United Kingdom Upper Tribunal (Lands Chamber)

UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2012] UKUT 54 (LC)

UTLC Case Number: LRX/158/2010

 

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

LANDLORD AND TENANT – service charges – liability – management company owned by lessees – insurance – water damage caused by lessees of flats – cost of repairs falling within excess included in service charges – whether lessee entitled to set off against service charge amounts attributable to other lessees’ breach of covenant – held he could not – interest on unpaid service charges and legal costs – whether lessee liable for share of these – held that he was – appeal allowed.

 

 

IN THE MATTER OF AN APPEAL AGAINST A DECISION

OF A LEASEHOLD VALUATION TRIBUNAL

 

 

 

BETWEEN SEACON RESIDENTS COMPANY LIMITED Appellant

and

IBOSA OSHODIN Respondent

Re: Apartments 5 & 38 Seacon Tower,

Seacon Wharf,

Westferry Road,

London, E14 8JR

 

Before: The President

 

Sitting at 43-45 Bedford Square, London, WC1B 3AS

on 14 February 2012

 

John Summers instructed by Fairweather Stephenson & Co for the appellant

The respondent in person

 

The following cases are referred to in this decision:

 

Reichman v Beveridge [2007] 1 EGLR 37

Mark Rowlands Ltd v Berni Inns Ltd [1986] 1 QB 211

Gilje v Charlgrove Securities Ltd [2002] L & TR 33

St Mary’s Mansions Ltd v Limegate Investment Co Ltd [2003] 1 EGLR 41

Sella House v Mears (1989) 21 HLR 147

Billson v Tristrem [2000] L & TR 220

 

DECISION

Introduction

1. This is an appeal against the decision of a Leasehold Valuation Tribunal for the London Rent Assessment Panel on an application under section 27A of the Landlord and Tenant Act 1985 for determination of liability to pay service charges.  The appellant is the management company for a large block of 99 flats, known as Seacon Tower, and the respondent is the lessee of two of those flats, numbers 5 and 38, for a term of 999 years from 1 January 2002.  The lessor is St James Group Limited.  The management company, which is owned and controlled by the lessees, was a party to each lease, and the lessee is required under the terms of each lease to pay service charges to it.  The two leases are materially identical except that the lease of flat 38 includes a parking space whereas that for flat 5 does not.  The appellant issued two sets of proceedings against the respondent in the Bow County Court on 12 October 2009 seeking the recovery of unpaid service charges due under the leases.  As at the date of issue of the claims, £6,932.26 was alleged to be due (including interests and legal costs) for flat 5 and £5,868.62 (including interest and legal costs) for flat 38.  The respondent filed defences challenging the reasonableness of certain elements of the service charges, and the court referred the claims to the LVT for determination.

2. A significant proportion of the charges in issue related to the costs incurred by the appellant in remedying incidents of water damage in Seacon Tower, where the costs fell within the excess of the relevant insurance policy.  The appellant claimed that these costs were all properly recoverable from the tenants through the service charge provisions in the leases.  The respondent’s case in response was that the water damage should have been covered by insurance, that tenants as a whole should not have to bear the costs of damage caused by individual flat owners, but where water damage resulted from defective design, that ought to have been taken up with the National House-Building Council or the developer of the building and that the legal charges which were levied by the appellant were unfair and unreasonable.  In outline the appellant’s case was that the cost of repairs following from water damage was covered by insurance, albeit that the costs charged to the tenants fell within the excess amount payable by the appellant under the policy, and that such expenditure was recoverable through the service charges.  The appellant contended that it was not open to it to pursue individual tenants for the costs of rectifying water damage and neither did it have any cause of action against the developer or NHBC.  It contended that the legal costs were reasonably incurred and reasonable in amount and it claimed that it was entitled to charge interest on arrears of service charges.  Also in issue was the question whether on a true construction of the leases the legal costs which the appellant incurs in recovering arrears of service charges can themselves be charged to lessees as service charges.

