England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
(HH JUDGE HALLGARTEN QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		16th July 2003

Lord Justice May:

Introduction

1. This is an appeal by the claimant, Leila Mohammadi, against a judgment and order of HH Judge Hallgarten QC in the Central London County Court on 24^th October 2002. The main trial had taken place over six days in April 2002. The judge gave an initial substantive judgment on 29^th May 2002. This was supplemented in two respects by a further judgment on 12^th June 2002. Certain questions were left over for further submissions, after which a final judgment was given on 24^th October 2002.

Facts and the Judge's Judgment

2. The proceedings concern a flat at 8 Eton Hall, Eton College Road, London NW3. There was a lease of these premises dated 25^th January 1971 for a term of 99 years from 25^th March 1969. The claimant became the lessee under the lease by an assignment in October 1985. The defendants (or one of them) had become the lessor. [There were complications about this but no issues arise out of them on this appeal.]
3. The lease provided for payment of a yearly ground rent of £36 payable quarterly. The lessee covenanted to pay the reserved rent. There was a separate lessee's covenant to pay a service charge. I shall refer to the details of this covenant later in this judgment. The covenant did not provide that the service charge should be or be deemed to be additional rent and recoverable as such. There was a standard proviso for re-entry by the lessor for non-payment of rent or breach of covenant by the lessee. There were lessor's covenants relating to structural repair and to the common parts.
4. From the early 1990s, the claimant suffered serious water penetration and damage to her flat caused by subsidence. She claimed that the poor condition of her flat was attributable to breaches by the lessor of their repairing obligations. In April 1993, she brought proceedings against the defendants claiming damages for these alleged breaches. Much of the trial before Judge Hallgarten concerned these matters. He expressed some sympathy with her for the discomfort she had suffered, but rejected most of her damages claim. She only succeeded in recovering £750 and a small sum for fees for a creaking floor, and a further sum of £1753.64 in relation to subsidence. There is no appeal against these decisions.
5. From about September 1992, the claimant had withheld payment of ground rent and service charges because of what she regarded as inaction on the part of the lessor and because she was angry at the state of her flat. On 10^th May 1996, the lessor served on the claimant a notice under section 146 of the Law of Property Act 1925. The notice stated that the claimant was in breach of covenant for failing to pay ground rent, service charge and legal fees up to 8^th May 1996. Full details of the arrears were given in an attached schedule. The notice indicated an intention to re-enter the premises and forfeit the lease if payment was not made within 7 days. In November 1996 the defendants amended their defence in the claimant's action to add a counterclaim seeking judgment for arrears of ground rent and service charges up to that date and claiming possession of the flat by forfeiture on the basis of arrears of ground rent and service charges. Service of this counterclaim amounted to re-entry by the landlords on well established principles – see for instance Canas Property Company Limited v. K.L. Television Services [1970] 2 QB 433. In her Reply and Defence to Counterclaim, the claimant claimed relief from forfeiture. She put in issue the reasonableness of the service charges.
6. Having rejected most of the claimant's claim, the judge gave judgment in favour of the second defendants on the counterclaim. First, he gave judgment against the claimant for £8511.26. This represented the counterclaim for unpaid rent and service charges up to the date of re-entry less small amounts recovered by the claimant on her claim and limited concessions by the Respondents. Second, he made an order for possession of the flat unless terms as to relief from forfeiture were complied with. Third, he granted relief from forfeiture on terms that the claimant paid to the first defendant:

i) £297.00 arrears of rent.

ii) £25,077.89 arrears of service charge (credit being given for £1,753.64 subsidence payment to the claimant);

iii) £9,450.36 interest on these sums;

iv) £172.50 for the costs of preparation of the notice under section 146 of the Law of Property Act 1925;

v) £82.06 as interest on the £172.50; and

vi) the defendants' costs of the counterclaim and of her application for relief from forfeiture as assessed or agreed.

The first five of these payments were to be made by 28^th November 2002. The costs were to be paid within 14 days of agreement or detailed assessment. The order then provided that, if the terms for relief from forfeiture were not achieved and the lessors took possession of the flat, the defendants were to recover as mesne profits most of the sums whose payment were terms of relief. The judge also made orders for costs of the claim and counterclaim against the claimant and in relation to the Legal Services Commission.

