UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2011] UKUT 13 (LC)

LT Case Number: LRX/102/2009

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

LANDLORD AND TENANT  – service charge – building estate costs – whether recoverable from underlessees – construction of lease – principles of construction to be applied – held costs recoverable – appeal dismissed

 

 

IN THE MATTER OF AN APPEAL FROM THE LEASEHOLD VALUATION TRIBUNAL AND IN THE MATTER OF SECTION 27A OF THE LANDLORD & TENANT ACT 1985 AND IN THE MATTER OF 11 & 21 SHELDON SQUARE, PADDINGTON CENTRAL, LONDON, W2

 

 

BETWEEN:

 

SHELDON SQUARE RESIDENTS ASSOCIATION Appellant

 

and

 

ST GEORGE NORTH LONDON LIMITED Respondent

 

 

Re: 11 and 21 Sheldon Square,

Paddington Central,

London W2 6DQ and 6DS

 

 

Before: His Honour Judge Reid QC

 

 

Sitting at: 43/45 Bedford Square London WC1B 3AS

on 24 November 2010

 

 

 

 

David Holland (of counsel) instructed by Finers Stephens Innocent of 179 Great Portland Street London W1W for the Appellant

Patrick Rolfe (of counsel) instructed by Charles Russell LLP, 5 Fleet Place London EC5M 7RD for the Respondent

 

The following authorities and texts were referred to:

 

Lewison: The Interpretation of Contracts (4^th edition)

City Alliance v Oxford [2001] 1 All ER Comm 233

Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38

Charter Reinsurance v Fagan [1997] AC 313

Earl Cadogan v 27/29 Sloane Gardens [2006] 2 EGLR 89

Gilje v Charlgrove [2001] EWCA Civ 1777

KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363

Lancashire CC v Municipal Mutual Insurance Ltd [1997] QB 897

Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47

Powell and others v GEC [20051 EWHC 644 (Ch)

 

Also referred to:

 

Investors Compensation Scheme v West Bromwich Building Society [1998] 1WLR 896

Patching v Dubbins (1853) 1 Kay 1.

Ravennavi SpA v New Century Shipbuilding Co Ltd [2007] EWCA Civ 58

 

 

DECISION

Introduction

1.           This is an appeal from a decision of the Leasehold Valuation Tribunal dated 29 January 2009 and amended on 13 March 2009.  The LVT was required to determine an application made by the Appellant pursuant to section 27A of the Landlord and Tenant Act 1985 (as amended) (“the Act”) on behalf of its members for a determination of their liability to pay and/or the reasonableness of various service charges claimed by the Respondent for the service charge years ending 30 November 2004 until 30 November 2007.  The decision now appealed was, in effect, an interim decision because the Tribunal left over a number of matters to be determined at a later date.  The premises to which the application relates are 11 and 21 Sheldon Square, Paddington Central, London W2.

2.           The Appellant is an association comprised of over 100 members, all of whom are long leaseholders of apartments at Sheldon Square.  The association is recognised by the Respondent.

3.           Sheldon Square is a large mixed use development with residential and commercial properties.  There are two residential buildings in the development each comprised of private residential apartments, affordable housing flats, retail units and an underground car park.  Block A, which was completed first, is comprised of 27 Sheldon Square (affordable housing flats) and 21 Sheldon Square (private residential apartments).  Block B is comprised of 7 Sheldon Square (affordable housing flats) and 11 Sheldon Square (private residential apartments).  In total there are 164 private residential apartments held on long leases.  The Respondent is the head leaseholder.

4.           The Respondent is the head leaseholder by virtue of a headlease granted to it dated 7 August 2003 by Bishopbridge (GP) Ltd for a term of 999 years from 3 July 2003 (“the headlease”).  Paddington Central Management Company Limited was made a party to the headlease and was made responsible for the overall management of the development.

5.           The Respondent subsequently granted underleases of the residential apartments, which are presently held by the members of the Applicant.  The Tribunal was provided with a specimen copy of the underlease granted in relation to Flat 10, 21 Sheldon Square dated 3 September 2003 by the Respondent to Fusionpoint Limited (“the underlease”) and an undated copy of the underlease of Flat 203, 11 Sheldon Square.  It appears that all the underleases held by the members of the Applicant were granted mutatis mutandis on the same terms.

The Issue

6.           The issue on the appeal can be summarised as an issue of construction as to whether the “Sector 2 -Building Estate Costs” (“the estate charge”) are recoverable as a matter of contract from the underlessees under the underleases.

