England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
HIS HONOUR JUDGE SEYMOUR Q.C.
SITTING AS A HIGH COURT JUDGE
HQ 07X00728

		Royal Courts of Justice Strand, London, WC2A 2LL
		23rd July 2008

Lord Justice Tuckey:

1. This appeal is about the proper construction of the service charge provisions in four leases. It arises from a decision of His Honour Judge Seymour Q.C. sitting as a High Court Judge, [2008] EWHC 136 (Q.B.), who decided on the trial of a preliminary issue that the tenant, Mott Macdonald Ltd., had no liability to the landlord, Leonora Investment Co. Ltd. "pursuant to" an invoice for £263,117.21 dated 15 January 2003 for works to the common parts of the office block occupied by the tenant.
2. The thirteen storey office block, St. Anne House in Wellesley Road, Croydon was owned by the landlord until 17 January 2003. By four leases dated 7 July 2000 it let the ground, first, second and third floors of the building to the tenant for a term of ten years starting on 24 June 2000 on terms which, for present purposes, are identical.
3. Clause 2 contained the demise and reserved the rents set out in the remainder of the clause which, by clause 3.1.1, the tenant covenanted to pay "at the times and in the manner aforesaid". The reserved rents included:

2.3 the Additional Rents – to be payable from the Rent Start Date and to be paid to the Landlord within 14 days of demand (except as otherwise provided).

4. Clause 1.1 defined the Additional Rents. There were five of them including:

1.1.2 The Service Charge (as hereinafter defined).

It was defined by clause 1.16 as:

the sum payable by the Tenant in accordance with Part 2 of the SCHEDULE OF SERVICES hereto.

5. The relevant provisions of part 2 of this schedule are:

Service Charge

1. The Service Charge to be paid by the Tenant shall be such fair proportion (which may if appropriate be the whole amount) of the actual or anticipated Service Costs for each Service Charge Year which shall be assessed by the Landlord or its Surveyor according to a reasonable and proper basis for apportionment applicable from time to time to the Premises.

2. The Landlord may make and send to the Tenant notice in writing of the Landlord's estimate of the anticipated Service Costs and the Service Charge applicable to the Premises for the coming Service Charge Year and the Tenant shall pay such estimate of the Service Charge by equal quarterly instalments in advance on the usual quarter days.

3. The Landlord will (unless prevented by causes beyond its control) prepare and send to the Tenant a statement of the actual Service Costs and Service Charge for each Service Charge Year as soon as practicable after the end of such year and in the event of the Service Charge for the Premises exceeding the aggregate amount paid by the tenant for such year the Tenant will pay the balance due to the Landlord within fourteen days of demand and in the event of the aggregate amount being greater the excess will be credited by the Landlord by way of set-off against the next instalment of Service Charge due from the tenant …

6. Service Costs are defined by clause 1.15 as:

The reasonable and proper costs incurred by the Landlord in carrying out the works and providing the Services set out in Part 1(A) of the SCHEDULE OF SERVICES hereto and the reasonable and proper service expenses incurred under Part 1(B) of that Schedule.

The costs and expenses listed in part 1(A) and (B) of the schedule are obviously intended to represent the total expenditure incurred by the Landlord for the whole building which then falls to be apportioned by paragraph 1 of part 2 of the schedule to determine the service charge payable by each tenant. The service charge year is defined in the lease but in this case it was the period of twelve months up to 24 December.

7. The relevant facts are as follows. The tenant had made quarterly advance payments in accordance with notices issued under paragraph 2 of part 2 of the schedule throughout the term of the lease. It had also received statements in accordance with paragraph 3 of the schedule at the end of the service charge years in 2000 and 2001. The works the subject of the invoice were carried out between May and September 2002 but their estimated cost had not been included in the quarterly payments made for the service charge year ending 24 December 2002 because, according to the landlord's agent:

… they were regarded as extra and outside the "normal" Service Costs and we always intended to invoice for them separately.

8. The invoice dated 15 January 2003 was accompanied by a letter to the tenant from the landlord's agents which said:

St Anne House, 20/26 Wellesley Road, Croydon

Common parts redecoration etc

I refer to past discussions and our telephone conversation on Monday regarding the above. In particular Mott MacDonald's contribution towards the cost of the works involved, and in accordance with the leases between our respective companies.

