"40.  The one issue in this case which has caused the Tribunal the most anxious consideration is the calculation of the management charge.  It will be recalled that both leases allowed the landlord to demand "management charges... in an amount equal to 10% of all other items included in the service charge."

41.  The issue arises in this way.  One element of the service charge for both flats is lift maintenance.  The way in which the cost is calculated is as follows.  Firstly, there is a maintenance contract with a lift engineering company.  Secondly, Camden itself has a call centre which can receive calls from tenants complaining about lifts breaking down etc.  An appropriate proportion of the call centre is calculated and allocated to "lifts".  Thirdly, there are Camden employees in the mechanical and engineering team who check that the work on the lifts has been done properly.  These last two heads are described as "indirect costs".  Fourthly there is a sum for "support services" and fifthly there is an item for "payment and analysis".  These items are described as "overheads".

42.  All these items are then added together and divided by the appropriate proportion for each flat.  After this exercise is done, the landlord adds its 10 per cent management fee on top.

43.  There are two issues on this.  One is an issue of fact: has there in fact been double-counting?  So, for example, does the work charged as "payment and analysis" in fact include preparation of accounts for individual tenants (which it was common ground would fall within the landlord's 10 per cent management fee)?

44.  The second is a question of law on the construction of the lease: are some of the items charged to lifts, for example "payment and analysis" properly to be considered as management expenses and are thus to be included in the 10% figure, rather than as part of the "lift" head?

45.  The question of fact we can deal with quite easily.  Mr Compton gave evidence to us.  He was a patently honest witness.  He told us that the management costs which were the subject of the 10 per cent management charge were quite separate to anything charged elsewhere.  He produced a calculation of the actual costs, which comprised the accounting, auditing and certification fee for the tenant's accounts and the general management costs relating to the tenants, spread between three different cost centres.  The amount totalled £558 .17, which was much more than the 10% which the two leases permitted the landlord to charge.

46.  Mr Compton told us that there was no double-counting as a matter of fact.  We accept that evidence.  There was no evidence (other than assertion) from the tenant to the contrary.

47.  The issue of law is more difficult. It arises because many of the matters for which the landlord charges separately are things which in a smaller privately owned block would be done by the management agents as part of their management functions.  So, for example, a managing agent would expect to answer calls from a tenant complaining about a broken-down lift, whereas the landlord here operates its own call centre.  Does the cost of the call centre constitute part of the "landlord's management charges for the estate" or its "management charges for the building and for general management of the estate"?

48.  Likewise are the costs of supervising the caretakers properly a matter to be covered by the landlord's 10 per cent management charges?  Or are they  separate, so that the landlord can not only charge for the supervision of the caretakers, but also 10% on top of the total for its other management expenses?

49.  Before turning to the authorities to which we were referred, we should state our conclusion on the construction question.  We start by considering what the position would be if the paragraph referring to the 10% management charge were omitted altogether.  If that occurred then in our judgment a landlord would be entitled to make a charge for services intimately concerned with the provision of an allowable item.  Thus as part of the cost of lift maintenance, the landlord would be entitled to charge for a call centre and as part of the cost of providing caretakers the landlord could charge for the supervisors.

50.  If that is right then the provision for a 10% management charge is in our judgment intended to provide for a payment on top of other heads.  For the tenant to succeed on this argument, the management charge provision would have to be interpreted as a cap on the management expenses, whereas it says in terms that it is in addition to the other charges.

51.  This interpretation is in accordance with the determination of this Tribunal (Ms Samupfonda, Mr Coffey FRICS and Mr Gowman) under the reference LON/00AG/LSC/2006/O326 dated the 30th of March 2007, which concerned these two flats.  For example, the Tribunal there upheld the cost of caretaking at £23.51 per hour: see Para 4 (iii).  In the current case, the landlord produced (as no doubt it produced to the Tribunal in 2007) the calculation which results in £23.51 being charged.  It includes sums for various overheads, all of which are incorporated into the headline £23.51 figure.  It follows that the Tribunal approved the charging of the 10% on top of this figure.