Grounds of Appeal

7. Peter Gibson LJ gave permission to appeal on two grounds. The first relates to section 81 of the Housing Act 1996. The second relates to a contention on behalf of the claimant that a demand for service charges was a pre-condition to their recovery and that the lessor made no demand for service charge after June 1995.

Section 81 of the Housing Act 1996

8. Section 81 of the Housing Act 1996 came into force on 24^th September 1996. This was after the service of the section 146 notice but before service in November 1996 of the amended defence and counterclaim seeking forfeiture of the lease. Section 81 provides:

"(1) A landlord may not, in relation to premises let as a dwelling, exercise a right of re-entry or forfeiture for failure to pay a service charge unless the amount of the service charge –

(a) is agreed or admitted by the tenant, or

(b) has been the subject of determination by a court or by an arbitral tribunal …

(2) Where the amount is the subject of determination, the landlord may not exercise any such right of re-entry or forfeiture until after the end of the period of 14 days beginning with the day on which the decision of the court or arbitral tribunal is given.

…

(6) Nothing in this section affects the exercise of a right of re-entry or forfeiture on other grounds."

9. The claimant's case is that, at the time of the lessor's re-entry by service of the amended defence and counterclaim, the amount of unpaid service charges was neither admitted by the claimant nor the subject of determination by a court or arbitrator. Accordingly re-entry by the lessor for failure to pay service charges was forbidden by statute. This did not apply to re-entry for failure to pay the ground rent. It was therefore open to the judge to order forfeiture subject to terms as to relief, but the available terms as to relief were, by virtue of section 138 of the County Courts Act 1984 less onerous than the terms which the judge imposed.
10. Section 138 of the 1984 Act provides:

"(1) This section has effect where a lessor is proceeding by action in a county court (being an action in which the county court has jurisdiction) to enforce against a lessee a right of re-entry or forfeiture in respect of any land for non-payment of rent.

(2) If the lessee pays into court not less than 5 clear days before the return day all the rent in arrear and the costs of the action, the action shall cease, and the lessee shall hold the land according to the lease without any new lease.

(3) If –

(a) the action does not cease under sub-section (2); and

(b) the court at the trial is satisfied that the lessor is entitled to enforce the right of re-entry or forfeiture,

the court shall order possession of the land to be given to the lessor at the expiration of such period, not being less than 4 weeks from the date of the order, as the court thinks fit unless within that period the lessee pays into court all the rent in arrear and the costs of the action.

…

(5) … if –

(a) within the period specified in the order; or

(b) …

the lessee pays into court –

(i) all the rent in arrear; and

(ii) the costs of the action;

he shall hold the land according to the lease without any new lease.

…

(10) Nothing in this section or section 139 shall be taken to affect –

(a) the power of the court to make any order which it would otherwise have power to make as respects a right of re-entry or forfeiture on any ground other than non-payment of rent; or

(b) section 146(4) of the Law of Property Act 1925 (relief against forfeiture)."

