to be 10 per cent.

Fourthly, it seems to me that that conclusion is also indicated by the word 'cost' in paragraph B of the same definition.

Fifthly, in my view the reference in the second schedule, part B, paragraph 2, to the provision of a manager does not affect the prima facie meaning of 'all costs and expenses incurred or payable' in the phrase to which I have already referred. The cost of providing such a manager is, in my view, not management expenses, for the purposes of the final part of the important paragraph to which I have referred. It is 'cost', not 'expenses'.

Sixthly, prima facie the meaning of the words 'all costs and expenses incurred or payable, or prospectively payable, by the landlord' is not displaced by anything in the lease.

Lastly, I am not persuaded that that meaning is displaced by anything in the factual circumstances, of which I heard no evidence by the time that the argument on this point had ended. It may be that the construction I have arrived at gives rise to a risk of abuse by the landlord, as for example by appointing a connected company which overcharges, but the law has other ways of dealing with such an abuse. It is not disputed by the claimant that the charges must be reasonable."

24. For the appellants, Mr Dight submits that the relevant provisions do not enable the landlord, by appointing a managing agent, to (in effect) have his cake plus 10 per cent of it. Further, he submits that if the landlord employs an extra member of staff as a manager, then the costs of so doing are not costs which fall to be included among the landlord's costs and expenses of performing the specified covenants. He submits that the landlord is entitled by way of management fee, only to a figure equal to 10 per cent of the total of its costs and expenses of securing performance of the relevant covenant. He submits that such costs and expenses do not, on the true construction of the relevant provision, include the costs of management. He submits that whether the landlord elects to manager the property in-house or whether it elects to engage a managing agent for that purpose, it cannot recover the costs of so doing as part of the annual expenditure. He submits that the landlord's entitlement to 10 per cent of the total of the specified costs and expenses represents, in effect, its fee for managing the premises, however it discharges that function.
25. In a skeleton argument submitted on behalf of the respondent at a time when it was represented by counsel (Mr James Thom) counsel submitted that the expression "all costs and expenses incurred... in securing the performance of the covenance" is wide enough on its own to include the costs of a managing agent and the cost of employing an extra member of staff as a manager.
26. In the first place, I do not consider that, in the context of the Underlease, any particular significance should be attached to the fact that the final words of paragraph (A) in the definition of "the Annual Expenditure" include no reference to costs, but refer only to expenses. I agree with Mr Dight that it would be unsafe to base a conclusion as to the true construction of the paragraph on an assumption that the draftsman intended to draw some meaningful distinction between costs on the one hand and expenses on the other. Had he intended to draw such a distinction, he could (and I think would) have made his intention clear. Rather, as I read the Underlease, the draftsman has used the words "costs and expenses" more or less interchangeably.
27. In the second place the expression "all costs and expenses incurred or payable... in securing the performance of the [specified] covenants cannot", in my judgment, have been intended to include costs and expenses incurred or payable by the landlord in discharging its general management function, that is to say the function of arranging for or procuring the necessary steps to be taken to perform the specified covenants; otherwise the landlord would be entitled to recover 110 per cent of those costs or expenses - a result which, to my mind, the draftsman cannot sensibly have intended. In my judgment the costs and expenses referred to in the first part of paragraph (A) are, on the true construction of that paragraph, read in the context of the Underlease, limited to the direct costs of complying with the various covenants, that is to say, the cost of the insurance premium, the cost of repairs, repainting and so forth, and the costs of providing "the services". Hence the entitlement of the landlord to recover in respect of its general management function is, in my judgment, limited to a sum representing 10 per cent of the total of those costs.
28. It follows that if the landlord elects to delegate its general management function to a managing agent, it cannot in my judgment recover the cost (or expense) of so doing under the first part of paragraph (A), and hence cannot include it in the calculation of the 10 per cent to which it is entitled under the latter part of that paragraph.
