Landlord and tenant — Service charges — Recovery of bank interest and charges — Expenses of manager — Recovery of legal expenses — Appeal against dismissal of originating application
applicants are the tenants of three of 13 flats in a Victorian block at South
Terrace, Littlehampton, Sussex — The respondent landlord occupies one of the
flats — On December 12 1989 the applicants, with the tenants of five more of
the flats, issued an originating application in Chichester County Court
claiming relief in respect of service charges — The relief sought included a
declaration and inquiry relating to the relevant costs incurred by the
respondent lessor and properly payable by the applicants in respect of the
maintenance charge provided for by the leases of the flats — The leases, which
were in common form, provided that there could be charged to the maintenance
fund certain costs and expenses incurred by the respondent, the cost of
employing a managing agent and all legal and other proper costs incurred — The
trial judge dismissed the application — The applicants appealed seeking a
declaration that certain items should not have been included in the accounts,
namely interest and bank charges, management fees and legal expenses
the recovery of interest and bank charges provided: ‘Any interest charges
payable by the Lessor on his Bank Account or accounts in respect of any for the
purposes of the Maintenance Charge’ — Notwithstanding that some word had been
omitted after the words ‘in respect of’, the plain intention was that interest
should be chargeable and to give effect to that intention it was necessary only
to insert after the words ‘in respect of any’ the word ‘incurred’ —
Alternatively, the same result can be achieved by implying a term that interest
should be so chargeable on the basis that it is necessary to give business
efficacy to the terms of the lease or, alternatively, on the basis of the
officious bystander test — The legal expenses in question were incurred in
recovering rents and service charges from certain of the tenants, but the
account rendered by the solicitors was not separately itemised between the
various tenants concerned — There was insufficient material upon which the Court
of Appeal could make any declaration in respect of the particular legal fees —
The management fees were payable to a company called Rockford Property
Management Ltd, a company formed by the respondent and his wife to manage the
block and other properties — The company was not a sham — The lease expressly
permitted the employment of a manager and for that manager to be paid — There
is no reason why a landlord should not employ a company and charge therefor,
even if he owned that company, provided that it was not a complete sham —
Although the respondent’s service charge accounts may have been in a muddle,
that was not a basis upon which an inquiry should be ordered, as the true
position could readily be ascertained as a result of the documents produced in
the proceedings
The following
case is referred to in this report.
Finchbourne
Ltd v Rodrigues [1976] 3 All ER 581; (1976)
238 EG 717, [1976] 1 EGLR 51, CA
This was an
appeal by Kerry Skilleter, Paul Denly, Gina Tamburri, Simon Burn, Alison
Richardson, Geraldine Harris, Tony Harbach and Diane Hallady, from an order of
Judge Michael Baker whereby on May 14 1991 he dismissed the applicants’
originating application, which sought various relief in relation to the service
charges properly incurred and payable in respect of 21/21a South Terrace,
Littlehampton, Sussex, owned by the respondent landlord, David Charles.
Colin MacKay
QC and Timothy Sisley (instructed by Williams MacDougall & Campbell, of
Worthing) appeared for the appellants; Peter Sheridan QC and Robert Deacon
(instructed by Bennett Griffin & Partners, of Worthing) represented the
respondent.
Giving
judgment, PARKER LJ said: The appellants are the tenants of three of 13
flats in a Victorian block situate at South Terrace, Littlehampton, West
Sussex. The respondent is their landlord, who also occupies one of the 13
flats.
On December 12
1989 the appellants joined with the tenants of five more of those flats in an
originating application in Chichester County Court in which they claimed the
following relief:
1. A
declaration as to what relevant costs of maintenance had been lawfully and
properly incurred by the Respondent as Landlord of the various premises
occupied by the Applicants, and the extent to which such relevant costs had
been reasonably incurred or have been done to a reasonable standard in respect
of maintenance of all that block of flats situate at and known as 21/21a South
Terrace, Littlehampton in the County of West Sussex, in respect of the years
1987/1988/1989.
2. An enquiry
in consequence of the declaration in paragraph 1 above as to what sums are due
either from the Applicants to the Respondent, or from the Respondent to the
Applicants.
3. A
declaration pursuant to Section 20(c) of the Landlord and Tenant Act 1985 that
the costs or some part of the costs as the Court shall think fit incurred by
the Landlord in connection with these proceedings shall not be regarded as
relevant costs to be taken into account in determining the amount of any
service charge payable by the Applicants in these proceedings.