52.  The tenant also relied on the decision in 45 New Compton St also involving Camden as the landlord with reference LON/OOAG/LSC/2008/0253 (Mr Shaw, Mr White FRICS and Mr Goss).  The lease there was atypical, because it allowed recovery only in respect of "the building" not "the estate".  The Tribunal there found as a fact that the charging of management fees on top of overheads did involve duplication (see Para 9.12).  The Tribunal held "that there may be an argument for some uplift in the service charge made in particular cases to cover an overhead which is so inextricably bound up with the provision of the service that it is in fact a proper part of the service charge" but found on the facts of that case that the landlord has failed to show transparently how the overheads had been allocated.

53  In the current case there can be no complaint of lack of transparency.  The landlord has produced detailed spreadsheets showing how overheads are allocated to particular heads.  Unlike 45 New Compton St we have found as a fact that there is no double-counting.

54.  Accordingly in our judgment the landlord was entitled to charge 10% on top of the other heads of service charge.  We would, however put down a marker.  Our decision is not intended to give the landlord carte blanche to charge overheads on top of services.  In each case it will be opened to tenants to challenge the amount of the overheads, however, as we have noted above, Mr Palley in the current case has not adduced evidence to mount such a case.

55.  In a view of the importance of the issue, however, the Tribunal considers that it would be right to give the tenant permission to appeal on this one point.  Since it is a point of law, any appeal should be by way of a review rather than a rehearing."

6. The formal decision of the LVT was, so far as relevant, that other than the sum of £604.49, none of the sums claimed by way of service charge be disallowed and that:

"There be permission to appeal by way of review on the following point, namely whether on the true construction of the leases and on the facts found by the Leasehold Valuation Tribunal the landlord was entitled to charge a 10 per cent management fee on all other heads of service charge."

7. Mr Palley applied to the Upper Tribunal for permission to appeal on a large number of factual issues.  The President refused permission to appeal on the 7th of January 2011 in the following terms:

"The applicant, who was given permission to appeal by the LVT on one issue (entitlement to charge a 10 per cent management fee), now seeks permission to appeal on a large number of other matters.  In refusing permission to appeal on these grounds of the LVT stated that some of the points were not taken before it at the hearing.  The application to this Tribunal does not seek to identify what these points were or to say why permission should be granted in relation to them despite the fact that they were not pursued before the LVT.  The decision of the LVT deals clearly with the matters that it addresses, and I can see no basis for a successful argument that it was not entitled to reach the decisions that it did on the basis of the material before it."

The Leases

8. The relevant parts of the leases are as follows.

27 Borrowdale. 

The lease was dated the 5th of March 1990.  By clause 3.2 .1 the tenant covenanted with the landlord to:

"pay to the Landlord at the times and in the manner specified..... such annual sum as may be notified to the Tenant by the Landlord as representing the Specified Proportion of the Service Charge calculated in accordance with the Fourth Schedule"

The "Service Charge" was defined in clause 1.1 as:

"All  those costs and expenses incurred or to be incurred by the Landlord in connection with the management and maintenance of the estate and the carrying out of the Landlord obligations and duties and providing all such services as are required to be provided by the Landlord under the terms of the Lease including where relevant the following:

- Category A Services

- Category B Repairs

- Category C Improvements

and without prejudice to the generality thereof all such matters set out in the Fifth Schedule"

"Estate" was defined in clause 1.1 as

"the property in respect of which the Landlord is or was the registered proprietor under the title number (s) to the building or conveyed by deed in respect of unregistered land set out above and the Managed Buildings thereon and thereover and including the Common Parts”.

The Fifth Schedule (Items of Expenditure) included the following items:

8.        All fees and costs incurred in respect of the annual certificate and of accounts kept and audits made for the purpose thereof.

13.  The landlord's management charges for the Estate in an amount equal to 10% of all other items included in the Service Charge

14.  All costs charges and expenses together with all VAT and other taxes (if any) thereon incurred or to be incurred by the Landlord in the observance and performance of all the Landlord's obligations and duties to be observed and performed under the terms of the lease"

69 Bucklebury

The lease for 69 Bucklebury, made on the 27th of February 1989, contained the following relevant covenants.