7.           Until the short adjournment it appeared that there might be another issue in the appeal.  Unfortunately the parties’ solicitors had chosen to ignore the directions the Tribunal as to the provision of a statement of agreed facts and an agreed statement of issues.  The result was that time was wasted in ascertaining what was in fact in issue on the appeal, and it was only after the short adjournment that the fact that there was a single issue of construction was clarified.

8.           The practical effect of the dispute is that if the Appellant’s contention is correct almost two thirds of the charges sought to be recovered by the Respondent from the underlessees for the years to 30 November 2004 and to 30 November 2005 are not properly recoverable from the underlessees.  On the revised service charge accounts for the year ended 30 November 2004 the total estate charge for Block A was £288,572 and for Block B £186,122.  The equivalent figures in the revised accounts for the year ended 30 November 2005 are £172,055 and £170,617.

The Lease Terms

9.           The service charge obligations under each of the underleases are as follows:

(i)         By clause 3.1 the underlessee is obliged to observe the covenants in the Eighth Schedule.

(ii)       By paragraph 2 of Part 1 of the Eighth Schedule the underlessee is obliged to pay the “Lessee’s Proportion” in accordance with the provisions of the Seventh Schedule.

(iii)     The “Lessee’s Proportion” is defined in clause 1 of the underlease as “the percentage specified in paragraphs 10-12 of the Particulars [on the first page of the underlease] in respect of the Maintenance Expenses in accordance with the Seventh Schedule hereto.”

(iv)      Paragraphs 10, 11 and 12 of the Particulars prescribe different percentages for “Sector 1 - Shared Building Costs”, “Sector 2 - Building Estate Costs” and “Sector 3 Private Residential Costs”.

(v)        The “Maintenance Expenses” are defined in clause 1 as “the costs incurred in accordance with the Landlord’s obligations contained in the Sixth Schedule hereto”.

(vi)      By the Seventh Schedule, the lessee is obliged to pay in advance on 1 December and 1 June “in every year throughout the term one half of the Lessee’s Proportion on the amount estimated by the [landlord] or its managing agents as the Maintenance Expenses for the year in question….” Any balance is payable within 14 days of service of the audited account for that year certified by an independent accountant.

(vii)    Part II of the Sixth Schedule is headed “The Maintenance Expenses” and there follow 15 paragraphs, two of which are subdivided.  Paragraph 1 is in these terms: “All sums spent in and incidental to the observance and performance by or on behalf of the Lessor of the covenants in Part 1 of this Sixth Schedule and any of the matters referred to in Clauses 2-15 of this Part II of the Sixth Schedule which are relevant or attributable thereto.”

(viii)  The covenants in Part 1 of the Sixth Schedule are divided into three groups that mirror the three different sector costs set out in paragraphs 10, 11 and 12 of the Particulars.

10.        Paragraph 11 of the Particulars identifies the “Lessee’s Proportion  Sector 2 -Building Estate Costs” as:

“[a specified percentage varying from apartment to apartment] of the fair and reasonable proportion of either sums paid or incurred pursuant to the covenants performed pursuant to the Superior Lease” (ie the headlease).

In the case of Flat 37 that figure is 1.2295%.  Other appropriate figures are inserted in the other underleases.

11.        By clause 3.2 of the headlease, the Respondent is obliged to pay the Service Charge defined in the Third Schedule as being the “Tenants Share” (which is in turn “a fair and reasonable proportion”) of the Service Cost.  The Service Cost means “all proper and reasonable costs and expenses” set out in Part II of the Third Schedule of the headlease.

The LVT decision

12.        Before the LVT the Appellant on the construction issue contended that each underlessee’s obligation to pay a service charge in respect of items charged under the headlease was limited.  It submitted that paragraph 11 of the Particulars of the underlease did not entitle the Respondent to a full indemnity for the estate charge demanded from it under the headlease.  It contended that for the Respondent to be able to contractually recover the estate charge it had to demonstrate that: (i) the amount of the estate charge was properly payable under the headlease, (ii) the amount of the estate charge fell within the recoverable expenditure permitted by paragraphs  1-3 under the heading “Sector 2-Building Estate Costs” in Part I of the Sixth Schedule of the underlease, (iii) the costs included work in relation to the maintained property, as defined in the underlease, and (iv) the sums claimed from the Applicant complied with the statutory requirements under the Act.

13.        The Respondent submitted that the construction of the underlease advanced by Appellant would lead to a result that was completely unworkable in practice and would make no “business commonsense”.  It submitted that it was intended that the underlessees should indemnify the Respondent through the Lessee’s Proportion for the fair and reasonable proportion of those sums paid or incurred pursuant to the covenants performed under the headlease.