4. An account
or an enquiry and an account of the monies representing the maintenance fund
for the said flats for the years 1987/1988/1989.
5. An Order
both interlocutory and final for the appointment of a Manager of the said
premises pursuant to Section 24(1) (a) and/or (b) of the Landlord and Tenant
Act 1987 with such consequent directions as to functions of the said Manager as
the Court deems just.
6. A
mandatory injunction requiring the Respondent whether by himself or any other
person on his behalf to repair or cause to be repaired the said flats in
accordance with the terms of the Lease, and in respect of the schedule of works
appended to this Application marked ‘A’.
7. Such
further or other relief as may be just.
8. Costs.
On May 14
1991, after a four-day trial before Judge Michael Baker, that application was
dismissed with costs on scale 2. On June 3 1991 the eight tenants gave notice
of appeal seeking to set aside the judge’s order and obtain either: (1) orders
in accordance with paras 1 to 5 of the original application; or (2) a retrial.
The appeal is pursued only on behalf of three of the original applicants, all
of whom are legally aided. The other of the original applicants, who are not
legally aided, have disappeared owing to the fact that they have failed to
comply with orders for security for costs.
Mr MacKay QC,
who appeared for the three appellants, has rightly limited the conduct of this
appeal very considerably, so that of the many matters canvassed before the learned
judge and raised in the notice of appeal we have only a few to consider.
At this point
I should say that all the matters now raised relate to the maintenance charge
provided for by the leases and that although Mr MacKay restricted the matters
raised in the notice of appeal which he desired to argue, he also sought to
raise additionally one or two further matters.
All the leases
are in identical form. The immediately relevant provisions are contained in the
fifth and the eighth Schedules, to which I now turn.
Para 2 of the
fifth Schedule, which contains the lessees’ covenants, is in these terms:
2. To pay to
the Lessor a Maintenance Charge being that fraction specified in Paragraph 5 of
the Particulars of the expenses which the Lessor shall in relation to the
Property reasonably and properly incur in each Maintenance Year and which are
authorised by the Eighth Schedule hereto (including the provision for future
expenditure therein mentioned) the amount of such payment to be certified by
the Lessor’s Managing Agent or Accountant acting as an expert and not as an
arbitrator as soon as conveniently possible after the expiry of each
Maintenance Year . . .
The remainder
of that provision I need not read.
The eighth
Schedule is headed ‘Costs and Expenses charged upon
follows:
There shall be
charged upon the Maintenance Fund such of the following costs and expenses as
may from time to time be incurred in connection with the Property . . . The
said costs and expenses are:
1. The cost
incurred by the Lessor in complying with its obligations in Part 1 of the Sixth
Schedule.
. . .
9. The cost
of employing a Managing Agent or Surveyor to manage the property and to collect
the maintenance charges in respect of the flats therein and to carry out such
other duties as may from time to time be assigned to him by the Lessor or are
otherwise imposed on him by the provisions of this Lease.
. . .
11. All legal
and other proper costs incurred by the Lessor:
(a) in the
running and management of the Property and in the enforcement of the covenants
on the part of the Lessee and of the Lessees of other flats in the Property and
the conditions and regulations contained in the leases granted of the flats in
the Property insofar as the costs of enforcement are not recovered from the
Lessee in breach . . .
It is also
necessary to refer to two provisions of the Landlord and Tenant Act 1985.
Section 19(1) provides:
Relevant costs
shall be taken into account in determining the amount of a service charge
payable for a period —
(a) only to the extent that they are reasonably
incurred, and
(b) where they are incurred on the provision of
services or the carrying out of works, only if the services or works are of a
reasonable standard;
and the
amount payable shall be limited accordingly.
Section 20C:
(1) A tenant
may make an application to the appropriate court for an order that all or any
of the costs incurred, or to be incurred, by the landlord in connection with
any proceedings are not to be regarded as relevant costs to be taken into
account in determining the amount of any service charge payable by the tenant
or any other person or persons specified in the application; and the court may
make such order on the application as it considers just and equitable in the
circumstances.
The applicants
now seek, principally, a declaration that certain specified items, which had
been included in the accounts for service charges presented to the tenants,
should not have been included.
These are:
(1) a sum of
£490 plus any interest thereon, which sum was not in fact incurred;
(2) interest
and bank charges;
(3) legal
expenses;
(4) management
fees.