"2(2) to pay to the Corporation without any deduction by way of further and additional rent a proportionate part of the reasonable expenses and outgoings including all VAT incurred by the Corporation in the repair and maintenance and renewal decoration improvement and insurance and management of the building and the provision of services therein and the other heads of expenditure as the same are set out in the Third Schedule hereto such further and additional rent (hereinafter called the "Service Charge")

The Third Schedule defines the expenses and the outgoings and other heads of expenditure in respect of which the tenant is to pay a proportionate part by way of service charge and includes –

"13.  The Corporation's management charges for the building and for general management of the estate in which the building is situated in an amount equal to 10% of all other items included in the Service Charge."

Submissions

9. Mr Palley took me through the submissions set out in his Reply. His central submission was that clause 13 of the leases imposed a cap on the totality of the management charges for the estate that the landlord was entitled to charge. For each charge the question was whether it was of its nature a management charge. Every charge of that nature should then be aggregated up and compared to the totality of all other items included in the service charge. So far as those management charges exceeded 10% of all other included items they could not be claimed. Mr Palley said that the decision of the LVT chaired by Ms Samupfonda in Palley v  London Borough of Camden LON/00AG/LSC/2006/0326 (referred to as the 'Samupfonda decision') had been in his favour on that point. The decision of the LVT under challenge (which he referred to as the ' Jack decision' after the name of its chairman) had misinterpreted the Samupfonda decision. The LVT was wrong to suppose that it supported their interpretation. He submitted that I should follow the Samupfonda decision. He also relied upon the case of 45 New Compton St, pointing out that clause 13 had been relied upon by Camden. At paragraph 9.11 the tribunal had accepted the argument put forward by the applicant, finding that while there might be arguments for some uplift in the service charge to cover an overhead inextricably bound up with the provision of the service, the leaseholder was entitled to a satisfactory explanation as to what it was and how it had been calculated. There was no such satisfactory explanation in the case.

10.  Perhaps of particular relevance to Mr Palley's submissions is paragraph 9.12 of the New Compton Street decision.

"Furthermore, the Tribunal accepts the Respondent's argument that on a proper construction of the lease, the Respondent is restricted to a 10% recoverable administration charge and no more. The inclusion of an "overhead charge" (see as an example page 104 "Certificate of Service Charges for financial year 2005 -- 2006 where the charges totalled £977.21 already include "overhead charges") upon which a further charge of 10% £97.72 for administration is made does involve, on the finding of the Tribunal an element of duplication not justified by the provisions of the lease. Even if the Tribunal is wrong in this construction of the lease, (which it seems to the Tribunal should be construed "contra proferentem") a very considerable number of the "overheads", examples of which are given above, are completely extraneous to this building and not recoverable under the particular terms of this lease."

11.  If nothing else, said Mr Palley, clause 13 was ambiguous and ought to be construed contra proferentem. He referred me to Berrycroft Management Company Ltd v Sinclair Investments (Kensington) Ltd [ 1997] EGLR 47 , Gilje v Charlegrove Securities[ 2001] EWC Civ 177 and the decision of His Honour Judge Green QC in Westminster v Pottle, Central London County Court, 10th April 2000.

12.  Indeed Mr Palley wished to take his submissions rather further. He was very anxious to revisit the facts and argued that I should conduct a rehearing of this matter. He further invited me to review the decisions in several of the cases that had been mentioned to me by the parties, in respect of both law and facts. His submissions extended into political matters, including the politics of the judiciary, as he saw it. He was reluctant to accept my repeated explanations of the comparatively narrow ambit of his appeal and my refusal to follow him into such matters.

13.  Ms Gibbons of Counsel submitted on behalf of the respondent London Borough of Camden that the LVT was right in law. The terms of the leases entitled the respondent to charge the direct costs of a service, its indirect or specialist costs and 'overheads' or support costs. Mr Crompton had defined those costs for the LVT, which had described them as "intimately concerned with the provision of an allowable item". In addition to those costs clause 13 entitled the respondent to charge a management fee of 10%. Reliance was put on the authorities of Lloyds Bank plc v Bowker Orford [ 1992] 2 EGLR44, Wembley National Stadium Ltd v Wembley London Ltd [2008] 1 P & CR 3 , London Borough of Brent v Hamilton LRX/51/2005 and Norwich City Council v Marshall LRX/114/2007. These authorities demonstrated that, while each lease needed to be construed according to its own facts and circumstances and there must be clear terms in the provisions of the lease that are said to entitle a landlord to recover money from his tenant by way of service charge, there is nothing in principle to confine a service charge to the cost of the actual service to the exclusion of any management costs included in its provisions.