14.        The LVT agreed with that submission as being correct in principle.  At paragraph 27 of its decision it expressed its conclusion in these terms: “The Tribunal was referred by both parties to a number of rules of construction and authorities in support.  It was not necessary for the Tribunal to rely on either of these.  It was clear to the Tribunal that any ambiguity caused in the underlease was as a result of poor or clumsy drafting on the part of the draftsman.  Nevertheless, what was intended by the contracting parties can be ascertained by considering the relevant contractual provisions in the underlease and the obligations created by them.”  The LVT then set out its reasons in the next four paragraphs of the decision.

The Appellant’s submissions

15.        The Appellant’s submissions began by reference to the headlease.  By clause 3.2 of the headlease, the Respondent is obliged to pay the Service Charge as defined in the Third Schedule.  By paragraph 2 of the Third Schedule the service charge payable is defined as the “Tenants Share”.  This in turn is (by paragraph 1.6) defined as “a fair and reasonable proportion” of the Service Cost.  By paragraph 1.5, the “Service Cost” means “all proper and reasonable costs of the services and expenses set out in Part II”.  Under the heading “Estate Services”, Part II contains a list of 15 separate services which, in turn, by clauses 6.1 and 5.4 the headlessor is to use its reasonable endeavours to provide.

16.        The Appellant stressed that (1) it has only to pay “all proper and reasonable” costs of the matters set out in Part II of the Third Schedule; (2) the percentage of those costs payable is a “fair and reasonable proportion” which, (3) can be varied by the headlessor under paragraph 3 of Part I of the Third Schedule and (4) headlessor is only entitled as service charge to charge the Respondent for the cost of providing the services listed in Part II.

17.        Against this background it turned to the underleases and pointed out that by paragraph 2 of Part 1 of the Eighth Schedule the underlessee is obliged to pay the “Lessee's Proportion” in accordance with the provisions of the Seventh Schedule and that the “Lessee's Proportion” is defined in clause 1 as the percentage specified in paragraphs 10-12 of the Particulars in respect of the Maintenance Expenses in accordance with the Seventh Schedule each of paragraphs 10, 11 and 12 prescribe different percentages for different heads.  In relation to sector 2 costs (“Building Estate Costs”) with which this appeal is concerned, these are defined in paragraph 11 of the Particulars in the leases set out above.

17.        “Maintenance Expenses” are defined in clause 1 as the costs incurred by the landlord in accordance with its obligations in the Sixth Schedule.  That Schedule is divided into two parts.  In Part I, under the heading “The Maintenance Covenants” there are listed a number of different services.  The covenants in Part I of the Sixth Schedule are, in turn, divided into three headings.  The three headings mirror the three different sectors in paragraphs 10, 11 and 12 of the Particulars.

18.        Part II, under the heading, the “Maintenance Expenses” lists a number of different heads or types of expenditure.  Part II is introduced by paragraph 1 which reads:

“All sums spent in and incidental to the observance and performance by or on behalf of the Lessor of the covenants contained in Part I of this Sixth Schedule and any of the matters referred to in Clauses 2-15 of this Part II of the Sixth Schedule which are relevant or attributable thereto”

19.        The Appellant submitted the obligation is to pay the “Lessee’s Proportion” which is in turn defined by reference to paragraphs 10, 11 and 12 of the Particulars.  These refer to Sector 1, Sector 2 and Sector 3 costs and the sub-division is mirrored in Part 1 of the Sixth Schedule and is a percentage “in respect of the Maintenance Expenses”.  These are in their turn defined as the costs incurred in accordance with “the Landlord’s obligations contained in the Sixth Schedule”.  The only obligations contained in that Schedule are in Part I (which is so headed).  The items of expenditure listed in Part II of the Sixth Schedule could not properly be described as “obligations”.  They are simply different types of expenses incurred in performing the obligations in Part I.  Paragraphs 2 to 15 of Part II to the Sixth Schedule are said to be governed by the words of paragraph 1 set out above.

20.        Thus it was submitted that the terms of the leases are clear.  The Respondent can only recover expenditure incurred in supplying the services or performing the obligations listed in Part I of the Sixth Schedule.  Those services and obligations are divided into three sectors and a separate percentage is recoverable in respect of each sector. In particular, under the heading of sector 2 costs, which are the charges under the headlease which the Respondent is entitled to recover, it can only recover if the sums sought to be recovered fall within the services or obligations listed in the three paragraphs under the heading “Sector 2-Building Estate Costs” in Part I of the Sixth Schedule.  The 15 paragraphs in Part II to the Sixth Schedule to the leases, it was said, do not contain freestanding heads of expenditure which the Respondent is entitled to claim as service charges.  They merely list heads or items of expenditure which can be claimed only if and insofar as they are incurred in the performance of the obligations or provision of the services listed in Part I.