3. The LVT determined that expenditure within the excess levels of the insurance policies was recoverable in principle under the service charge provisions, and it accepted that the appellant had acted properly in not pursuing legal action against the developer or NHBC.  It held that “either on the basis of the express wording of the leases and/or on the basis of the general duty to mitigate ones losses when making a contractual claim” the appellant had failed to discharge its responsibilities by not making any attempt to pursue individual leaseholders where they had seemingly been at fault in respect of causing water damage.  The LVT therefore deducted from the service charge amounts recoverable from the respondent those sums which it concluded related to damage in respect of which a tenant was at fault.  The LVT also determined that the leases did not permit the recovery of interest on service charge arrears and did not permit the recovery of legal costs incurred by the appellant in connection with court or tribunal proceedings from tenants as a whole through the service charges provisions.  The LVT granted permission to appeal to this Tribunal in respect of the first two issues and I granted permission to appeal in relation to the third.

4. There are thus three issues in the appeal:

(a) whether the LVT was wrong to deduct from the service charge amounts recoverable from the respondent those sums which it considered related to damage in respect of which a tenant was at fault;

(b) whether the leases permitted the recovery of interest on service charge arrears; and

(c) the recovery of legal costs incurred by the appellant in connection with court or tribunal proceedings made chargeable to the tenants as a whole through the service charge provisions.

The lease provisions

5. Under clause 8 of the lease the management company (referred to as the Manager) covenants with the lessee and the lessor that it will observe and perform the covenants, requirements and stipulations in the Fourth Schedule.  Provision is made for two service charges, under clause 11.1.1 for an “Apartment Service Charge” consisting of “all expenses incurred by the Manager of and incidental to observing and performing the provisions of Part 1 of the Fourth Schedule”; and under clause 11.2.1 for an “Estate Service Charge” consisting of “all expenses incurred by the Manager of and incidental to observing and performing the provisions of Part 2 of the Fourth Schedule”.  (There are also equivalent provisions in leases where a parking space is included in the demise, as here in relation to flat 38, for a “Parking Service Charge”.)  Clause 11.1.4 provides as follows:

“11.1.4  It is expressly agreed that the intention of the Lessor the Manager and the Lessee in relation to the Apartment Service Charge provisions is that all costs expenses and other liabilities which are incurred by the Manager shall be the subject of reimbursement recoupment or indemnity by the lessees of the Apartments so that no residual liability for any such costs expenses or liabilities shall fall upon the Manager.”

Provision to the same effect is made in relation to the Estate Service Charge by clause 11.2.4.

6. Clause 15 makes provision for payments by the lessee, including payments in respect of service charges:

“15.2  The Lessee hereby covenants with the Manager and as separate covenants severally with the lessees of the other Apartments to pay on demand to or to the order of the Manager without any deductions the following amounts:-

15.2.1    such sum as is demanded by the Manager on account of the Estate Service Charge Proportion or thereafter by half yearly instalments in advance on the service charge payment dates or otherwise within 21 days of the date of any demand made by or on behalf of the manager

15.2.2    All expenses the Manager may incur in collecting arrears of the Estate Service Charge Proportion payable by the Lessee (together with interest thereon and on all Estate Service Charge Proportion which is in arrears and unpaid for more than twenty one days after the same shall become due and payable hereunder) or enforcing any obligation of the Lessee whether or not proceedings are taken and whatever the outcome of any such proceedings.”

Provision to the same effect is made by clause 15.3.2 in relation to the Apartment Service Charge.

7. The First Schedule contains covenants by the lessee and the following are to be noted:

“1. Not to do or permit or suffer anything to be done in or upon the premises or any part thereof which maybe or become a nuisance or annoyance or cause damage or inconvenience to the Lessor or the lessees or occupiers of other properties on the Estate nor may the Premises be used for any immoral illegal or unlawful purpose

2. Not to permit or suffer to be done anything whereby the Lessor’s or the Manager’s policy or policies of insurance on the estate or any part or parts thereof may become void or voidable or whereby the premiums thereon may be increased and to pay to the Lessor or as the case may be to the Manager all sums paid by way of increased premiums and all expenses incurred by it in or about any renewal of such policy or policies rendered necessary by a breach of this covenant and to notify the Lessor or the Manager as the case may be as soon as possible of any event which is likely to lead to a claim on the Lessor’s or the Manager’s insurance(s)…

6. Not to do or suffer to be done anything on or to the Premises which may prejudice weaken or endanger the Premises or the main Structure in any way whatsoever…