11. Thus the submission is that the only legitimate re-entry effected in the present case was for non-payment of rent. The court had to proceed under section 138(3) of the 1984 Act which prescribed the terms on which relief from forfeiture should be ordered. The wider discretion as to the terms on which the court may grant relief from forfeiture under section 146 of the 1925 Act was not available in the present case.
12. The judge considered this submission in his third judgment. He recorded that Mr Lederman, counsel for the defendants, accepted that, if section 81 of the 1996 Act had been applicable, it would have provided an impediment to the proceedings. He rejected a submission by Mr Lederman that re-entry had been effected by service of an amended defence and counterclaim where permission to amend granted before section 81 of the 1996 Act had been set aside. The judge held, correctly in my view, that re-entry was only effected when permission to amend was given again and service effected after section 81 had come into force. He said that, if the section 81 point had been open to the claimant, it would have been a good one. But he held that the point was not available because it had not been sufficiently pleaded nor relied upon at the trial as representing what might be a substantive defence. The judge rejected a submission on behalf of the claimant that this was a point of law which could be advanced at any time. It should have been advanced at the main trial and the judge had already ruled that there had been a forfeiture. Secondly, the judge considered that a party wishing to rely on a case which depends on certain facts is obliged to set those facts out in their pleading. If there had been an application to amend, he would have refused the application because so late an amendment would have severely prejudiced the defendants. If the point had been taken at an appropriate time, the defendants could have taken steps to put things right by using the appropriate section 81 machinery. To allow the claimant now to rely on section 81 would have given the claimant a gigantic windfall.
13. It looks as if the submission made to the judge on behalf of the claimant, at least as understood by the judge, was not exactly the same as that which Mr Semken, who appears for the claimant in this court, advances on this appeal. The judge obviously understood the submission to be that section 81 of the 1996 Act constituted a substantive defence to the claim for forfeiture and that, forfeiture apart, it provided a defence to the claim for unpaid service charges. Mr Semken does not submit that section 81 by itself provides a defence to the claim for payment of the service charges. Nor does he submit that an order for forfeiture was not available for non-payment of ground rent. The submission only goes to the terms on which relief from forfeiture should be granted. By section 138 of the 1984 Act, the terms had to be limited to payment into court of "all the rent in arrear and the costs of the action". The rent in arrear did not include the service charges.
14. As to matters of pleading, paragraph 51 of the counterclaim had said that the amounts which would be claimed as due and owing by way of mesne profits upon any application for relief from forfeiture were set out in an annexed printout. Paragraph 30 of the re-amended defence to counterclaim pleaded certain points in response to "the claim foreshadowed in paragraph 51 of the re-re-amended counterclaim [that] the relief should be on terms of payment of rent and service charge said to have accrued after those expressly claimed". One of these points was that "the imposition of terms as to payment of service charge would contradict the scheme of section 81 of the Housing Act 1996". Mr Semken submits that this is an adequate pleading giving clear notice that section 81 of the 1996 Act will be relied on in relation to the terms upon which relief against forfeiture might be granted, which is all that the present submission seeks to achieve. We were told that this part of the pleading had been tendered in March 2002 and that the judge gave permission to incorporate it by amendment at the main hearing in April 2002.
15. Mr Lederman submits that the judge's ruling in relation to section 81 of the 1996 Act was correct. He says that section 81 has no application to the terms upon which relief from forfeiture may be granted under section 146(2) of the 1925 Act or section 138 of the 1984 Act. Taken literally, this is correct, but it does not, in my view, address the submission that, in the circumstances of this case, the obligatory route to relief was through section 138. Mr Lederman next submits that the claimant had abandoned any challenge to the reasonableness of the service charges. Her only challenge was pleaded in her defence to counterclaim of June 1997. This was deleted by her amended reply and re-amended defence to counterclaim. The only challenge to recovery of service charges was a matter of construction of the lease. This does not answer the point that, when re-entry was effected in November 1996, the amount of service charges was neither agreed or admitted nor the subject of determination by a court or arbitrator.
16. Mr Lederman further submits that service charges come within the expressions "non-payment of rent" and "all the rent in arrear" in section 138(1) and (3) of the 1984 Act respectively. He relies on Maryland Estates Limited v. Joseph [1999] 1 WLR 83. But in my judgment, contrary to this submission, Maryland Estates does not decide that service charges fall within the expression "all the rent in arrear" in section 138(3). The decision was that the expression includes in an appropriate case, not only rent in arrear when re-entry is effected, but also amounts accruing subsequently and claimed for use and occupation which, if the lease was not forfeited, would be arrears of rent. As Beldam LJ said at page 91F:

"In my view it is not straining the interpretation of the language to hold that all rent in arrear means the rent in arrears at that time when the court making its order assumes the payment of that rent will result in the lease continuing for all purposes."

Beldam LJ said that a construction which excluded payment for use and occupation or rent between the service of the summons and the making of the order would be inconvenient. The landlord would have to start proceedings all over again. Such an inconvenient result is easily avoided if it is assumed that the lease continues to exist after service of the summons on the tenant, that he remains under an obligation to pay the sum reserved in the lease as rent and that "all the rent in arrear means" the rent payable up to the date stated in the order.

