Landlord and tenant – Service charge – Legal expenses – Respondents holding long leases of flats – Appellant landlord bringing county court proceedings against some of respondents for unpaid service charges – Respondents applying to leasehold valuation tribunal for determination of service charges properly payable – Whether appellant entitled to recover its expenses of those two sets of proceedings through the service charge – Whether such expenses covered by wording of lease – Appeal dismissed
The appellant owned the freehold of a building in Wallington, Surrey, comprising a car showroom, garage and workshop on the ground floor and 12 flats above. Five flats were let to the respondents on long leases dating from the 1970s and the others were let on assured shorthold tenancies. The respondents’ leases provided for the payment of a service charge to cover the appellants’ expenses incurred in respect of various specific matters listed in the fourth schedule and, by para 6 of that schedule, “all other expenses (if any) incurred in and about the maintenance and proper and convenient management and running of the development”.
A dispute arose between the appellant and the respondents over the latter’s liability to contribute through the service charge to the cost of major works to the building. In 2010, the appellant brought proceedings against three of the respondent leaseholders in the county court to recover unpaid interim service charges, while those leaseholders counterclaimed for damages for breach of the appellant’s repairing covenants. The county court proceedings were ultimately compromised, but all five respondents subsequently applied to the leasehold valuation tribunal (LVT), under section 27A of the Landlord and Tenant Act 1985, for a determination of the service charges payable for six consecutive years to 2013. The LVT decided the issue substantially in the appellant’s favour and refused to make any order, under section 20C of the 1985 Act, barring the appellant from recovering its costs of the proceedings through the service charge.
The appellant subsequently sought to recover a contribution to its costs of the two sets of proceedings through the service charge; it sought a total contribution of about £54,000. It applied to the first-tier tribunal (FTT), as successor to the LVT, for a further determination under section 27A of the 1985 Act as to the respondent’s liability to pay that contribution.
Ruling in favour of the respondents, the FTT held that the language of the service charge provisions in the leases was not wide enough to allow the landlord to recover expenditure which it incurred in contesting legal proceedings brought against it. The appellant appealed.
Held: The appeal was dismissed.
Since leases were rarely identical in their language and in the circumstances of their creation, it was not possible to lay down strict rules of universal application. However, the proper approach to the interpretation of service charge provisions was the same in every case and was no different from the proper approach to the interpretation of other contractual terms: Arnold v Britton [2015] UKSC 36; [2015] EGLR 53 applied.
In the instant case, the appellant was entitled to recoup, through a service charge payable by the respondent leaseholders, its expenses incurred “in and about the maintenance and proper and convenient management and running of the development”. The words “proper and convenient management and running”, used in the context of a mixed residential and commercial building, did not have a precise meaning which either clearly included or excluded the activity of litigating over the collection or quantification of sums required to repair the building. “Management” might sometimes include obtaining professional advice, including legal advice, and might in some circumstances involve litigation, such as where that was necessary to clarify the meaning of the lease provisions: Reston Ltd v Hudson [1990] 2 EGLR 51 considered. However, it was less obvious that proceedings to enforce the obligation of an individual leaseholder to make a payment to the landlord fell naturally within the scope of “management and running”.
In those circumstances, it was relevant to take into account the fact that parties to any contract would wish to be clear when defining payment obligations. An absence of clarity could therefore be treated as an orthodox aid to identifying the boundaries of payment obligations generally, including service charge obligations: Arnold, McHale v Earl Cadogan [2010] EWCA Civ 1471; [2010] HLR 412; [2011] 1 EGLR 36 and Philips v Francis [2014] EWCA Civ 1395; [2015] EGLR 8 applied. It was inherently improbable that parties to a lease would regard general words as sufficient to express an intention that any shortfall in the landlord’s cost of litigation between them should be a charge on the whole body of leaseholders. Clear and unambiguous terms would generally be required to impose an onerous and unusual payment obligation requiring lessees who paid their rent and service charges to subsidise the landlord’s costs of proceedings against their fellow lessees who defaulted: Sella House Ltd v Mears [1989] 1 EGLR 65 considered.
The language of para 6 of the fourth schedule to the respondents’ leases was less clear than would be expected if the parties had intended the cost of proceedings against defaulting leaseholders to be recoverable as costs and expenses of “proper and convenient management and running of the Development”. While the parties were likely to have contemplated that there might be litigation between the landlord and lessees at some point during the lease term, it was improbable that they would have intended the costs incurred to be signified by inclusion in a residual “all other (if any)” category. The words “proper and convenient” did not assist the appellant in that context; they were words of imprecise scope and, if anything, seemed to suggest routine or unexceptional expenditure. A consideration of the other lease provisions, and other overall purpose of the fourth schedule, did not point to any different conclusion.
It was also relevant that, when the leases were granted in the 1970s, service charge disputes were determined in the county court, where the successful party would recoup its costs from the unsuccessful party. The joint expectation would therefore have been that, barring any change to those ground rules, the appellant would not find itself out of pocket if it proved necessary to collect service charge contributions by legal action, and so would have no need to recoup its legal expenses through the service charge. Neither the factual or statutory background existing at the time when the leases were granted, nor considerations of commercial common sense, supported the conclusion that such expenses should be recoverable through the service charge.
Mark Warwick QC (instructed by Judge Sykes Frixou) appeared for the appellant; Howard Lederman (instructed by direct access) appeared for the respondents.
Sally Dobson, barrister
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