19. From time to time and at all times during the terms hereby granted (whether the Lessor or the Manager shall or shall not have served notice requiring the Lessee so to do) and utilising best quality materials of their various kinds and in good and workmanlike manner well and substantially to repair the Premises and all improvements and additions thereto or replacement thereof and also all landlord’s fixtures and fittings which may at any time during the term be fixed or fastened to the Premises or to any part thereof (including but without prejudice to the generality of the foregoing the space and water heating equipment and installations exclusively serving the Premises and the Transmission Media comprised in and used exclusively for the benefit of the Premises and appurtenances thereof) damage to the premises by any of the Insured Risks excepted unless and to the extent that such policy or policies of insurance shall have been vitiated or been rendered void or voidable or payment of the policy monies been refused or withheld in consequence of any act or default on the part of the Lessee and to be responsible in all respects of all damage caused to the Premises or to other parts of the estate or to the Lessor or the lessees of the Apartments and/or to the Manager through the bursting overflowing or stopping-up of such Transmission Media occasioned by or through neglect of the Lessee its servants or agents (damage by the Insured Risks excepted so far and so long as aforesaid) and peaceably to deliver up the premises to the lessor in such repair and condition at the expiration or sooner determination of the said term.”

“Insured Risks” are defined to include risks in respect of bursting or overflowing of water tanks apparatus or pipes.

8. Part 2 of the Fourth Schedule contains the following covenants by the Manager:

“2. Keep the Main Structures properly repaired supported reconstructed maintained and cleansed…

8. Keep the Premises and the whole of the Building (whether separately or together with other buildings) insured through such agency and insurance company as may be nominated by the Lessor from time to time in the full reinstatement value for loss or damage by the Insured Risks and against third party risks and Property Owners’ liability as shall from time to time be appropriate and third party claims boilers and heating apparatus (if any) and the cost of valuing the Premises for such insurance purposes and will produce to the Lessee upon receipt of the written request so to do written details of the policy or policies of such insurance and a copy of the receipt for the last premium for the same and if the Building or any part of it is destroyed or damaged by the occurrence of any of the Insured Risks the Manager will with all convenience speed apply all insurance monies received in repairing and rebuilding or reinstating the powerful parts of the building so destroyed or damaged.”

9. In Part 1 of the Fourth Schedule the following covenant by the Manager is to be noted:

“6. At the written request of the Lessee enforce by all means available to the Manager the covenants entered into and to be entered into by each of the lessees of the Apartments provided that:

6.1 The Manager shall not be required to incur any legal or other costs under this paragraph unless and until such security as the Manager in its absolute discretion may require shall have been given by the lessee or mortgagee requesting action

6.2 The Manager may in its absolute discretion before taking any action under this paragraph require the Lessee or the person requesting such action at his her or their own expense to obtain for the Manager from Counsel to be nominated by the Manager advice in writing as to the merits of any contemplated action in respect of the allegations made and in that event the Manager shall not be bound to take action unless Counsel advises that action should be taken and is likely to succeed.”

The LVT decision

10.        The LVT was told that Seacon Tower and its neighbour the Naxos Building both had very poor claims histories as regards water damage, with huge numbers of water damage incidents.  The appellant had estimated that the total uninsured excess on claims then current in relation to Seacon Tower was £133,000.  As a result of the poor claims record there had been substantial excesses applicable to water damage claims on the policies of insurance.  In 2007-8 the excess was £20,000 in respect of burst pipe claims and this was increased during the year to £35,000 for each claim; in 2008/9 the excess for burst pipe claims was £100,000; in 2009/10 it was £50,000; and in 2010/11 it was £10,000.  The appellant told the LVT that 2009/10 was the first year in which it had taken over policy renewals and it drew attention to the significant downward trend in excess levels from 2008 when the appellant started its campaign to reduce water damage claims.  It was the respondent’s share of the excess figures or levies made in 2008 and 2009 that he challenged.