21.        The services or obligations listed in the three paragraphs under the heading “Sector 2-Building Estate Costs” in Part I of the Sixth Schedule are, it was submitted, much narrower and more limited than the 15 different services listed under the heading “Estate Services” Part II to the Third Schedule to the headlease.  For example, paragraph 11 of Part II to the Third Schedule to the headlease allows headlessor to charge the Respondent for the cost of insurance.  There is no equivalent paragraph under “Sector 2-Building Estate Costs” in Part I of the Sixth Schedule to the lease.  Thus, it was said, the Respondent cannot claim any such sum under the leases.

22.        It was submitted that the LVT erred in stating that there was “no distinction between the costs that may be incurred under Parts I and II of the Sixth Schedule” and that “there is no other mechanism in the lease whereby the costs recoverable under Part II of the Sixth Schedule may be calculated”.  This did not reflect the fundamental difference between the two parts of the Sixth Schedule: Part I containing the services or obligations to be provided or performed, and Part II containing the recoverable items of expenditure which could be recovered only as far as they are “relevant or attributable” to the “observance and performance” of the obligations in Part I.

23.        If the parties to the leases had intended the landlord simply to be able to pass on to the tenants by way of service charge a percentage of the former’s total service charge liability under the headlease, they could easily have said so.  They could have described the sector 2 costs as “x% of the sums paid by the Lessor by way of Service Charge under the Superior Lease”.  Alternatively, under “Sector 2-Building Estate Costs” in Part I of the Sixth Schedule they could simply have repeated verbatim the 15 paragraphs in Part II to the Third Schedule to the headlease.  They did neither, although the first underlease was entered into within a month of the headlease and the Respondent was a party to both documents.  The LVT was bound to assume that the difference between the leases and the headlease was intentional and that the parties to the leases did not intend that the Respondent would be able to pass on the entirety of its service charge obligations under the headlease.

24.        The LVT’s decision found, in effect, that the Respondent could recover under the leases the entirety of its service charge liability under the headlease.  This involved finding that the paragraphs in Part II to the Sixth Schedule were freestanding heads of expenditure which could be claimed without reference to the paragraphs in Part I and ignoring the clear terms of the leases.  As the Tribunal put it, its construction of the leases rendered paragraphs 10-12 of the Particulars “of no consequence”.

25.        The Tribunal erred when it appear to rely on the application of “business common sense” in reaching its conclusion.  If the terms of the leases are clear (as they are) there is no room for the application of this principle.  The court cannot, under the guise of construction, re-write the bargain the parties actually made.  Reference was made to Lewison: The Interpretation of Contracts (4^th edition) at paragraph 2-08, City Alliance v Oxford [2001] 1 All ER Comm 233 and Charter Reinsurance v Fagin [1997] AC 313 and Powell v GE [20051 EWHC 644 (Ch).  There is, it was submitted, no ambiguity and the relevant terms of the lease are clear, but even if there was an ambiguity, there is no presumption of full recovery in favour of a landlord in respect of service charges and that any ambiguity should be resolved in favour of the tenant on the application of the doctrine of contra proferentem: Gilje v Charlgrove [2002] L&TR 33 and Earl Cadogan v 27/29 Sloane Gardens [2006] 2 EGLR 89.  The Tribunal should not have sought under the guise of construction either to “rectify” the clear terms of the leases to remedy what in retrospect might seem an unfortunate situation for the Respondent or to ignore or excise what are clear and workable provisions in the underleases.  Substantial premiums were paid for the grant of the 999 year underleases and the LVT should not have altered the clear terms of the bargain reached between landlord and tenant.

The Respondent’s Submissions

26.        The Respondent submitted that the Appellant’s argument depended upon what it says is the clear meaning of paragraphs 10-12 of the Particulars and Schedule 6 of the leases.  The LVT rejected the argument, referring to ambiguity arising from “poor or clumsy drafting on the part of the draftsman”, and instead accepted that, having regard to the background and context, as a matter of “business common sense”, the leases should be construed as entitling the Respondent to an indemnity in respect of estate charges.

27.        The proper approach to construction was for the LVT to have regard to the meaning which the document would convey to a reasonable person.  In determining this, the reasonable person is to be taken to have knowledge of all the background facts reasonably available to the parties at the time of the contract (“the factual matrix”: see Investors Compensation Scheme v West Bromwich Building Society [1998] 1WLR 896, at 912H-E).  If a provision is susceptible to two meanings, one of which would validate the particular clause or contract and the other render it void or ineffective, then the former interpretation should be applied even though it might otherwise, looking merely at the words and their context, be less appropriate: Lancashire CC v Municipal Mutual Insurance Ltd [1997] QB 897, per Simon Brown LJ at 906D.  As an aid to construction, the Court should have regard to the commercial purpose of the provision; if necessary, detailed semantic and syntactical analysis must be made to yield to business common sense.  In other words, “the more unreasonable the result of a given construction, the readier the court should be to adopt some less obvious construction to the contract”: per Simon Brown LJ, in the Lancashire CC case, at 905E.