17. In Maryland Estates,, the rent in arrear did include service charges. But this was, not because the section was so construed, but because by clause 4(23) of the lease the tenants covenanted to pay a service charge which was to be regarded as, and recoverable as, rent – see page 85 E. Escalus Properties Limited v. Robinson [1996] 2 QB 231 establishes that, where there are arrears of service charge but the lease contains no provision deeming them to be sums due by way of additional rent and recoverable as such, the service charge cannot be treated as rent – see Nourse LJ at 243E. As Lord Woolf MR (as he then was) said in Khar v. Delmounty Limited 75P & C.R. 232 at 236:

"In our judgment, the authorities establish that, unless the lease contains an agreement that a maintenance or service charge is to be treated as or deemed to be rent or additional rent, it is not "rent", either within the meaning of the lease or of the statutory provisions conferring jurisdiction to grant relief from forfeiture.

The legal position is settled at this level of decision in the recent case of Escalus Properties Limited v. Robinson [1996] QB 231."

18. Mr Lederman submitted without conviction that Maryland Estates supported his submission that service charges should be included as part of "all the rent in arrear" at least after the lessor re-entered. His argument was that Beldam LJ held that payments for use and occupation after re-entry came within the expression and a claim for service charge was capable of being part of a claim for use and occupation. I reject this submission. Beldam LJ was not addressing this point at all. His concern was whether a claim for mesne profits representing what, forfeiture apart, would have been rent came within the expression.
19. I accept Mr Semken's chain of reasoning based upon section 81 of the 1996 Act. Re-entry was effected in November 1996 by service of the counterclaim, but only on the ground of arrears of ground rent. Arrears of service charge were neither admitted nor determined then. So re-entry for failure to pay service charges was forbidden. The counterclaim was a county court action within section 138 of the 1984 Act. Section 138(3)(b) applied and the court was obliged to make an order for possession within the terms of the latter part of that sub-section. The obligatory terms of relief from forfeiture had to be that the lessee within a period of not less than four weeks from the date of the order should pay into court "all the rent in arrear and the costs of the action". The rent in arrear under this lease does not include service charges for reasons which I have already discussed. The terms for relief from forfeiture should not have included payment of the outstanding service charges nor, I think, the cost of preparing the section 146 Notice, since no such notice was necessary to support re-entry for non-payment of rent.
20. Mr Lederman submits that the judge was correct to refuse to permit the claimant to rely on section 81 of the 1996 Act. It would be grossly inequitable. The defence relying on section 81 should have been pleaded. An amendment was needed and no amendment could fairly be granted in 2002, when the proceedings had been on foot for six years or so without the challenge being articulated. It is a procedural point which should not be permitted if it causes prejudice to the defendants.
21. Mr Semken submits that there was no argument based upon estoppel before the judge. There was no representation that section 81 would not be relied on. It is a plain point of statute of which the experienced defendants and those advising them should have been aware. Section 81 is a statutory provision which the court is obliged to apply. There would have been no strict need to plead it at all.
22. In my judgment, the judge was wrong not to permit the claimant to rely on section 81 of the 1996 Act. As I have said, he may have understood the submission as advancing a substantive defence to the claim for payment of the service charges. It is not, however, so advanced at least in this court. The section is only relied on as limiting the terms on which relief from forfeiture should be granted. This leaves intact, subject to other defences, the money claim for payment of the service charges. There is no gigantic windfall. In my view, once the judge had given the claimant permission to re-amend her defence to counterclaim to refer to section 81 of the 1996 Act in the terms which I have quoted, no further amendment was necessary to enable the point to be taken. The permitted pleading is, it is true, somewhat condensed. It does not spell out the chain of reasoning with reference to section 138 of the 1984 Act. But section 81 of the 1996 Act is expressly pleaded in the context of the terms of relief from forfeiture and with reference to services charges. Anyone reading the pleading who did not immediately understand its purport had only to read section 81 to appreciate that the defendants' right to re-enter for non-payment of service charges was challenged. Since, as I think, the point was sufficiently raised in a pleading which the judge permitted, it is unnecessary to decide whether, if section 81 had not been referred to at all, it was nevertheless a statutory provision which the court was obliged to take into account. I am inclined to think that the court would have been obliged to take it into account. Mr Lederman floated possibilities of waiver or estoppel but without any factual material which would be necessary to support such pleas.
23. The claimant, relying on the submissions made on her behalf, paid £400 into court within four weeks of the judge's order. Mr Semken submits that the costs of the action referred to in section 138 of the 1984 Act must in this case refer to the costs of the proceedings insofar as they relate to the claim for possession on account of arrears of ground rent. He says that the proceedings were entirely concerned with different claims and that the costs attributable to the possession claim for arrears of ground rent were nil or very small. Mr Lederman takes issue with this. He submits that if, contrary to the defendants' main case, section 138 is relevant, the costs of the action must be the costs of the counterclaim and the application for relief from forfeiture. This is what the judge ordered. The court has a discretion as to these costs and issue based costs orders create difficulties. The costs have yet to be assessed or agreed. Even on this basis, it is premature to determine that the claimant has complied with terms upon which she would be entitled to relief from forfeiture.
24. In a case in which a landlord counterclaims for forfeiture and possession on the ground of arrears of rent, "the costs of the action" would normally be the costs of the counterclaim. In the present case, in addition to claiming possession, the counterclaim claimed arrears of rent and service charge and mesne profits after the date of re-entry by reference to the ground rent and service charges. There was at one time (although not at the hearing itself) an issue as to the reasonableness of the service charges. Witness statements were prepared in support of the defendants' case. We are told that these witnesses attended to give evidence but in the event their evidence was not needed. The costs of the counterclaim therefore will have included costs referable to the claim for service charges. In my judgment, these costs must be excluded from the "costs of the action" for the purpose of section 138(3) of the 1984 Act. This of course only refers to payment of costs as a term for relief from forfeiture. It has no bearing on the judge's general order that the claimant should pay the defendants' costs of the claim and counterclaim against which there is no appeal.
25. For these reasons, in my judgment the terms upon which the judge should have ordered relief from forfeiture should have been limited to payment of ground rent in arrear and the costs of the counterclaim apart from costs referable to the claim for service charges or mesne profits based upon service charges.