11.        The LVT concluded that expenditure within the excess levels of the insurance policies was in principle recoverable under the service charge provisions.  It said:

“36…on balance the Tribunal is of the view that in this case the obligation on the part of the tenant under the Leases to contribute towards the excess falls within the obligation to contribute towards the cost of insurance against Insured Risks.  In the alternative, it is covered by the obligation to contribute towards the cost of repair (i.e. repair of damage caused by an uninsured risk: see paragraphs 1, 2 and 4 of Part 2 of the Fourth Schedule and other relevant provisions.”

12.        The LVT then said that, having heard and seen the relevant evidence, it agreed on the balance of probabilities that it was not a realistic option for the management company to take legal action against the developer or NHBC as a means of trying to recoup some or all of the cost of making good water damage.  As for pursuing individual leaseholders it said that the evidence was unfortunately not very detailed so that it was forced to do the best it could with the available evidence.  Looking at the list of incidents it said that its view, the balance of probabilities, was that individual leaseholders should be held wholly responsible in respect of three incidents and partly responsible in respect of a fourth.  It attributed a total amount of £94,251.65 to these and said, on the basis of what it took to be Mr Oshodin’s percentage contributions, that the amount attributable to flat 5 was £754.01 and that attributable to flat 38 was £735.16.

13.        The LVT then proceeded to note the lessee’s covenants in paragraphs 1, 2 and 6 of the First Schedule (set out above) and the landlord’s covenant in clause 9.5 to enforce the lessees’ covenants under their respective leases.  It went on:

“41. There is no evidence that the Applicant or the landlord made any attempt to claim sums back from individual leaseholders nor even investigated the possibility of doing so.  Nor is there any indication that the Applicant – if it believed that the power to do so rested only with the landlord – made any attempt to persuade the landlord to demand payment from individual leaseholders.  Either on the basis of the express wording of the Leases and/or on the basis of the general duty to mitigate one’s loss when making a contractual claim, the Tribunal considers that the Applicant has failed to discharge its responsibilities in this regard by not making any attempt to pursue individual leaseholders where they have seemingly been at fault.  Applying the principle in Continental Proprty Ventures v White (LRX/60/2005), whilst it could be argued that the costs themselves were reasonably incurred, in the Tribunal’s view the Respondent is entitled to a set-off in view of the Applicant and/or landlord’s failure to try to recover the relevant amounts from individual leaseholders.

The LVT therefore reduced, by way of set-off, the amount of the arrears that it found were due from Mr Oshodin.

14.        In relation to interest charges the LVT held that these fell to be calculated in accordance with a formula in the lease and that accordingly they were not variable administration charges within paragraph 1(3) of the Commonhold and Leasehold Reform Act 2002.  It therefore did not have jurisdiction to determine whether the amount was reasonable.  However, it said, it did have jurisdiction to determine whether the charges were payable.  It said that the relevant provision was clause 15.1.2, and, under this, interest was payable only on “rent”, and the service charges were not reserved as rent.  It concluded, therefore that the leases did not contain a mechanism for charging interest on unpaid service charges, and it disallowed the amounts relating to this.

15.        The LVT declined to make an order under section 20C in favour of Mr Oshodin, but it went on to say that the service charge provisions did not, in its view, contain a provision entitling the landlord or the management company to charge the legal costs incurred by them in connection with court or tribunal proceedings to the leaseholders as a whole through the service charge.

Issue (a): set-off

16.        For the appellant Mr John Summers said that when the management company carried out works of repair in respect of an Insured Risk it was complying, as it must, with its covenants in Part 2 of the Fourth Schedule.  It was the scheme of the lease that those works of repair should fall on the management company, and not on the lessor or the lessees, and that the management company should be indemnified by the lessees in respect of the cost of such works through the payment of service charges.  Furthermore the intention of all parties, as set out in clauses 11.1.4 and 11.2.4, was that the indemnity should be a complete one.

17.        It was the role of the management company, Mr Summers said, to provide services to the lessees.  Those services included insuring the entirety of the building, and the lessees were required to indemnify the management company for the cost of providing this insurance.  Each tenant was responsible for keeping his flat in repair: but excluded from this liability was the duty to repair damage by the Insured Risks (paragraph 19 of the First Schedule). 

