England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF THE LANDS TRIBUNAL
(His Honour Judge Michael Rich QC)
APPEAL FROM ORDER OF HIS HONOUR JUDGE RICH QC

		Royal Courts of Justice Strand London WC2 Thursday, 4th October 2001

1. LORD JUSTICE LAWS: In form, these are two appeals respectively from a decision given by His Honour Judge Rich QC in the CentralLondon County Court on 11th August 2000 and a decision of the same judge sitting in the Lands Tribunal on appeal from the Leasehold Valuation Tribunal given on 15th August 2000. Before us there is only one issue which was considered in both decisions. The issue concerned the liability or otherwise of underlessees of flats in the same block to pay service charges in respect of the rental value of the flat occupied by the caretaker who was employed by the landlord. We are faced with a bare question as to the true construction of the material provisions in the underleases. In the County Court below the judge granted declarations which favoured the construction put forward by the tenants. He refused permission to appeal in both sets of proceedings, but permission was granted by Lord Justice Pill on 26th August 2000.
2. The duality of the proceedings is explained by the fact that in the events which happened, there arose, it appears, some doubt as to the jurisdiction of the Leasehold Valuation Tribunal and hence the Lands Tribunal on appeal; and it was thought convenient to canvass the essential issues which fell for decision in the County Court.
3. It is helpful to go to the statement of agreed facts which is a useful document. It includes all the relevant terms of underleases including additional words appearing in the underleases of Flats 1 and 5 which do not appear in the underleases of Flats 3 and 4:

"1. The claimants are tenants of flats within 27 Lennox Gardens, London SW1 ("the property"). The property is a mid-terraced house comprising four floors plus basement. There are six flats within the property. Five flats are let on long underleases ("the leases"). The sixth flat is in the basement and is occupied by the caretaker.

2. The defendant holds the reversionary interest immediately expectant on the termination of the leases.

3. The leases are in substantially similar terms with some variations.

4. The leases contain, amongst others, the following clauses:

`4. The lessee hereby covenants with the lessor and with and for the benefit of the owners and lessees from time to time during the currency of the term granted of the other flats comprised in the building that the lessee will at all time hereafter during the said term:

..... (2) To pay to the lessor in each year a sum equal to twelve and one half per centum per annum of:

(i) All monies expended by the lessor in carrying out all or any of the works and providing the services and management and administration called for under clause 5 (4) ......

5. The lessor hereby covenants with the lessee as follows:

..... (4) That (subject to contribution and payment as herein before provided) the lessor will maintain, uphold and keep the building (other than the parts thereof to be maintain[ed] by the lessee or any other lessee of a flat in the building) in accordance with the obligations set out in the fourth schedule hereto.

..... The fourth schedule:

Costs, expenses, outgoings and matters in respect of which the lessee is to contribute:

[In the leases of Flats 1 and 5:]

..... 6. Expenses of management to include the proper and reasonable charges of any managing agents any legal and accountancy charges properly incurred in management and including the lessor's liability of whatsoever kind in relation to this lease and the costs of enforcing the covenants herein contained.'"

4. The equivalent provision in paragraph 6 of the fourth schedule in the cases of the leases of Flats 3 and 4 omits the words "the lessors liability of whatsoever kind in relation to this lease". Paragraph 8 of the fourth schedule is in these terms:

"`The lessor shall provide a resident housekeeper or porter to perform the services specified in the sixth schedule hereto provided that the lessor shall not be liable to damages for any omission on the part of such housekeeper or porter for any interruption to such services.'"

5. In paragraph 9 these words appear:

"`Gas, electricity, telephone, general and water rates and internal maintenance repairs of the flat occupied by the resident housekeeper or porter.'"

6. The sixth schedule is headed:

"`(Duties of Resident Housekeeper or Porter):

..... 4. To reside in the flat provided in the building and to be in attendance between the hours of 7 am and 12 noon and at such other times during the day as the lessor shall require or as may be found necessary for the proper fulfilment of these duties.'"