Services Charges

26. The second ground of appeal seeks to challenge the landlord's ability to recover service charges as a money judgment whether as a contractual payment under the lease or after re-entry as an element of mesne profits. It is said that the defendants ceased to demand payment of service charges after June 1995. Mr Semken has three strands of submission. These are:

i) clause 2(2)(h) of the lease, properly construed, requires an appropriate written demand as a precondition to payment of the service charges;

ii) the counterclaim only pleaded a claim for mesne profits: but if relief from forfeiture is effected, the lease will be reinstated and the money claim will revert to being a contractual claim for service charges under the lease, and this was not pleaded; and

iii) the claimant may have been deprived, for want of a demand, of a defence under section 20(B) of the Landlord and Tenant Act 1985.

27. By clause 2(2) of the lease the lessee covenanted:

"(2) to pay to the Lessor without any deduction a proportionate part of the expenses and outgoings incurred by the Lessor in the repair, maintenance, renewal and insurance of the said Building and the provision of services therein and other heads of expenditure as the same are set out in the Fourth Schedule hereto such payment (hereinafter called "the service charge") being subject to the following terms and provisions:

(a) The amount of the service charge shall be ascertained and certified by a Certificate (hereinafter called "the Certificate") signed by the Lessor's auditors or accountants or managing agents … annually and so soon after the end of the Lessor's financial year as may be practicable and shall relate to such year in the manner hereinafter mentioned.

(b) …

(c) A copy of the Certificate for each such financial year shall be supplied by the Lessor to the Lessee on written request …

(d) The Certificate shall contain a fair summary of the Lessor's said expenses and outgoings … and … shall be evidence for the purpose hereof of the matters which it purports to certify.