28.        The construction which the Appellant contends for would result, in the Respondent’s submission, result in the Respondent being unable to recover whole categories of expenditure which form part of the estate charge, and only a lesser proportion of the expenditure referable to those categories which were recoverable.  There were, it was said, fundamental problems with this result.

29.        The alienation provisions of the headlease provide inter alia by clause 4.15.5(i) that the Tenant (i.e. the Respondent) may not underlet unless “the underlessee covenants with the Tenant ... to observe and perform the Tenant’s covenants in the Lease (including payment of a fair proportion of the Service Charge insofar as it relates to the premises to be underlet)....”.  If the Appellant’s construction were correct then it would mean that the Respondent must be taken to have offered, and the Appellant’s members (and their respective conveyancing solicitors) must be taken to have agreed to take, leases which were unlawfully granted in breach of covenant, with the potentially dire consequences for both parties that such a step would entail.  The Appellant completely failed to address this consequence of its interpretation, or explain why it should be ignored in construing the lease.

30.        The effect of the Appellant’s interpretation is that only certain categories of estate charge expenditure are payable under the service charge, and even then not all items within a given category.  However, deciding which particular estate charge categories (or items within them) are recoverable, and in which proportions, would be extremely difficult, and in some cases, impossible, to undertake in practice: (1) The headlease does not contemplate any apportionment of the type proposed, and in consequence the estate charge accounts produced by the headlessor are not broken down in a way which identifies those items which on the Appellant’s case do and do not form part of the service charge.  (2)  Even if the vouchers themselves were inspected on an annual basis (which might be an extremely laborious and costly process), the position could not necessarily be clarified.  For example, it would not necessarily be clear what proportion of any given employee's time was spent in carrying out duties associated with the discharge of obligations falling within the service charge as interpreted by the Appellant.  (3) An additional complication in administering the proposed regime arises because the obligations described in Sector 2 in Part I of Schedule 6 to the lease are defined by reference to a different geographical area (“the Maintained Property” as defined in the underleases) from those covered by the estate charges (“the Estate” as defined in the headlease).

31.        The commercial context of the transaction was that the Respondent as a developer built the blocks of which 21 and 11 form part, took a long headlease of each (at a premium of £10m per block), and sold off the long leases of the individual apartments at premium in each case.  The financial model was entirely conventional: any continuing income from the blocks would derive exclusively from the ground rents payable under the leases.  It would simply not make commercial sense that the Respondent should agree to anything other than a complete indemnity in respect of estate charges, as one would ordinarily expect with this sort of lease structure.  Yet, on the basis of the Appellant’s case, in relation to the 2004 and 2005 service charge account periods the Respondent would be responsible for almost two thirds of the aggregate estate charge.  It is very difficult to imagine why anyone should contemplate such an arrangement.  Further, from a practical point of view, there is simply no reason why, for example, the Respondent should agree to be responsible for the insurance contribution payable to the headlessor in respect of the blocks, or for any other estate charges for services which benefit the underlessees and not the Respondent.

32.        Interpretation does not, it was submitted, involve a two-stage process of deciding first, and without context, whether the meaning of the document is clear and then, only if it is not, considering whether there is anything in the background or surrounding context to resolve any lack of clarity.  It involves a single task of ascertaining the meaning of the document, as part of which the background and context must be taken into consideration: KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363, per Carnwath LJ at paras. 44-50.  If, having regard to that background and context, there has been a clear mistake or there is an ambiguity in the language of the document, the Court can construe the document in such a manner as corrects that mistake or resolves that ambiguity.

33.        Even construing the underleases free of its context there is still an ambiguity in the language of the leases, deriving from an inconsistency in the use of language associated with Schedule 6 and that schedule's relationship with the definition of “Lessee's Proportion”.  Within Schedule 6, a distinction appears to be made between the provisions in Part I, which are described “The Maintenance Covenants”, and the provisions in Part II, which are described as containing “The Maintenance Expenses”.  However, even within Schedule 6 itself this distinction is not maintained, since within Part I, the various covenants are sub-divided by reference to headings which describe them as costs rather than obligations: “Sector -1 Shared Building Costs”, “Sector 2 - Shared Building Costs” and “Sector 3 - Private Residential Costs”.  Thus the internal language of Schedule 6 undermines the distinction apparently drawn between Part I and Part II.  The distinction is further undermined elsewhere in the leases.  The lessor’s covenanted obligations are described in clause 4.1 as those set out in Part I and Part II.  Conversely, the phrase “the Maintenance Expenses” is in fact given a formal definition by reference to Schedule 6 as a whole, without distinguishing between Part I and Part II.