29. As to the employment of a "manager" under paragraph 2 of Part B of the Second Schedule to the Underlease, it seems to me that the significance of this paragraph is very much less than has been appreciated. Construing paragraph 2 in context, a manager provided under that paragraph is not in my judgment the equivalent of a managing agent. On the contrary his or her responsibilities are limited to the servicing, maintenance and cleaning of the common parts. As I see it, the purpose of including in paragraph 2 of Part B of the second schedule a power to employ additional staff (a power which the landlord has in any event) must be to enable the landlord to charge appropriately for so doing by, in effect, upgrading the services which it provides in relation to the common parts. But in my judgment this is nothing whatever to do with the discharge of the landlord's general management function to which I referred earlier; this is to do with the provision of a specific service. If the landlord chooses to provide a manager pursuant to Part B (and it is not obliged to do so) then it seems to me to follow from the conclusions which I have already expressed that the landlord is entitled to include the costs or expense of so doing as a (direct) cost (or expense) of securing the performance of the covenant contained in Clause 4.8 of the Underlease. It follows that the landlord will be entitled to bring that costs or expense into account in calculating the 10 per cent to which it is entitled in respect of its general management function.
30. In disagreement with the judge, therefore, I would answer the three questions posed in the final part of his judgment which I quoted earlier as follows (and I will repeat in each case the question and give my answer): 1. Whether Wilor Investments in calculating the service charge payable by the defendants under Clause 2.4.3 of the Underleases in the terms and in the manner provided in the first schedule thereto, is entitled, on a true construction of the provisions, to recover in respect of the landlord's administration and management costs and expenses a sum greater than 10 per cent of the costs and expenses incurred by the landlord in providing the service referred to in Clauses 4.2 to 4.8 of the underleases. My answer to that question is No.
31. 2. Whether, on the true construction of the underleases, the landlord is, if it engages a managing agent to procure the performance of the covenants in Clauses 4.2, 4.3 and 4.5 to 4.8 of the underleases, entitled to recover fees of that managing agent as being costs and expenses incurred or payable, or prospectively payable, by the landlord in securing performance of those covenants. My answer to that question is also No.
32. 3. Whether, on the true construction of paragraph 2 of Part B of the Second Schedule, the landlord is entitled to incur the cost of the provision of a manager, and, if so, whether the cost of such provision is to be included within the 10 per cent of the total of all such costs and expenses in the landlord's management expenses, as defined in Clause A of the annual expenditure, set out in Part 1 of the First Schedule to the Underleases. My answer is as follows: the landlord is entitled to appoint a manager to perform the (limited) functions specified in paragraph 2 of the Second Schedule, and the cost or expense of so doing is to be brought into account in the calculation of the 10 per cent referred to in paragraph (A) of the First Schedule as being a costs or expense of securing performance of the covenant contained in clause 4.8 of the Underlease.
33. For the reasons which I have given I would allow the appeal, set aside such parts of the orders as are intended to reflect the judge's conclusions on the preliminary issues, and substitute declarations to the effect which I have indicated.
34. MR JUSTICE BODEY: I agree.
35. LORD JUSTICE JUDGE: I agree. Although we are disagreeing with the judgment of Judge Moseley there is nothing I can usefully add to the judgment which my Lord Jonathan Parker LJ has just given, which precisely reflects my own conclusions on the construction issues.
(Appeal allowed; the defendant may not, in calculating the service charges payable by the Plaintiffs under the underlease, claim in respect of administrative and management costs and expenses a sum greater than 10 per cent of the costs and expenses incurred or payable or prospectively payable by the Defendant in performing the covenants on its behalf contained in clauses 4.2, 4.3, 4.5, 4.6, 4.7 and 4.8 of the underlease; the Defendant is not entitled to claim the costs, if any, of instructing or engaging Campus Property Services Limited to act as a manager in the provision of services by the Defendant under its obligations contained in the underlease).