18.        Mr Summers said that, in the light of this scheme, no action would lie against a tenant by the management company in respect of an Insured Risk.  If something done by a tenant caused an increase in the insurance premium, the management company could recover from him the amount of such increase.  The lease provided for the all lessees to contribute to the costs of insurance; where damage by an Insured Risk occurred, the management company must deal with it in the context of the insurance policy; and the lessees were named beneficiaries under the policy.  Thus, if the respondent were correct that the management company could sue a lessee, the effect would be that the management company could thus deprive the lessee of the benefit of the policy for which he had been obliged to pay.

19.        The management company, Mr Summers said, had a right to the payment of a lessee’s contribution to the insurance premium as part of the service charges.  This was a right to the payment of a debt, and not a right to damages.  The suggestion that the management company was obliged to take steps to minimise the amount to which it was entitled to receive from the lessees was entirely misconceived: there was no obligation to mitigate a debt claim (see Reichman v Beveridge [2007] 1 EGLR 37).  It should also be noted, he said, that if a lessee felt that he had suffered a loss as the result of another’s carelessness, the lessees’ covenants were mutually enforceable; although a lessee would have to overcome any defence arising out of the principles enunciated in Mark Rowlands Ltd v Berni Inns Ltd [1986] 1 QB 211, that the defendant lessee would be entitled to the benefit of the insurance cover effected pursuant to the leases.

20.        The respondent Mr Oshodin said that the LVT had looked not only at the express wording of the lease but also at the intention of the parties.  Most of the claims had arisen because of poor maintenance by flat owners of water installations in their flats.  Under paragraph 1 of the First Schedule they were obliged not to do or suffer to be done anything that might be or become a nuisance or cause damage.  It would be unfair if damage caused by some lessees’ poor maintenance should be borne by others who kept their own flats in proper condition.  Under clause 9.5 the landlord had a specific duty to enforce the covenants in the leases.

21.        In my judgment the LVT was clearly in error in determining that respondent was entitled to a set-off against the service charges claimed in view of the failure on the part of the management company and/or the landlord’s to try to recover the from individual lessees the cost of repairing damage caused by the lessees’ negligence.  Such a determination fails to take account of the provisions of the lease in relation to Insured Risks; the specific provision in relation to increased premiums due to a lessee’s breach of covenant; the provisions relating to requests by a lessee to the management company to enforce the covenants; and the fact that liability to service charges lies in debt and not damages.  I will take these points in turn.

22.        The Insured Risks include bursting or overflowing of water tanks apparatus or pipes.  There is no dispute that the damage about which the respondent is concerned is an Insured Risk.  The management company is required to insure both the Premises (the apartment that is the subject of the lease) and the Building (which comprises the apartments on the lessor’s estate): paragraph 8 of Part 2 of the Fourth Schedule.  Each lessee is required to pay an Estate Service Charge (clause 15.2.1), which includes the cost of such insurance (clause 11.2.2.1; Part 2 of the Fourth Schedule).  The management company is required to apply all insurance monies received for damage included in the Insured Risks to the repair of such damage, even though it is damage to the lessee’s apartment, and the lessee’s covenant to repair excludes such damage (paragraph 8 of Part 2 of the Fourth Schedule; paragraph 19 of the First Schedule).  The scheme, therefore, is that a lessee’s risk of liability in respect of water damage caused by him is taken over by the management company and he pays for this benefit through the service charge.  He is covered in this way against the consequences of his own negligence, just as he would have been if he had taken out insurance himself against such risks.  Neither the management company nor the landlord could pursue him for breach of covenant in respect of the cost of repairing the damage, since that would be inconsistent with the scheme for insurance under the lease.

23.        What the management company can do is to require the lessee to repay any increase in the insurance premium caused by the lessee’s breach of covenant not to cause damage.  This is the remedy expressly provided for, and the fact that this provision is made underlines the fact that no other action can be taken against him in respect of the Insured Risks.

24.        The lease makes specific provision enabling a lessee to request the management company to enforce a breach of covenant by another lessee.  But the lessee making the request must provide security before the management company is required to incur legal or other costs for this purpose; and the management company may require him to obtain counsel’s opinion on the prospects of success and will not be bound to take action unless the advice is that it would be likely to succeed.  In view of this express provision enabling a lessee to request enforcement and circumscribing the liability of the management company in the event that such a request is made, I do not see that it is arguable that the management company could incur liability to a lessee for failing to enforce the covenant of another tenant in the absence of such a request being made.  In any event the respondent made no request.