7. The agreed statement of facts proceeds to set out in some detail successive arrangements made between the appellant landlord and the residential caretaker. I will not replicate all the particulars. Essentially the position was as follows. Up to or at least for the year 1994-1995 the landlord paid a wage to the caretaker and provided the flat in the basement at no cost to him or her. The caretaker was obliged by contract to reside in the basement flat. Independent local surveyors had assessed the notional rental value of the caretaker's flat in 1993 at £150 per week. In 1994-1995 the claimant tenants were charged by way of service charge a total of £275 per week. That comprised £125 which was the caretaker's wage and £150 which was the notional rent of the caretaker's flat.
8. From 1995-1996 onwards the arrangements as between the landlord and the caretaker were altered. The caretaker remained obliged to reside in the basement flat but her salary was increased, on the face of it, to £328 a week and she agreed to pay £150 per week rent for the flat. She did not actually pay £150 or any rent; it was deducted from her wages as a book entry. That left £178 a week; £53 of that was accounted for by tax and national insurance which were also deducted. Thus her wage remained £125. After some tax items she received rather less. From 1995-1996 onwards the claimants were charged the whole £328.
9. Following, as I understand it, paragraph 74 of the decision of the Leasehold Valuation Tribunal, the landlords accept, as they did before Judge Rich, that they are not entitled to recover the £53. In the result the claim by the landlord against the tenants was, in money terms, the same in 1995-1996 as it had been in 1994-1995 -£125 plus £150. I should read paragraphs 16 to 18 of the agreed statement of facts:

"16. The purpose of the above arrangement"

10. I interpolate, that is the arrangement as between the landlord and the caretaker which I have just described,

"was to enable the defendant to recover a rent for the caretaker's flat through the service charge as a rent payable by the caretaker out of the caretaker's wages, rather than as a notional rent payable directly by the tenants. The defendant is entitled to recover caretaker's wages, through the service charge, pursuant to paragraph 8 of the fourth schedule of the leases, subject to the Court's determination as to reasonableness, pursuant to section 19 (2A) of the Landlord and Tenant Act 1985.

17. A rent of £150 per week, if properly chargeable, is a reasonable rent for the caretaker's flat.

18. A wage of £125 per week is a reasonable rent for the caretaker."

11. The tenants' essential case is, as it was before the judge, that they are not obliged to make payments in respect of the notional cost to the landlord of providing accommodation to the caretaker whether in respect of the 1994-1995 arrangements or the later arrangements. Whether that case is good is the issue we have to decide. The judge held that the tenants' liability to contribute to the notional rent on the caretaker's flat depended on whether the notional rent fell within Schedule 4 paragraph 8 of the underleases. This is what he said:

"In my judgment, the scope of the covenant in clause 4 (2) to pay a proportion of the money expended in providing the services called for under clause 5 (4), must be determined by reference to the scope of the services to which schedule 4 contemplates contribution, and a restrictive construction by reference to grammatical construction or the dictionary definition of the words of either clause 4 (2) or 5 (4) is not appropriate."

12. I agree with the judge to this extent. Plainly, paragraph 4 (2) looks forward to paragraph 5 (4) which, in turn, looks forward to Schedule 4. The content of Schedule 4, therefore, is at least a determinant of the scope of the tenants' liability to contribute under paragraph 4 (2) (1). I would part with the judge insofar as he declined to attach importance to the specific words used in clause 4 (2) which is the covenant which imposes the obligation of contribution upon the tenants. Schedule 4 paragraph 8 requires the landlord to "provide a resident housekeeper". The judge held that the cost of providing the residency - the basement flat - was not caught by paragraph 5 (4) nor, therefore, by paragraph 4 (2). He said this (pages 6 to 7 of the judgment):

"If in this context, one asks whether the provision of a resident caretaker includes the provision of a residence for that caretaker, as one of the matters in respect of which the underlessees are to contribute, there must in my judgment be at least an ambiguity. That one cannot provide a resident housekeeper without providing the residence is, of course, obvious. That provision, by the allocation of a particular flat in the building, was, however, as I have pointed out, contemplated at the time of the grant of the underlease and is part of the context in which its provisions fall to be construed. The problem, may therefore, be expressed, as Mr Dutton has sought to express it: was the cost of the provision of the caretaker's flat part of the consideration for which the original lessee paid £15,000 or is it to be met by an addition to the annual service charge throughout the term of the underlease?

That ambiguity seems to me to be clearly resolved by the express provision of paragraph 9 of the 4th schedule, which includes certain particular expenses of the caretaker's accommodation as specified expenditure `in respect of which the lessee is to contribute', but makes no reference to the value of the accommodation itself, as being such `cost expense outgoing or matter'. At the least, if, contrary to my view, there remains an ambiguity, such ambiguity must be resolved against the landlord, and I find that the service charge provisions do not require the underlessees to make a contribution to compensate the landlord for the notional rent of the caretaker's flat."