14.  In this case clause 13 was a specific provision that allowed for the recovery of relevant general management costs. The circumstances of the respondent landlord should not be ignored. It was responsible for a great many properties. It would have been envisaged at the time of the grant of the leases that there would be management costs which might not relate to specific services and which it might not be possible to identify as relating to a particular building or estate. It was not unreasonable to seek to claim a proportion of such costs from the tenant.

15.  Like any other service charge, the Landlord will always have to be able to show that the management charges were reasonable and, in particular, that there was no double-counting involved in seeking to charge not only for management that was concerned with the provision of an allowable item but also for the general management costs that were the subject of clause 13. In the present case, unlike several of the other cases quoted, the LVT had considered all the facts, heard the evidence of Mr Crompton and decided that the charges under clause 13 were reasonable and did not involve any double-counting. The provisions of the leases were clear and therefore there was no reason to turn to the contra proferentem principle for help.

Consideration

16.  This matter turns upon the proper construction of the leases in question and particularly of clause 13.

17.  I was referred to a number of previous decisions of the LVT.  Very often those decisions turn on their own facts and are of little help for that reason.  However I feel I should say something about the decision of the LVT dated the 30th of March 2007 (the Samupfonda decision) in relation to these two flats.  Although, of course, that decision does not bind me and I have to reach my own view of the proper construction of the provisions of the leases, Mr Palley clearly felt that the decision in that case was inconsistent with the decision of the LVT that I have to consider. 

18.  I can understand why Mr Palley submits that the Samupfonda decision supports his argument. I have not found that decision entirely clear.  However, on a careful reading, I am not persuaded that decision is necessarily inconsistent with the decision of the LVT that I now have to consider.  In that case the London Borough of Camden were seeking to charge not only a 10 per cent management fee but also additional costs over and above that, relying upon clause 14.  The Samupfonda LVT rejected that argument but did appear to say that clause 13 entitled the landlord to charge a 10 per cent management fee.  There was a reference in that case to the costs of caretaking and the figure of £23.51.  The current LVT referred to that in paragraph 51 of their decision, set out above.  I follow the argument that the Samupfonda LVT appears to have accepted that the 10 per cent management fee would be calculated on top of that figure.  I do not need to express any view as to whether that argument is right or wrong.  Ms Gibbons pointed out that the Samupfonda LVT did not have to rule on the interpretation of clause 13.  It was focusing on clause 14 and on that point Mr Palley succeeded.  That is correct.  What a tribunal says in a case about a point that it does not actually have to decide will usually carry much less weight with a later tribunal than what it says about the point that was at issue.  I have to say that I do not find it as clear as the current LVT seems to have done that the Samupfonda LVT did adopt the same interpretation of clause 13 that the current LVT did.  It may have done.  But I do not put much weight on the decision of the Samupfonda LVT either way, so far as the issue I have to determine is concerned.

19.  I do not derive much help from the other decisions of the LVT either.  The facts of the 43D Milner Square case were significantly different, as were the provisions of the lease in that case.  That LVT concluded that a tenant reading the provisions of that lease would not consider that a requirement to contribute to the supervision and management of the building would oblige him to contribute to the formation of the proposed borough-wide Islington Leaseholder Association.  I have no problem in understanding that decision but it is of no assistance in the current case.  Neither is the decision in 45 New Compton St.  Although the landlord was the London Borough of Camden and unsuccessfully relied on clause 13 to justify its charges, the reason was that it failed to demonstrate as a matter of fact that the charges were reasonable and that there was no double-counting in them.  That is in stark contrast to the current case, where the London Borough of Camden has succeeded in demonstrating both those points to the satisfaction of the LVT.