To this end I enclose our invoice number SUN102979 to which is attached a schedule detailing the work involved and costs incurred by your Landlord. By way of information the schedule indicates the overall cost and, that apportioned to Mott Macdonald. …

The landlord looks forward to receipt of your payment.

The invoice amount had not been apportioned between the four leases as the earlier paragraph 2 notices and paragraph 3 statements had been.

9. On 31 January 2003 the same agents issued four credit notes on behalf of the landlord in respect of the service charge year ending on 24 December 2002 which reflected the fact that the tenant's payment of estimated service charge for the year exceeded the actual service charge for each of the four leases. The credit notes were supported by schedules of actual service cost incurred for the year but did not include the cost of the works to the common parts the subject of the earlier invoice.
10. The tenant did not pay the invoice and after some desultory correspondence these proceedings followed. The tenant contended that service charge was only recoverable under the procedure laid down by paragraph 3 of the schedule which had not been followed for the costs the subject of the invoice. The tenant's defence also contends that a large proportion of the amount claimed is for improvements for which the tenant is not liable and that the costs claimed are not reasonable and proper. But it was the first of these contentions which led a master to order the preliminary issue which the judge tried.
11. The judge's conclusions are to be found in paragraphs 49 to 54 of his judgment. He concluded that the tenant was only liable to pay service charge if the procedures in paragraphs 2 or 3 of part 2 of the schedule were followed and that the delivery of the invoice was not in accordance with those procedures.
12. However, at paragraph 53 he said:

I see no justification for construing paragraph 3 of Part 2 of the Schedule of Services as limiting the entitlement of [the landlord] to service of one statement. It is true that a statement was required to be produced under that paragraph but it would be strange and harsh if a revised statement could not be issued if the first one contained some error. It does not seem to me that the obligation on [the landlord] to provide a statement under paragraph 3 should be construed as an inhibition on producing more than one.

He went to say that as no revised statement had in fact been produced this point did not arise.

13. On the hearing of the appeal both parties were represented by leading counsel who did not appear before the judge. It was apparent that their arguments differed from those advanced to the judge and indeed from those advanced in the skeleton arguments prepared for the purposes of this appeal. As the issue we have to decide is purely one of construction this does not matter, but what I have said will serve to explain why the arguments we have considered may not be reflected in the judge's judgment.
14. The skeleton arguments referred to a number of cases in which the courts have had to consider whether terms in a lease are conditions precedent to obligations to pay, substantive procedural provisions which have to be followed to the letter before a liability to pay is triggered, or mere mechanics which do not have to be insisted upon regardless of the circumstances. I have not found these cases particularly helpful for the simple reason that we are only concerned with an issue of construction, the rules of which are not in doubt. The leases in this case must be construed in accordance with their own terms.
15. The essence of the argument by Mr Seitler Q.C. for the landlord was that part 2 of the schedule does not contain a definitive or exclusive regime for imposing the obligation to pay service charge on the tenant. Paragraph 2 describes the procedure to be followed to make the tenant liable to pay estimated service charges in advance. But paragraph 3 does not prescribe the only way in which a tenant will be liable to pay actual service charges. There are, he says, two parts to this paragraph. The first part imposes an absolute obligation on the landlord to produce a statement; the second, but distinct, part starting with the words "and in the event" in the fourth line deals, but only deals, with the situation where advance payments under paragraph 2 have been made. Hence the references to "paid by the tenant for such year" and "balance due" which can only refer to a tenant who has made advance payments. So the obligation in paragraph 3 to pay the balance within 14 days arises in such a case. But paragraph 3 says nothing about what happens in the case of a tenant who has not made advance payments. He is contractually entitled to a statement, but paragraph 3 does not impose any obligation upon him to pay. That obligation has to found elsewhere in the lease and is the primary obligation to pay in clauses 2.3 and 3.1.1. Mr Seitler submits that this all shows that paragraph 3 is not the only way in which the tenant becomes obliged to pay service charge. So the landlord was entitled to claim service charge by its invoice and the tenant was obliged to pay it outside the paragraph 3 regime. He seeks to derive further support for his argument that part 2 is not definitive by contending that the landlord could not recover service charges "from the Rent Start Date", as clause 2.3 provides, under the paragraph 2 or 3 procedures.
16. As to the requirement for a statement, Mr Seitler accepts that the tenant has a contractual right to call for one which he could enforce if necessary by an action for specific performance. But, he submits, provision of the statement is not a condition precedent to the tenant's obligation to pay service charge. Clear language is required if that was what the parties intended and paragraph 3 is silent about what is to happen if no statement is provided.
17. Persuasively though Mr Seitler's submissions were put, I do not accept them. I think the simple question is: what does the lease say has to happen before the tenant is obliged to pay service charge? Rewriting clause 2.3 to include the definition of service charge it becomes:

Service Charge – to be payable by the tenant in accordance with Part 2 of the Schedule of Services from the Rent Start Date and to be paid to the landlord within 14 days of demand (except as otherwise provided).

18. So one is immediately taken to part 2 which is headed Service Charge. Paragraph 1 does not contain any obligation to make payment; it simply deals with how the service charge is to be calculated. Paragraph 2 provides that advance payments are to be made on the usual quarter days in the event that the landlord opts for such payments (as he is very likely to do) and follows the procedure which entitles him to do so. There is no other provision which obliges the tenant to make such payments.
19. So one then goes to paragraph 3 to see what happens next. At the end of the service charge year the landlord must produce a statement. There can be no doubt about the position if the tenant has made advance payments: any balance due to the landlord must be paid within 14 days. This obligation to pay is triggered by the statement which has to state "the actual service charge" and will one assumes contain a demand for any balance due. I do not think this balance could be claimed under this (or any other) provision in the lease before the statement has been sent to the tenant.
20. So is there a lacuna in paragraph 3 as to the position of a tenant who has not paid service charge in advance? I do not think so. The statement has to go to such a tenant and the provisions about payment are all contained in the same sentence linked by the word "and". When paragraph 3 talks of the balance due it must be intending to refer to any amount due from the tenant whether or not he has made advance payments. The statement he is entitled to receive will show him what that amount is and how it has been calculated. It would make no sense to have one regime in paragraph 3 for those who had paid in advance and no regime for those who had not. Where would one look to see what other regime there was? Answer: paragraph 2.3, but that throws one back again to paragraph 3 of the schedule which should therefore be construed in the way I have indicated.
21. I do not think Mr Seitler's subtle point about payable from the Start Date gets him very far. "From" cannot literally mean that service charge becomes payable from the first day of the lease. In context it must mean simply that service charge may be claimed under part 2 from the commencement of the lease.
22. As to Mr Seitler's points about conditionality, I do not see this as a case in which the leases contain a condition precedent to the landlord's right to recover. Rather they prescribe the contractual route down which the landlord must travel to be entitled to payment. The prescribed route in this case is, we are told, a very familiar one and it is obviously not difficult to follow. The statement will be of considerable importance to the tenant. It gives him information about the actual service costs for the past year, which only the landlord will know, and how they have been apportioned to him so that he can make an informed decision as to whether to pay or not in the knowledge that the landlord may acquire a right to forfeit if he does not. Mr Seitler had to accept in argument that the logic of his submission was that the landlord can make a demand for service charge outside the part 2 regime in any form, for any service cost for up to six years. This would be contrary to what sensible commercial parties would contemplate in a relationship carefully defined by the terms of a commercial lease.
23. So I conclude that the judge was right to decide that the landlord was not entitled to payment of the invoice because it had not followed the paragraph 3 procedure and its requirement for provision of the statement of service charge which triggered the obligation to pay. I should make it clear that Mr Seitler said that he did not and could not contend that the invoice taken together with the statements which were sent 16 days later were sufficient to comply with paragraph 3.
24. The conclusion I have reached may seem harsh or over technical, but if so it results from what I consider to be the proper construction of the leases. No one has challenged the judge's conclusion that it was open to the landlord to issue a revised statement. Nor would I. Provisions of this kind should not be seen as procedural obstacle courses. Businessmen dealing with one another often make mistakes and there is no scope for saying that the provisions in this clause only gave the landlord one opportunity to get it right. I say nothing about the landlord's prospects of being able to get it right even now, because we have not heard argument about this. But for the reasons I have given I would dismiss this appeal.

Lord Justice Wilson: I agree

President of the Family Division: I also agree