13. The reference there to what was "contemplated at the time of the grant of the underlease" is, as I understand it, a reference to an earlier short passage in the judge's judgment in the County Court as follows (page 4):

"I should refer finally to the second of the recitals to the underlease which records that

`the lessor has previously granted or intends hereafter to grant underleases of the flats in the building other than the premises hereby demised and ..... to impose the restrictions set forth in the fifth schedule ..... '

The flat reserved for the occupation of the resident porter or housekeeper is and clearly was intended to be an exception to that recital. Mr Holbech, who has appeared for the landlord, accepts that the factual context in which these somewhat disconnected provisions must therefore be construed, includes a scheme whereby one out of six flats in the building was to be held available for the occupation of what is now called the resident caretaker, and the costs of running the building were to be met by the underlessees of the other five flats. It is in this context that the provisions as to service charge which I have already set out will fall to be construed."

14. The judge proceeded to consider two cases cited to him in which the courts have had to construe other but not identical leases. I shall refer to those very briefly in due course.
15. The essential question in the case is whether the judge's reasoning rejecting the landlord's argument is correct. Looking at the question, unassisted by authority, I would first observe that it seems to me inescapable and, indeed, it is not in dispute that the obligation in paragraph 8 of Schedule 4 to provide a resident housekeeper includes an obligation to provide the residence. So much is obvious. If anything, it is underlined by paragraph 4 of Schedule 6 which falls under the heading "Duties of Resident Housekeeper". If that is right it would appear to follow that the obligation to provide the residence is an obligation referred to in paragraph 5 (4) of the lease which the landlord thereby covenanted to fulfil. The question at the end of the day, however, is whether the claimants are bound under clause 4 (2) of the lease to contribute to the cost or rather the notional cost to the landlord of fulfilling that obligation. The question depends on whether the notional rent foregone by the landlord can be described as "monies expended" for those are the words used in the operative provision of paragraph 4 (2) (1).
16. The judge thought that there was an ambiguity, and he perceived that it was resolved by the terms of paragraph 9 of Schedule 4 which specifies particular aspects of expenditure related to the caretaker's accommodation. I have already set it out. The judge cited an observation made by Mr David Neuberger QC, as he then was, sitting as a Judge of the Chancery Division in Lloyds Bank v Bowker Orford [1992] 2 EGLR 47G as follows:

" ..... if the lease enumerates a number of aspects of the costs of the provision of the caretaker's flat for which the tenant is liable, there is obviously a fairly formidable argument open to the tenant that the parties cannot have intended any further aspects of the costs of the caretaker's flat to be included in the service charge."

17. His Honour Judge Rich considered this argument to be determinative of the case (see page 9 of his judgment).
18. I do not agree. As between the landlord and caretaker some or all of the expenses mentioned in Schedule 4 paragraph 9 might have been made the caretaker's responsibility, and in that case would not have been recoverable from the tenants even if the cost of providing the accommodation were so recoverable. Schedule 4 paragraph 9, as I see it, is thus separately called for, whatever the position as regards contribution towards the cost of providing the accommodation.
19. It is worth noting that in the other case cited by the judge - Agavil Investments, Court of Appeal (unreported) 3rd October 1975 -it was held that the cost of providing a caretaker's accommodation was recoverable under the lease by the landlord although the relevant schedule also referred to specific expenses which were also recoverable. In that case the landlord's obligation was to employ a caretaker "whether resident upon the premises or otherwise". For my part, I would not hold that the terms of paragraph 9 of Schedule 4 in our case conclude this matter in the landlord's favour but that is by no means the end of the case.
20. I mention next a subsidiary argument advanced by the landlord but rejected below. It was to the effect that the additional words in paragraph 6 of Schedule 4 in the underleases of Flats 1 and 5 - "the lessor's liability of whatsoever kind in relation to this lease" - amounted to a further arrow in the landlord's quiver. In relation to that subsidiary argument the judge said:

"It is clear that the landlord's obligation to provide a flat for the accommodation of the caretaker is a `liability ..... in relation to this lease'. It is however, in my judgment, equally clear that it is not `a charge incurred in management'."