34.        The Appellant’s argument in relation to the alleged “mismatch” between the provisions of the headlease and the underleases places reliance on a distinction between Part I and Part II which the language of the leases themselves will not bear.  It fails to take account of the fact that, as shown elsewhere in the underlease, obligations can exist in Part II independently of Part I, with the consequence that the cost of complying with those obligations is also recoverable independently of Part I.  Examples of items in Part II which may have nothing to do with the obligations found in Part I are paragraph 2 (insurance), paragraph 3.1 (which refers not merely to the employment costs associated with compliance with the Lessor's covenants but the upkeep and management of the Maintained Property generally), paragraph 4 (rates, etc. payable in respect of the Maintained Property), paragraph 8 (generally managing and administering, and maintaining the amenities of, the Maintained Property), paragraph 13 (the provision of a reserve in respect of the Maintained Property), and 14 (lighting in respect of the Maintained Property).

35.        The meaning which the Appellant attributed to the words “of the fair and reasonable proportion of either sums paid or incurred pursuant to the covenants performed pursuant to the Superior Lease” appearing immediately after the percentage figure in paragraph 11 of the Particulars is unclear.  The phrase itself is ambiguous.  It appears to be envisaged that the sums are “paid or incurred” by the Respondent, which in turn suggests that the headlessor will perform the covenants, and then recover the costs of performance from the Respondent.

36.        Assuming that the phrase refers to the performance of obligations by headlessor, then this in turn creates an issue regarding the alleged effect of the phrase.  It does not, as the Appellant contends, qualify the lessees' liability to pay the specified percentage of the Sector 2 costs.  Assuming that Part I of Schedule 6 is concerned with obligations, then these are covenants by the Respondent under of clause 4.1 and the obligations described are obligations which Respondent is covenanting to provide.  The costs of carrying out such obligations are, if carried out by the headlessee, nonetheless recoverable by the Respondent because the definition of “Lessor” in the underleases includes any superior lessor where there is a provision for the repayment of any expenses incurred.  But, the Respondent submitted, on the Appellant's case, the effect of the qualification is that Sector 2 costs would only be recoverable if they related to obligations performed by headlessor under the terms of the headlease.  Given that the obligations specified in Sector 2 are the Respondent's obligations, and not those of the headlessor, this could make no sense.

37.        The Respondent contended that the general structure of the bargain, of which all parties must have been aware, was that the Respondent's title derived from its interest under the headlease, and that its entitlement to grant the leases depended upon the alienation provisions contained therein, including clause 4.15.5(i).  The words “the fair and reasonable proportion” in paragraph 11 refer back to the provisions in the Third Schedule of the headlease which deal with the estate charge, and the mechanism for calculating the appropriate proportion that can be found in paragraph 1.6 of that schedule.  It was therefore reasonable to infer that the intention was to create an obligation on the part of the lessees to pay a fair proportion of the estate charge (i.e. the percentage specified) so as to comply with the alienation provisions in the headlease.  In terms of drafting such an obligation, the rather complicated structure of the leases, in particular Schedule 6, and the inconsistencies of language in the various definitions, meant that the exercise was not straightforward, and explains the “poor or clumsy drafting” described by the LVT.  There was no obvious and neat way of integrating the required obligation into the existing lease structure.

38.        When the background and context is taken into account, it was clear, the Respondent submitted, that the reasonable person would have understood the parties to have meant that the lessees should indemnify the Respondent in respect of a proportion of the latter's liability to the headlessor in respect of estate charges, that proportion being the percentage specified in paragraph 11 of the Particulars.  This is in substance precisely the conclusion which the LVT arrived at, and the means by which it reached that result.  Although Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 had not yet been decided by the House of Lords when the LVT gave judgment the LVT in fact did no more than take the approach prescribed by Lord Hoffman in focusing on the intention of the parties as revealed by the language used as construed against the background and context of the leases, rather than trying to undertake some complex reformulation of the lease.

Discussion

39.        In Lancashire CC v Municipal Mutual Insurance Ltd [1997] QB 897 Brown LJ said:

“The principles governing the construction of commercial contracts are not in doubt: the more unreasonable the result of a given construction, the readier should the court be to adopt some less obvious construction of the words.  Or, as Lord Diplock put it in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191, 201, the “detailed semantic and syntactical analysis . . . must be made to yield to business commonsense.”  There is this further principle also here in play: the contra proferentem rule of construction.  In cases of ambiguity and where other rules of construction fail, an instrument should be construed more strongly against its maker or grantor.”