20.  The case of Gilje v Charlegrove Securities Ltd (above) confirms the basic principle. Laws LJ said (at paragraph 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 proffered, by the landlord. It falls to be construed contra proferentem ..."

Mummery LJ noted with approval the statement from the Encyclopaedia of Forms and Precedents (fifth edition, vol 23,p71, para 55) that "the courts tend to construe service charge provisions restrictively and are unlikely to allow recovery for items which are not clearly included".It follows that, in cases of doubt, provisions providing for the recovery of service charges tend to be construed restrictively against the landlord.

21.  The cases equally establish that provisions providing for the recovery of service charges must be read in a commonsense and practical way. As the President of the Lands Tribunal said in the case of London Borough of Brent v Hamilton (see above), at paragraph 11:

" To be recoverable the expenditure must be incurred by the council in fulfilling the obligations and functions set out in clause 6. There is, in my judgement, no ambiguity in this. To the extent that expenditure is so incurred it is recoverable, and whether it is so incurred is a question of fact. Clause 6 includes usual landlord's covenants, of which the provision of services is one, and with the exception of the covenant for quiet enjoyment they will require expenditure to be incurred by the council in their performance. If repairs are to be carried out or windows painted or staircases cleaned someone will have to be paid for doing the work and someone will have to arrange for the work to be done, supervise it, check that it has been done and arrange for payment to be made. Since the council can only act in these respects to employees or agents it will have to incur expenditure on all these tasks. If it does incur such expenditure, the lessee will be liable to pay a reasonable part of it."

With that law in mind I turn to consider the meaning of each of the relevant leases.

The 27 Borrowdale Lease, dated 5^th March 1990.

22.  The obligation on the tenant is to pay the annual sum notified to him as representing the specified proportion of service charge ‘calculated in accordance with the Fourth Schedule’. (Clause 3.2.1. Nothing turns on the calculation under the Fourth Schedule.)

23.  The definition of ‘Service Charge’ in Clause 1.1 is broad. It includes ‘all … costs and expenses incurred … in connection with the management and maintenance of the Estate and the carrying out of the Landlord obligations and duties and providing all such services as are required to be provided … under the lease.” The words ‘management and maintenance’ must relate to the Estate. That is one element of the service charge. The carrying out of the Landlord obligations and the provision of services in accordance with the lease is another element of it.

24.  Clause 1.1 then specifies the inclusion of three categories of services, repairs and improvements. The provision continues “and without prejudice to the generality thereof all such matters set out in the 5^th Schedule.” 

25.  In that definition of Service Charge nothing is said explicitly about any management costs arising out of the carrying out of the Landlord obligations under the lease. However, so far as such costs are concerned, it seems to me that the words of clause 1.1 are plainly apt to include such management costs as are incurred in the course of fulfilling those obligations. Such management costs are incurred  ‘in connection with’ the carrying out of those obligations and duties and the provision of those services, in the commonsense way illustrated by the President in L B Brent v Hamilton and Norwich CC v Marshall. Nothing was said explicitly about management costs under that head because nothing needed to be said.

26.  Clause 1.1 expressly includes in the service charge a proportion of “all … costs and expenses incurred … in connection with the management and maintenance of the Estate.” A tenant reading that phrase might have difficulty in the circumstances of 27 Borrowdale and the lack of clarity in the lease and plans in understanding what exactly was included as the Estate as a matter of fact and therefore what sum was likely to represent a reasonable proportion of those costs and expenses, but he would plainly understand that his service charge would include this separate element in addition to the other items. In that context the meaning of the 5^th Schedule, clause 13 seems to me to be clear.

27.  The 5^th Schedule provides a list of specific items that may be included in the service charge and then at clause

13 says:

“The landlord's management charges for the Estate in an amount equal to 10% of all other items included in the Service Charge”.

(‘Estate’ is defined in clause 1.1, as I have set out above. It will be observed that the definition includes the building in which the flat is situated.)