(e) The annual amount of the service charge payable by the Lessee as aforesaid shall be calculated by dividing the aggregate of the said expenses and outgoing … by the aggregate of the rateable values … of all the [relevant] flats …

(f) …

(g) The Lessee shall if required by the Lessor with every quarterly payment of rent reserved hereunder pay to the Lessor such sum in advance and on account of the service charge as the Lessor or its accountants or managing agents (as the case may be) shall specify at their discretion to be a fair and reasonable interim payment.

(h) As soon as practicable after the signature of the Certificate the Lessor shall furnish to the Lessee an account of the service charge payable by the Lessee for the year in question due credit being given therein for all interim payments made by the Lessee in respect of the said year AND upon the furnishing of such account showing such adjustment as may be appropriate there shall be paid by the Lessee to the Lessor the amount of the service charge as aforesaid or any balance found payable or there shall be allowed by the Lessor to the Lessee any amount which may have been overpaid by the Lessee by way of interim payment as the case may require.

(i) It is hereby agreed and declared that the Lessor shall not be entitled to re-enter under the provisions in that behalf hereinafter contained by reason only of non-payment by the Lessee of any such interim payment as aforesaid prior to the signature of the Certificate but nothing in this Clause … shall disable the Lessor from maintaining an action against the Lessee in respect of non-payment of any such interim payment as aforesaid notwithstanding that the Certificate had not been signed at the time of the proceedings subject nevertheless to proof in such proceedings by the Lessor that the interim payment demanded and unpaid is of a fair and reasonable amount having regard to the prospective service charge ultimately payable by the Lessee.

(j) PROVIDED ALWAYS and notwithstanding anything herein contained it is agreed and declared as follows:

(i) …

(ii) That the provisions of sub-clause (h) hereof shall continue to apply notwithstanding the expiration or sooner determination of the term hereby granted but only in respect of the period down to such expiration or sooner determination of the said term. "