40.        Chadwick LJ in City Alliance v Oxford [2001] 1 All ER Comm 233 pointed out the limits of this approach saying:

“It is not for party who relies upon the words actually used to establish that those words effect a sensible commercial purpose.  It should be assumed, as a starting point, that the parties understood the purpose which was effected by the words they used; and that they used those words because, to them, that was a sensible commercial purpose.  Before the Court can introduce words which the parties have not used, it is necessary to be satisfied (i) that the words actually used produce a result which is so commercially nonsensical that the parties could not have intended it, and (ii) that they did intend some other commercial purpose which can be identified with confidence.  If, and only if, those two conditions are satisfied, is it open to the court to introduce words which the parties have not used in order to construe the agreement.  It is then permissible to do so because, if those conditions are satisfied, the additional words give to the agreement or clause the meaning which the parties must have intended.”

41.        Patten J reinforced the point in Powell and others v GEC [2005] EWHC 644 (Ch) at paras 30 and 31, observing “Although the operation of these provisions can produce what appear at first sight to be anomalies, there are, in my judgment, well-recognised dangers for a court in seeking to impose its own views or preconceptions as to what the parties are likely to have intended, when language used is clear and there is nothing in the factual background which points decisively away from that meaning.”  As Lewison J put it in his book The Interpretation of Contracts (4^th edition) at p43: “Where the words of the contract are clear the court must give effect to them even if they have no discernible commercial purpose.” 

42.        Most recently there has been a decision of the Supreme Court.  In Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47 Lord Hope said at para 21:

“It has, of course, long been recognised that the commercial or business object of the provision in question may be relevant: Prenn v Simmonds [1971] 1 WLR 1381, 1385 per Lord Wilberforce; see also Aberdeen City Council v Stewart Milne Group Ltd [2010] CSIH 81, para 11, although I think that the way this issue should be approached is less clearly explained in the 19th century Scottish cases referred to by the Extra Division in that paragraph (Mackenzie v Liddell 1883 10 R 705, Bank of Scotland v Stewart 1891 18 R 957, Jacobs v Scott & Co 1899 2 F (HL) 70).  In Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201, Lord Diplock said that if detailed and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must yield to business commonsense; see also Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913 where Lord Hoffmann included this as the fifth of his common sense principles.  In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 771 Lord Steyn, making the same point, said that words are to be interpreted in the way in which a reasonable commercial person would construe them, and that the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language; see also Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 661 per Lord President Rodger.  In Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580, 1587, however, Lord Steyn reminded us that our law of construction is based on an objective theory, and he emphasised the objective nature of the exercise of searching for meaning of language in its contractual setting:

“The court must not try to [divine] the purpose of the contract by speculating about the real intention of the parties.  It may only be inferred from the language used by the parties, judged against the objective contextual background.”

43.        This was a Scottish case but Lord Clark noted at para 45 that he “detected no difference between the principles applicable to the construction of a lease in Scotland and in England.”

44.        There was no mention in that case of Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 although three members of the panel were common to both decisions.  In that case the House of Lords held that, although a court would not easily accept that linguistic mistakes had been made in formal documents, if the context and background drove a court to conclude that something had gone wrong with the language of a contract the law did not require it to attribute to the parties an intention which a reasonable person would not have understood them to have had; that where it was clear both that there was a mistake on the face of the document and what correction ought to be made in order to cure it, in that it was clear what a reasonable person having all the background knowledge which would have been available to the parties would have understood the parties by using the language in the contract to have meant, the court was entitled to correct the mistake as a matter of construction.  In Chartbrook the House held that both those requirements were satisfied; that the material definition in the contract was ambiguous and obviously defective as a piece of drafting; that there was always a commercial context to a contract negotiated between businessmen, and to interpret the definition in accordance with the ordinary rules of syntax made no commercial sense.

45.        In the present case the underleases in question are complicated documents drafted with a  lack of clarity.  Lord Walker pointed out in Chartbrook when construing the terms of a development agreement, that there is a “need, in the midst of a thicket of rather confusing definitions, to keep in mind the general structure of the bargain.”  In this instance the overall structure of the bargain is clear enough: the developer took a headlease, developed and then sold off the individual apartments for substantial premiums on long leases, requiring the underlessees to pay their appropriate part of the service charge and a modest rent.