There is no
dispute about item (1) and no relief is required in respect of it. As to item
(2), the interest and charges were incurred because the tenants had not paid
the maintenance charges. It was so found by the judge. No question of
reasonableness can arise. Mr MacKay submits that no provision has been made in
the lease for the recovery of interest charges and accordingly that no interest
or bank charges can be included as relevant expenses for the maintenance
charge.
The relevant
provision is no 16 in the eighth Schedule, which provides as follows:
Any interest
charges payable by the Lessor on his Bank Account or accounts in respect of any
for the purposes of the Maintenance Charge.
It is
submitted, rightly, that as that clause reads, it makes no sense. It is
apparent that some word has been omitted after the words ‘in respect of’. It is
submitted that, because the clause as it stands makes no sense, there can be no
interest charge recovered.
I cannot
accept this. The plain intention of the parties was that interest should be
chargeable and to give effect to that intention it is only necessary to insert
after the words ‘in respect of any’ the word ‘incurred’, so that the clause
would read ‘Any interest charges payable by the Lessor on his Bank Account or
accounts in respect of any incurred for the purposes of the Maintenance
Charge’. To read in such a word when there has been an obvious typographical
error appears to me to be both permissible and necessary. Alternatively, the
same result can be achieved by implying a term that interest should be so
chargeable. Such a term could, in my judgment, be implied either on the basis
that it is necessary to give business efficacy to the terms of the lease or,
alternatively, on the basis of the officious bystander test.
As to legal
expenses, the lease provides that they may be charged in so far as they are not
recovered from the tenants in breach. Therefore, if the question arises of
legal proceedings being taken for the purpose of enforcing the tenants’
covenant, there must be a corresponding duty on the landlord to endeavour to
recover the expenses from the tenants. It is also plain that the wording of the
legal expenses’ provision in the eighth Schedule covers not only legal
proceedings for the purpose of enforcing covenants, but a number of other legal
proceedings.
The legal
expenses here in question were incurred in recovering rents etc from certain of
the tenants, but the account rendered by the solicitors was not separately
itemised between the various tenants concerned. They were asked to itemise the
account but declined to do so. The matter was not fully explored in evidence
before the learned judge. I do not consider that we have before us any material
upon which we could make any declaration in respect of the particular legal
fees, much less in respect of all legal fees as a general matter, which is what
we are asked to do.
I turn to the
management fees. Two points are advanced. First, that the fees are not
recoverable at all because they are in respect of the services of a company
called Rockford Property Management Ltd, which it is said was the alter ego of
the landlord and, it is suggested, was put in place in order that the landlord
should be able to recover expenses to which he was not entitled. Second, that
they are in any event excessive.
The second
point can be shortly disposed of. The judge found them not to be excessive.
There was material upon which he could so conclude and we could not, in my
judgment, conclude to the contrary.
As to the
first point, it appears that the landlord and his wife formed the company after
the leases had been created. That company, however, manages other properties,
some of them outside Littlehampton, and it cannot be suggested that the company
is a sham put in place solely for the purpose which it is suggested lay behind
it. The lease expressly permits the employment of a manager and for that
manager to be paid. I can see no reason why in such circumstances the landlord
should not employ a company and charge therefor, even if he owned that company,
provided that it was not a complete sham. In this case there is no evidence
that it was such a sham and the evidence that it was not is plain. It further
appears that the point was not taken in the court below. Had it been taken, the
matter might well have been further explored. It was not, however, further
explored and, in my view, it is too late to advance the point now.
Finally on
this point I should mention that Mr MacKay referred us to Finchbourne Ltd
v Rodrigues [1976] 3 All ER 581, where it was held that the managing
agent must be intended to be someone different from the lessor and that in that
case the so-called managing agent was a mere nominee of the landlord. Indeed,
it was really the landlord trading under a firm’s name. I do not, therefore,
consider that that case avails the appellants.
The appellants
seek also an inquiry based, as I understand it, on the fact that the landlord’s
accounts were muddled. The judge declined to grant such relief, holding that
although the accounts could be improved upon, the true position could readily
be ascertained as a result of the documents which had been produced in the
proceedings. He was, in my view, both justified and in fact right in taking the
view which he did. To hold an inquiry when the matter can be dealt with more simply
and cheaply appears to me to be a good reason for rejecting the call for an
inquiry.
One further
matter raised related to the question whether the costs of this appeal and in
the court below could be properly included in the service charge. That question
could arise only if the appellants were substantially successful on this
appeal. Since I consider that they are not, the matter does not arise. In my
judgment, this appeal should be dismissed.
McCOWAN LJ agreed and did not add anything.