Landlord and tenant – Service charge – Legal expenses – Landlord claiming legal costs incurred in proceedings under section 27A of the Landlord and Tenant Act 1985 – Whether landlord entitled to recover from leaseholders as part of service charge legal costs incurred in previous tribunal proceedings – Appeal dismissed
The respondent was the lessee of Flat 7A, 7 Castlewood Road, London N16, holding a lease for a term of 99 years from 27 March 1995. The building comprised an end of terrace four-storey house containing three flats, each of which was let on a long lease. The appellant was the freeholder. In 2010 and 2011, there were proceedings between the current parties before the First-tier Tribunal (FTT) under section 27A of the Landlord and Tenant Act 1985 and the appellant claimed its legal costs incurred in those proceedings. Since October 2013 the management of the building had been in the hands of an RTM company controlled by the three leaseholders.
By clause 3(A), the service charge clause, the lessee covenanted with the lessor to pay an annual sum representing the due proportion of the reasonably estimated amount required to cover the costs and expenses incurred, referred to as the management charges. Clause 6(A) imposed on the lessor the duty to manage the estate with power to appoint managing agents, employ a range of persons, including solicitors, and delegate any of its functions.
The FTT initially concluded that clause 6 was sufficiently broad to encompass the costs of instructing solicitors and counsel in tribunal proceedings. However, following a review of that decision, in the light of the tribunal’s decision in Union Pension Trustees Ltd v Slavin [2015] UKUT 0103 (LC), the FTT decided that the ordinary and natural wording of clause 6(A), in the context of the terms of the lease as a whole, did not enable the respondent to recover, as service charge, costs incurred in the enforcement of outstanding service charges or the associated costs of litigation brought under section 27A of the 1985 Act.
The appellant appealed to the Upper Tribunal. The issue was whether, on a true construction of the lease, the appellant was able to recover from leaseholders as part of a service charge the legal costs it had incurred in previous tribunal proceedings.
Held: The appeal was dismissed.
(1) Whether a landlord was entitled to recover legal costs incurred in relation to tribunal proceedings against its tenants depended upon the true construction of the service charge clause. It was rudimentary that the clause had to be construed and its natural and ordinary meaning ascertained, in the light of its context, which involved consideration of the lease as a whole, taking into account the circumstances existing at the time of the grant. Each case was fact-specific, in that what had to be construed was the particular clause in the particular lease of the particular property. Conclusions arrived at by previous courts or tribunals in relation to other clauses in other leases of other property were unlikely to be of much assistance. It was axiomatic that, in determining the natural and ordinary meaning of a clause from the point of view of a reasonable person with the relevant background knowledge, the court or tribunal was to apply commercial common sense. Although context was an important consideration, the importance of the language of the provision was not to be undervalued by over reliance upon commercial common sense and the surrounding circumstances. It followed that the clearer the natural meaning of the provision the more difficult it would be to justify departing from it: Arnold v Britton [2015] UKSC 36; [2015] EGLR 53 applied.
(2) There was no need to construe service charge clauses restrictively. It was reasonable to expect that, if the parties to a lease intended that the lessor should be entitled to receive payment from the tenant in addition to the rent, that obligation and its extent would be clearly spelled out in the lease. The court or tribunal should not bring within the general words of a service charge clause anything which did not clearly belong there. There was no hard and fast rule that legal costs could not be recovered where the clause employed general words and made no specific mention of lawyers or the costs of legal proceedings. However, the requirement of clarity meant that in such circumstances there had to be other language apt to demonstrate a clear intention that such expenditure should be recoverable: Sella House Ltd v Mears [1989] 1 EGLR 65, McHale v Earl Cadogan [2010] EWCA Civ 14, Conway v Jam Factory Freehold Ltd [2013] UKUT 0592, [2014] 1 EGLR 111, Francis v Philips [2014] EWCA Civ 1395, Assethold Ltd v Watts [2014] UKUT 0537 and Union Pension Trustees Ltd v Slavin [2015] UKUT 0103 (LC); [2015] PLSCS 150 considered.
(3) Clause 6(A) imposed on the lessor the duty to manage the estate. It gave the lessor power: (i) to appoint managing agents; (ii) to employ a range of persons, including solicitors; and (iii) to delegate any of its functions. The powers contained in the three sub-clauses were clearly intended to enable the landlord to manage the estate. Management might be effected by appointing managing agents who would then need to be remunerated for their services and by employing any of a range of persons who, provided they were properly required to be employed, were also entitled to be remunerated. Finally, management might be affected by delegation of the landlord’s functions under clause 6 to any firm or company with the appropriate expertise. The application of commercial common sense, with reference to the intended relationship between the parties to the lease, led inexorably to the conclusion that the only possible purpose being referred to was the management of the estate. It was important to bear in mind that the expenditure incurred by the landlord in the exercise of its clause 6 powers could be recouped from the tenants by means of a management charge. Clause 6(A)(ii) made explicit reference to solicitors but the limit to their employment was for the purposes of the management of the estate. If that was done, their proper fees could be paid and recovered from the tenants pursuant to the service charge clause.
(4) The FTT might have given disproportionate weight to the result in Slavin when one took into account the clear differences between the clauses and the leases in each case. However, the reasoning in Slavin, and the manner in which the Upper Tribunal conducted the exercise of construction (by reference to the lease as a whole rather than the clause in particular) was rightly influential. On the true construction of the lease, the FTT had arrived at the correct result in denying that the landlord was able to recover legal costs under the service charge clause.
Oliver Radley-Gardner (instructed by direct access) appeared for the appellant; Justin Bates (instructed by Scott Cohen Solicitors) appeared for the respondent.
Eileen O’Grady, barrister
Read a transcript of Sinclair Gardens Investments (Kensington) Ltd v Avon Estates (London) Ltd here