46.        As Carnwath LJ made clear in KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363 at para 50 the process of construing a document is a single process.  A court does not compartamentalise the process of interpretation and construe the words standing alone out of their context and then re-examine the words in their context, correcting any mistakes.  The two parts of the exercise are simply aspects of a single task, “in order to get as close as possible to the meaning the parties intended.”  A court or tribunal does not first of all construe a document acontextually (to use a word apparently coined by Lord Walker at para 86 in Chartbrook Ltd v Persimmon Homes Ltd with an unexpected use of the alpha privative) and then look at it again in its context.  It engages in a single exercise of construction.

47.        In my judgment the Appellant fell into the error of trying to separate out the meaning of the words standing alone from the words standing in their context in the transaction.  I accept that the LVT’s task was to construe the bargain which the parties had entered into as recorded in the underleases and not to re-write it, but the LVT had to decide the point on the wording of the underleases in the context of the transaction.

48.        The clumsy wording of the underleases does not, in my judgment, support the conclusion for which the Appellant contends.  The Appellant’s argument depends on drawing a distinction between Parts I and II of the Sixth Schedule which is not maintained even within the Schedule itself.  It relies on the proposition that on its true construction the only obligations on the Respondent are those comprised in Part I of the Schedule.  However even within Part I the various “covenants” are sub-divided by reference to headings which describe them as costs rather than obligations: “Sector -1 Shared Building Costs”, “Sector 2 - Shared Building Costs” and “Sector 3 - Private Residential Costs”.  The language of the Schedule thus undermines the distinction the Appellant seeks to draw between Part I and Part II.  That this distinction is not one the draftsman was seeking to draw is demonstrated elsewhere in the underleases: by clause 4.1 the Respondent covenants to “perform and observe the obligations set out in Parts I and II of the Sixth Schedule,” and the expression “the Maintenance Expenses” is defined to Schedule 6 as a whole, without distinguishing between Part I and Part II.

49.        As a matter of business common sense it is clear that any arrangement whereby the developer, having sold off the long leases would be left over the entirety of the underleases picking up the tab for a substantial part of the service costs would be absurd.  The objective, in my view, was (as the LVT held) to enable the Respondent to recover from the underlessees the sums which it had to expend in reimbursing the headlessor and in performing service functions for the underlessees.

50.        The conveyancing solicitors of the underlessees would have been aware of the alienation provisions of the headlease providing by clause 4.15.5(i) that the Respondent might not underlet unless “the underlessee covenants with the Tenant ... to observe and perform the Tenant's covenants in the Lease (including payment of a fair proportion of the Service Charge insofar as it relates to the premises to be underlet)....”.  There is no evidence that any of them took the view that the service charge provisions of the underleases would leave a gaping shortfall and their clients at risk of forfeiture.  This provides support as to how the objective (but concerned) observer regarded the meaning of the provisions in question.

51.        I accept that the wording of the underleases lacks clarity and that it would not be particularly easy to clarify the intended meaning of service charge provision by any simple amendment of the underleases.  The fact that there might be difficulties in reformulating the terms of leases so as to make clearer the intention of the parties, or that the reformulation might differ, even substantially, from that used in the leases themselves, does not prevent the Court from interpreting the leases so as to accord with the parties’ intended meaning.  As Lord Hoffman observed in Chartbrook at para 21:

“When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties.  It is to decide what a reasonable person would have understood the parties to have meant by using the language that they did.  The fact that the court might have to express that meaning in language quite different from that used by the parties ... is no reason for not giving effect to what they appear to have meant.”

52.        The Appellant suggested that if it had been intended to indemnify the Respondent in respect of estate charges, this could easily have been done this, but such assertions are rarely probative of anything: see Lewison, op.cit. at 2.13.  The fact that another draftsman might have expressed himself with greater clarity does not prevent a more opaque formulation taking effect. 

53.        The Appellant also placed reliance on Laws LJ’s observation in Gilje v Charlgrove [2001] EWCA Civ 1777 at para 27:  “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 proferred by the landlord.  It falls to be construed contra proferentem.”  (See also per Judge Rich QC in Earl Cadogan v 27/29 Sloane Gardens [2006] 2 EGLR 89 at para 20.  In my judgment this does not assist it.  The contra proferentem rule is a rule of construction of last resort.  In this case, although the task of construction has not been a simple one, there has been no need to resort to the rule.  With a good deal of effort it has been possible to ascertain the meaning of the underleases by application of the normal canons of construction without reference to what is little more than a counsel of despair.

Conclusion

54.        In the end I conclude the intention of the parties can be determined from the language used in its context, that the intention is not contradicted any clear words of the document, and that applying the ordinary canons of construction the LVT arrived at a correct conclusion in its decision.  The appeal is therefore dismissed

Dated 20 January 2011

 

His Honour Judge Reid QC