25.        Finally, as Mr Summers correctly submitted, there can be no duty to mitigate a claim in debt, and thus there can be no entitlement to set-off in respect of an alleged failure to do so.

26.        For all these reasons the LVT was in error in holding that there should be a set-off against the respondent’s service charge liability because the management company did not seek from tenants who, it thought, had been responsible for incidents if water damage reimbursement for the costs of that damage.

27.        It is, of course, the case that the question of such possible reimbursement only arose because the costs of repairing the damage fell within the very large excess to which the insurance policy was subject.  No such question could have arisen if the claim had fallen within the insurer’s liability.  The LVT concluded, rightly in my view, that the obligation on the part of the lessee to contribute through the service charge to the insurance of the building includes an obligation to contribute towards the excess.  While the lease is silent about what happens when the cost of repairs falls within the excess, it provides that the lessee is not liable for any damage that is included in the Insured Risks (including, therefore water damage).  The liability must necessarily be that of the management company, therefore, and its duty to insure must impliedly be read as encompassing the duty to bear the cost of repairing Insured Risk damage falling within the excess and thus falling within those matters to which the service charges may relate.  (It should be noted also that each lessee benefits from the excess in a policy through the premium being lower than it would be if there were no excess, so that an attempt to make adjustments for payments made under the access would in any event be incomplete unless it brought such benefits into the reckoning.)

Issue (b): interest on service charge arrears

28.        The appellant’s county court claim which was referred to the LVT included interest (amounting to £222.73 and £176.36 for each of the flats) in respect of the unpaid service charges.  The tribunal disallowed these amounts on the basis that the lease made no provision for this.  It said that the relevant provision was clause 15.1.2, and, under this, interest was payable only on “rent”, and the service charges were not reserved as rent.  This was an error on its part.  The relevant provisions are not to be found in clause 15.1.2 but in clauses 15.2.2 and 15.3.2.  These (see above, paragraph 6) make express provision for the payment of interest on unpaid estate and apartment service charges respectively.

Issue (c): legal costs

29.        The LVT, having declined to make an order in the respondent’s favour under section 20C of the 1985 Act, went on to say:

“52. However, the service charge provisions do not, in the Tribunal’s view, contain a provision entitling the landlord or the management company to charge the legal costs incurred by them in connection with court or tribunal proceedings to the leaseholders as a whole through the service charge – Mr Summers referred the  Tribunal to sub-clause 15.2.2 of the Leases in the context of the specific legal costs which form part of the original claims, but clearly sub-clause 15.2.2 is not a service charge provision.  Therefore, the Tribunal considers that the Applicant’s legal costs in connection with these proceedings are not recoverable through the service charge as a matter of construction of the terms of the Leases.”

30.        Mr Summers’s arguments before me were based not on clause 15.2.2 but on clause 11.  He submitted that it was clearly envisaged in the structure of the leases that the management company was to be completely indemnified by the lessees in respect of “all costs expenses and other liabilities” incurred in carrying out its functions.  That was provided for expressly by clauses 11.1.4 and 11.2.4 (see above, paragraph 5).  When the management company incurred legal costs in providing the services it had covenanted to supply as set out in the Fourth Schedule it was entitled to recover them from the lessees as service charges because they were “costs expenses or other liabilities” incurred by the management company in carrying out its functions.  Clauses 11.1.1 and 11.2.1 provided that the service charges consisted of “all expenses incurred by the Manager of and incidental to observing and performing the provisions” of the Fourth Schedule.  One of the management company’s functions as listed in the Fourth Schedule was (at paragraph 8) to “do all things necessary to comply with the obligations contained or otherwise referred to in the Memorandum and Articles of Association of the Manager.”  

31.        The company’s objects, as stated in paragraph 3(a)(i) of the Memorandum are:

“…on behalf of the owners and occupiers of the flats at Seacon Wharf… to undertake the management and administration…maintenance and upkeep of the Manager,s Land and Main Structures as defined in the leases to be made or granted by the owner of the Estate to the members of the Company and in connection therewith to engage and employ…servants, agents, builders, engineers and other persons…”

The management and administration of the Manager’s Land and Main Stuctures, Mr Summers said, necessarily included the collection of service charges to pay for the other services.  So, when there were arrears of service charges, the management company was entitled to engage and pay solicitors and counsel as “agents” and “other persons” to assist with collecting them, their collection clearly being a function that the management company had to perform under the lease.