28.  Firstly clause 13 deals specifically with the Landlord’s management charges for the Estate (including the building), in contrast to ‘all other items included in the Service Charge.’ Secondly it limits the service charge under this particular head to 10% of those other items. Clause 13 is thus consistent with the general definition of service charges in clause 1.1. It is explicitly concerned only with the specific category of management charges for the Estate. To read it as applying to management charges generally either gives no meaning to the words ‘for the Estate’ or gives those words a meaning which neither fits the definition of ‘Estate’ nor gives any purpose to the words ‘of the Estate’ in the definition of ‘service charge’. Neither would such an interpretation sit comfortably with the reference to “10% of all other items included in the Service Charge.” I have already said that the natural meaning of the definition of Service Charge is that costs and expenses incurred in connection with the Landlord obligations, duties and provision of services does include management costs. On that basis management charges connected with the provision of services would be included in ‘all other items’. This would mean that the extent of the cap on management charges would in part be measured by the extent of management charges, which might be thought a surprising exercise.

The 69, Bucklebury Lease, dated 27^th February 1989

29.  This, older, lease is in different terms to the lease for 27 Borrowdale. The obligation to pay service charge arises from clause 2(2). I shall set it out again for ease of reference.

"2(2) to pay to the Corporation without any deduction by way of further and additional rent a proportion that part of the reasonable expenses and outgoings including all VAT incurred by the Corporation in the repair and maintenance and renewal decoration improvement and insurance and management of the building and the provision of services therein and the other heads of expenditure as the same are set out in the Third Schedule hereto such further and additional rent (hereinafter called the "Service Charge")”

30.  Considering the generality of that provision I reach the same conclusion on its meaning as I have about Clause 3.2.1 and the definition of ‘Service Charge’ in Clause 1.1 in the Borrowdale lease, and for the same general reasons. The natural meaning of Clause 2(2) of the Bucklebury lease is that management costs incurred as a necessary part of “the repair and maintenance and renewal decoration improvement and insurance and management of the building and the provision of services therein”, as set out in the 3^rd schedule, are included as part of the service charge. The ‘building’ is not defined but it will be recalled that the Bucklebury flat is on the top floor of an 18 storey block.

31.  As I said above the 3^rd Schedule defines the expenses, outgoings and other heads of expenditure that make up the service charge. The 3^rd schedule includes a clause 13  but it is not identical to clause 13 in the Borrowdale lease. The Bucklebury version reads:

"13.  The Corporation's management charges for the building and for general management of the estate in which the building is situated in an amount equal to 10% of all other items included in the Service Charge."

32.  Clause 2(2) does not distinguish between the management of the estate and building on the one hand and the carrying out of the Landlord’s other obligations towards the demised property on the other, in the same way as the later lease but in my judgement the intention is the same.

33.  In considering these leases it seems to me that it is right, as Ms Gibbons submits, to bear in mind that the landlord is a local authority responsible for a great many properties.  It may well make business sense to centralise some aspects of management with the result that it is difficult or impossible to attribute the costs of that management to a particular service or a particular building or estate with any precision.  In such a case the practical solution might well be for the Landlord to seek and the Tenant to agree a reasonable sum to be calculated by the sort of formula that is found in the leases in this case. There is no "political" judgment involved in taking this into account in considering the leases: it is no more than a recognition of the reality that the circumstances of landlords may be enormously different and what is reasonable in the case of one may not be reasonable in the case of another.

Conclusion

34.  In my judgement the plain and natural meaning of both the leases is that the Landlord is entitled by way of service charge to:

1.   All those direct and indirect costs and overheads (including management costs) that are incurred in connection with those matters set out in Clause 1.1 and the 5^th Schedule of the Borrowdale lease and Clause 2(2) and the 3^rd Schedule of the Bucklebury  lease and which do not fall under the next head, which is -

2.   An additional management charge for the estate and the building in which the particular flat is situated, calculated as 10% of all other items included in the relevant service charge.

35.  Since I am clear about the interpretation of the provisions in question there is no reason to turn to the contra proferentem principle for assistance.

36.  Of course, as the LVT stressed, there can be no question of double recovery being reasonable.  In so far as there is any doubt as to whether a particular management charge falls within the first or second head it will be for the landlord to satisfy the LVT that it should not be included within the ‘capped’ management charge.

37.  It follows that the LVT reached the right conclusion as a matter of law and the appeal is dismissed.

Dated 12 December 2011

His Honour Judge Mole QC