28. In his first judgment of 29^th May 2002, the judge briefly stated in a slightly different context that he agreed with Mr Lederman that there is nothing in Clause 2(2)(h) which makes the furnishing of a year end account a condition precedent to liability. In his third judgment, the judge addressed the claimant's case that, since there had been no demand for service charges after June 1995, the defendants could not recover service charges after the period to which that demand related whether as service charges under the lease before re-entry or after re-entry as mesne profit.
29. The judge decided, first, that furnishing an account of the service charge payable was not a precondition to its recovery; second, that a landlord claiming forfeiture may appropriately claim the equivalent of the contractual service charges as mesne profits after re-entry without having to comply with contractual formalities; and third, that in the present case the defendants had established the reasonableness of the service charges which they claimed, whose amount was thus determined.
30. It is submitted on behalf of the claimant that the judge's construction of the lease was clearly wrong. The clear wording of Clause2(2)(h) makes service of an account (that is a service charge demand) a precondition for accrual of liability to pay service charge. The need for such a demand is reinforced by a number of statutory provisions, including section 20B of the Landlord and Tenant Act 1985 and section 46 of the Landlord and Tenant Act 1987.
31. Mr Lederman accepts, I think, that the lessee is not obliged to pay amounts towards service charge, whether under Clause 2(2)(g) or (h), before he has received notification of the amount that he is required to pay. But he points to a number of notifications in the present case which, he submits, fully satisfy any formality required by the lease. He submits that contractual formalities cannot continue to apply after the lease has come to an end by re-entry and this is the express effect for service charges of Clause 2(2)(j)(ii) of this lease.
32. The notifications to which Mr Lederman referred include detailed schedules of unpaid rent and service charge (a) attached to the section 146 Notice dated 10^th May 1996; (b) set out in the body of the counterclaim served in November 1996 to the date of service; and (c) produced as an updated printout of unpaid rent and service charges between November 1991 and March 2002 and referred to in paragraph 51 of the re-re-amended defence and counterclaim. The defendants' solicitors had also sent to the claimant an updated printout to December 1996 with a letter dated 12^th December 1996 and a further breakdown of her service charge account from 1^st December 1984 to 25^th December 1996 with a letter to her solicitors dated 13^th May 1997. Mr Lederman also referred to a schedule of evidence which the claimant had sent to the Social Security Appeal Tribunal in support of a claim for Income Support with which she had sent a Service Charge Statement of 13^th October 1998 and a service charge bill of 25^th March 1999. Her summary of the facts in that case stated that "on 31.03.99 the claimant supplied verification of the amount of service charges paid quarterly."
33. In my view, the structure of Clause 2(2) of this lease is reasonably plain from its terms. The expenses and outgoings comprising the service charge as set out in the Fourth Schedule are for the building as a whole. Their amount is to be certified in a Certificate. The Lessor has to supply a copy of the Certificate to the Lessee on written request. The amount of the service charge payable by the lessee is a proportion of the amount certified calculated in accordance with Clause 2(2)(e). By Clause 2(2)(g) the lessee is obliged to pay such quarterly sums on account of service charge as shall be specified by or on behalf of the lessor to be fair and reasonable interim payments if required by the lessor to do so. Obviously the lessee cannot be obliged to make payments on account without being asked to do so. The obligation to make interim payments on account does not depend on the lessor furnishing an account under Clause 2(2)(h). This is reinforced by Clause 2(2)(i) which makes clear that the lessor can maintain an action for non-payment of interim service charge before the signature of the Certificate if he establishes that the amount demanded is fair and reasonable; although he cannot re-enter by reason only of non-payment of interim service charge before the signature of the Certificate.
34. Under Clause 2(2)(h), the lessor has to furnish an account of the service charge payable. When this is done, there is a balancing adjustment of any interim payment either in favour of the lessor or the lessee. The clause cannot operate until the account is furnished, but no particular formality is required. In the present case, I am satisfied that the various schedules to which Mr Lederman has referred were sufficient in form to constitute accounts under this clause. The expression "as soon as practicable after the signature of the Certificate" does not, in my view, make time of the essence, although no doubt in other circumstances in which Clause 2(2)(h) would result in a repayment, the lessee could complain if the lessor delayed furnishing the account.
35. I am satisfied therefore that the defendants' claim for service charge up to re-entry should not fail for want of service of accounts under Clause 2(2)(h). Clause 2(2)(j)(ii) makes clear that this contractual machinery does not extend beyond the expiration or sooner determination of the term, that is in the present case beyond the re-entry effected in November 1996. Thereafter, the defendants in accordance with convention claimed mesne profits. They were entitled to these without contractual formality but subject of course to proving them evidentially. This they did to the satisfaction of the judge.
36. Mr Semken submits that, in the unusual circumstances of this case where the lessor did not in law effect re-entry for non-payment of services charges, the defendants are not presently entitled to a money judgment reflecting the service charges after the date of re-entry in November 1996. Their only pleaded claim is for mesne profits. Under the order made by the judge, the point was not material. He ordered relief from forfeiture on terms which included payment of the arrears of service charge. If the terms were complied with and relief secured, a separate money judgment for the service charge was unnecessary. If the terms for relief were not achieved, the lease was forfeited and the pleaded claim for mesne profits in principle succeeded. But since, as I have held, the terms of relief from forfeiture should not include payment of the service charges, relief from forfeiture may, and probably will, be achieved without payment of the service charges. When this happens, the lease will be reinstated and the service charge claim will revert to being a contractual claim. In literal terms, this alternative claim has not been pleaded. Mr Semken submits that it is more than a mere pleading technicality, since the claimant may have defences to the contractual claim which were not available when the claim was for mesne profits. He mentions section 20B of the Landlord and Tenant Act 1985. He also submits that a claim for mesne profits is a claim for use and occupation. In the present case, although the defendants were entitled to limit their mesne profits claim to an amount equivalent to ground rent and service charge, they could have claimed a substantially greater amount, such that the claimant would have been ill-advised to resist the quantification of the claim as it was advanced.
37. Mr Lederman submits that this submission is an insubstantial technicality. If necessary, he seeks leave to amend the counterclaim to claim contractual service charges in the alternative in the event that relief from forfeiture is achieved. But he submits that the form of the pleading in the present case was entirely orthodox and sufficient to sustain a money judgment for the service charges whatever their eventual theoretical classification. I agree. If it were necessary, I would readily give permission to make an appropriate amendment, but I do not consider that an amendment is necessary. The defendants made an unambiguous claim for mesne profits including service charges quantified in accordance with the lease. In the twilight period between re-entry and the determination of the defendants' counterclaim, the claim was properly and conventionally expressed as a claim for mesne profits. By Clause 2(2)(j)(ii), the lessor was not obliged to operate the contractual machinery in the lease. They had to prove their claim evidentially and they did so. The claimant had every opportunity to contest the amount of the claim, but did not do so. The defendants are entitled to judgment for mesne profits, including the determined amount of the service charges, or, if the lease is reinstated as a result of operative relief, to exactly the same sum under the lease. In a contest between the overriding objective of the Civil Procedure Rules and insubstantial technicalities, the overriding objective should always win and in this case does so.
38. Section 20B of the Landlord and Tenant Act 1985 provides:

"(1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charges served on the tenant, then (subject to sub-section (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.

(2) Sub-section (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge."

39. I am not aware that there was or is any evidential basis for supposing that any relevant costs taken into account in determining the amount of the service charges in the present case were incurred more than 18 months before the demands made up to June 1995, or the accounts constituted by the schedule to the May 1996 section 146 Notice and the details given in the counterclaim served in November 1996. After November 1996, the claim was, as I have indicated, for mesne profits in the twilight period. Section 20B does not, in my view, apply to this. Nor is there any warrant for applying it retrospectively to the period after November 1996, if the tenant succeeds in achieving relief from forfeiture.
40. In the present case, the judge refused the claimant permission to amend her pleadings to rely on section 20B. This was a proper exercise of his discretion where there was no evidential basis to support the plea. This was in substance, not so much a decision on the pleadings, as a proper case management decision limiting the issues which justified the expense of investigation.

Conclusion

41. For these reasons, I would allow this appeal to a limited extent. I would vary the judge's terms as to relief from forfeiture in paragraph 3 of his order by omitting sub-paragraphs (ii) to (v) inclusive and by modifying sub-paragraph (vi) to the extent that I have indicated. There should then be an additional money judgment in favour of Anston to encompass the amounts omitted from paragraph 3 of the order, due account being taken of so much of those amounts as feature in the amount for which judgment is given in paragraph 1. There will need to be other consequential amendments to the order and I would invite the parties to submit a draft.

Lord Justice Sedley:

42. I am in full agreement with the answer given by Lord Justice May to the argument in the present case about the availability and extent of the tenant's defence under s.81: it was adequately pleaded and effect should have been given to it. But, like him, I am inclined to think that s.81 may not need to be pleaded (though it will not be wise consciously to omit it) where forfeiture is claimed for non-payment of still undetermined service charges. This may well be the kind of provision to which county courts must be alive and ready to give effect whether it is pleaded or not.
43. From the 1970s the anxiety of many residential leaseholders about the apparent profligacy of some of the service charges they were being called upon to pay led to pressure for statutory controls. Section 81 of the Housing Act 1996 is one of a series of legislative responses to the issue. Its self-evident purpose is to protect residential tenants from the risk of losing their homes for non-payment of dubious and possibly excessive service charges. Only when the charges have been fixed by agreement or adjudication, and then not for 14 days, can non-payment of them become a ground of forfeiture.
44. In this situation one should perhaps start not with the tenant's pleading but with the lessor's. Arguably the lessor ought, in obedience to s.81, not to make any claim at all for a forfeiture founded on asserted but legally undetermined service charges. If so, it is not obvious why a lessor who chooses to ignore s.81 should be able to secure possession from a tenant who, perhaps through ignorance or neglect, enters no defence or defends without pleading the statute – especially when counsel for the lessor will be professionally obliged at trial (see the Bar's current Code of Conduct, paragraph 708 (c)), to draw the court's attention to s.81.
45. I agree with Lord Justice May on the other issues addressed in his judgment and would allow the appeal in part on the terms which he proposes.

Order: Appeal allowed in part; as described in paragraph 41 of the judgments; the appellant to have 75 per cent of the costs of the appeal to be the submit of detailed assessment if not agreed, but the costs order below in relation to the hearing on 224t^h October 2002 to remain as it is; parties to submit a draft minute of order.

(Order does not form part od the approved judgment)