32.        Thus, Mr Summers said, because incurring legal costs in recovering arrears of service charges was integral to the performance by the management company of it functions, then on a true construction of the leases legal costs were recoverable through the service charges from the tenants as a whole.  That was a conclusion that could be arrived at on the express terms of the lease that he had referred to.  Alternatively, if it was necessary to imply a term to that effect, that term could be implied so as to give the leases business efficacy as contracts: if the management company could not fund the activities it is obliged to carry out, the management scheme envisaged by the leases would be unworkable.  The line of authorities that clear and unambiguous language was required before it could be said that service charges can include legal costs (for example, Gilje v Charlgrove Securities Ltd [2002] L & TR 33, St Mary’s Mansions Ltd v Limegate Investment Co Ltd [2003] 1 EGLR 41 and Sella House v Mears (1989) 21 HLR 147) was to be distinguished for three reasons.  Firstly, the management company was a company with no income or assets other than the service charges and funds raised from members under it articles of association.  Secondly, the lease included clause that expressly provided that no residual liability was to fall on the management company.  Thirdly, it was inappropriate to invoke the contra proferentem rule against the management company since the terms of the lease were forced on the company as much as they were forced on the lessees of the flats.  The more expansive approach to the interpretation of service charge provisions adopted by the Court of Appeal in Billson v Tristrem [2000] L & TR 220 (of construing a lease so as to give effect to the obvious intention of the parties) should be applied instead.

33.        I accept and endorse these submissions of Mr Summers.  The appeal succeed on ground (a).  I would only add the following in relation to the approach to construction where the terms in question relate to obligations owed by a lessee to a management company owned by the lessees.  The issue in Gilje v Charlgrove, the case most commonly referred to in this context, was whether the underlessees of flats in a block of flats were liable to pay service charges in respect of the rental value of the flat occupied by the caretaker, who was employed by the landlord.  There was no express provision in the leases that they should do so.  The Court of Appeal held that the obligation of the tenant to contribute to “The costs, charges and expenses incurred in employing a caretaker for the buildings whether resident on the premises or otherwise” was not to be construed so as impliedly to include the rental value of the caretaker’s flat.  Laws LJ said this (at paragraph 27):

“…The landlord seek 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.”

34.        Agreeing, Mummery LJ said this:

“31. In expressing my agreement I would make two short points.  First, I note what is stated in paragraph 55 on page 71 of the 5^th Edn of the Encyclopaedia of Forms and Precedents Vol 23 on Landlord and tenant in the section relating to the drafting of provisions in leases for service charges.  It is stated as follows: ‘The draftsman should bear in mind that the courts tend to construe service charge provision restrictively and are unlikely to allow recovery for items which are not clearly included.’

32. Cited as authority for that proposition are three cases, all decided in the 1980s.  They include decisions of this court.  They are collected in footnote 1.  The proposition is obvious.  [Counsel for the appellant] did not dispute it in argument.  Indeed, the proposition reflects a particular aspect of the contra proferentem rule.”

35.        It is clear that the contra proferentem rule, which is applied as a rule of construction against the landlord who drafted or proffered the lease, ought not to be applied against a management company which did not draft or proffer the obligations imposed on it or the entitlements conferred on it by the lease.  Quite apart from the different position of the management company from that of the landlord, it is manifestly undesirable, where, as here, the management company is owned by the lessees and has no independent assets, to construe the lease so that the company is unable to recover expenditure that it has made in accordance with provisions of the lease.  In the present case the lease stated expressly at clause 11.1.4 that all costs expenses and other liabilities incurred by the management company were to be the subject of reimbursement by the lessees of so that no residual liability should fall upon the company, and that compels an approach to construction that achieves this objective.

Conclusion

36.        The appeal is allowed on all three grounds.  The liability of the respondent is £6,932.26 for flat 5 and £5,868.62 for flat 38.

Dated 22 February 2012

 

George Bartlett QC, President