21. It would have to fall within that rubric if, through this route, it were to be recoverable from the tenant.
22. It is useful next to consider the question whether there are any differences between the position in 1994-1995 and the position thereafter when the landlord claimed from the tenants a sum including the notional rent for the caretaker's flat but in the guise of salary paid to the caretaker. In my judgment there is no material difference. In substance the £150 represented a reasonable rent for the flat. As the landlord did not recover that rent from the caretaker or, of course, anyone else it was income foregone. That seems to me to have been no less true under the new arrangements than it had been in 1994-1995.
23. As it seems to me, the real question in this case is whether the notional rent of the caretaker's flat, thus foregone by the landlord, falls within the expression "monies expended" in clause 4 (2) (1). Mr Holbech for the landlord says that it does. He says the lease being considered in this court in Agavil was very similar, and in that case this court held that the landlord could recover the caretaker's notional rent from the tenant. But the lease in Agavil was cast in different terms. The key provision which expressed the scope of the tenant's obligation to contribute (paragraph 1 of the Schedule) was expressed thus:

"The costs, charges and expenses incurred in employing a caretaker for the buildings whether resident on the premises or otherwise."

24. It is to be noted that the executive provision which imposed the obligation to contribute on the tenant (set out by Lord Justice Cairns in the first page of the transcript of his judgment) used the word "costs" as well as the word "expenses". I would have no very great difficulty in perceiving that income foregone may well amount to a cost; but the question here is whether it falls within the rubric "monies expended".
25. Mr Holbech's more substantial argument, in my judgment, is that one has to construe the lease as a whole. The heading to Schedule 4 reads as I have already indicated:

"Costs, expenses, outgoings and matters in respect of which the lessee is to contribute."

26. Mr Holbech submits that this shows that paragraph 4 (2) (1) was intended to cover all the matters set out in Schedule 4 and thus the cost to the landlord of providing the caretaker's flat.
27. However it seems to me that this process of implication is not sufficient to support Mr Holbech's case. The landlord seeks to recover money from the tenant. On ordinary principles there must be clear terms in the contractual provisions said to entitle him to do so. The lease, moreover, was drafted or proffered by the landlord. It falls to be construed contra proferentem. It is to be noted, as was put to counsel in the course of argument, that there are no provisions for the calculation or revision of the notional rent. As it happens - though in fairness perhaps this is no more than background - there was no attempt in this case to pass on the notional rent to the tenants until 1993 or 1994 albeit, as I understand it, the underleases were originally entered into in the 1970s.
28. At the end of the day, I do not consider that a reasonable tenant or prospective tenant, reading the underlease which was proffered to him, would perceive that paragraph 4 (2) (1) obliged him to contribute to the notional cost to the landlord of providing the caretaker's flat. Such a construction has to emerge clearly and plainly from the words that are used. It does not do so. On that short ground I would uphold the judge below and dismiss the appeal.
29. It is not necessary to say anything, as I perceive the matter, about the appeal from the Lands Tribunal. That falls away if my Lords agree in the result that I would propose as respects the appeal from the County Court.
30. LORD JUSTICE MUMMERY: I agree with my Lord that this appeal should be dismissed for the reasons given by him.
31. In expressing my agreement I would make two short points. First, I note what is stated in paragraph 55 on page 71 of the 5th Edn of the Encyclopaedia of Forms and Precedents Vol 23 on Landlord and Tenant in the section relating to the drafting of provisions in leases for service charges. It is stated as follows: "The draftsman should bear in mind that the courts tend to construe service charge provision restrictively and are unlikely to allow recovery for items which are not clearly included."
32. Cited as authority for that proposition are three cases, all decided in the 1980s. They include decisions of this court. They are collected in footnote 1. The proposition is obvious. Mr Holbech did not dispute it in argument. Indeed, the proposition reflects a particular application of the general principle of construction in the contra proferentem rule.
33. For the reasons stated by my Lord this underlease does not clearly include the notional rent of the caretaker's flat foregone by the landlord in the various items which the landlord is expressly allowed to recover from the underlessee in the service charge. Secondly, I also note that there is no provision in the underlease stating when or by whom or by the application of what criteria the notional rent of the caretaker's flat is to be ascertained, if it is not agreed between the landlord and the underlessee.
34. The absence of such machinery seems to me to be a yet further difficulty in Mr Holbech's argument that the notional rent of the caretaker's flat falls within the provisions of clause 4 (2) (i) and 5 (4) of the underlease and paragraphs 6 and 8 to the fourth schedule to the underlease.
35. LORD JUSTICE KENNEDY: For the reasons given by my Lords I also agree that this appeal should be dismissed.
Order: Appeal dismissed with a detailed assessment of costs.