Landlord and tenant — Dispute as to service charge provisions in long lease of a flat — Main issue tenants’ liability to pay interest on amount borrowed by landlords to finance provision of services set out in lease — Appeal from decision of county court judge — The lease provided that, in addition to an annual rent and a contribution to insurance, the tenants were liable to pay a percentage of the costs, expenses and outgoings incurred by the landlords in carrying out maintenance of the block of flats and in supplying certain services enumerated in a schedule — It was also provided that there should be added to such costs ‘such sums as the lessors may from time to time expend in respect to the general administration and management of the block’ — In proceedings in the county court brought by the landlords to resolve disputes the judge found in favour of the tenants on a number of matters, but gave judgment for the landlords on a claim in respect of interest payments and made no order as to costs — His decision was challenged on these two matters in the appeal — The interest point arose because the landlords had from time to time to borrow money temporarily, before receipts from service charges accrued, in order to carry out maintenance or provide services in accordance with their contractual obligations — The judge held that the tenants could be charged their due proportion of the interest payable in respect of such borrowings, as being within the sums expended ‘in respect to the general administration and management of the block’ — On analogy with applications for a new tenancy under the Landlord and Tenant Act 1954, he made no order as to costs — Held by the Court of Appeal that, although in some circumstances an express provision in a lease enabling tenants to be charged with such interest might be sensible, the present lease did not authorise such a contribution, whether as a matter of pure construction of the terms or when regard was had to the practical consequences — A subsidiary argument based on a broad interpretation of the word ‘cost’ was also rejected — The judge’s order in respect of the costs of the proceedings in the county court was set aside — Appeal by tenants allowed
This was an appeal by Rachel Cohen and Sally Cohen, defendants in an action brought by the present respondents, Boldmark Ltd, in Willesden County Court. The proceedings concerned the lease of a flat in a block, 27 Melvin Hall, Golders Green Road, London NW11. The appeal related to the appellants’ liability to pay, in the service charge for their flat, a contribution in respect of interest paid by the landlords on money borrowed by them to finance expenditure on the items covered by the service charge. The appellants also challenged the judge’s decision to make no order as to costs.
Derek Wood QC and Miss Joanne Moss (instructed by Winckworth & Pemberton) appeared on behalf of the appellants; J H Weeks QC and D P Friedman (instructed by A Kramer & Co) represented the respondents.
Giving the first judgment at the invitation of May LJ, SLADE LJ|page:48| said: This is an appeal by the defendants in an action, Rachel Cohen and Sally Michal Cohen, who are respectively mother and daughter, from parts of an order of His Honour Judge Hill-Smith made at the trial of the action in the Willesden County Court on October 22 1984. The principal issue raised by the appeal concerns the construction and effect of certain provisions in a lease relating to service charges, though there is a subsidiary issue relating to costs.
The lease, which was dated February 14 1969, comprised a flat numbered 27 (‘the flat’) in a block of flats known as Melvin Hall, Golders Green Road, London, which consists of 37 flats in all. I understand that most of them are let under long leases in similar form and that the second appellant is chairman of the local residents’ association. The parties to the lease were Charlton Estates Ltd as lessors and the appellants as lessees.
By clause 1 of the lease the lessors, in consideration of a premium of £10,750, demised the flat to the appellants (who were together defined as ‘the Lessee’) for a term of 99 years from January 1 1967 at a yearly rent of £60 and also paying by way of further or additional rent:
(i) from time to time a sum or sums of money equal to 2.6 per centum of the amount which the Lessors may expend in affecting [sic] or maintaining the insurance of the building and other parts of the Block against loss or damage by fire and such other risks (if any) as the Lessors think fit as hereinafter mentioned such last-mentioned rent to be paid without any deduction on the quarter day for the payment of rent next ensuing after the expenditure thereof and (ii) on the usual quarter days in advance as aforesaid the sums which shall be payable by the Lessee under the covenant hereinafter contained in Clause 4 hereof.
By clause 4(ii) the lessee covenanted with the lessors and with the owners and lessees of the other flats comprised in the block that the lessee would at all times thereafter:
(ii) Contribute and pay the yearly sum of SEVENTY EIGHT pounds as a contribution towards the Lessors’ yearly costs expenses and outgoings and matters mentioned in the Fourth Schedule hereto PROVIDED that this charge shall be subject to annual review and in the event of the said costs expenses and outgoings and matters rising above the sum of Three thousand pounds in any year expiring the Thirty-first day of December the Lessee shall pay 2.6 per centum of the total amount of increase in such costs expenses outgoings and matters. The said contribution shall be payable by equal quarterly payments in advance on the usual quarter days in each year and any increases determined after the then current payment or payments shall have been made shall be added on to the payment or payments next falling due after such determination PROVIDED that the Lessors shall be entitled to collect from the Lessee at any time on one month’s prior notice in writing such sum as the Lessors may anticipate expending in excess of the annual sum aforesaid in respect to any of the matters mentioned in Clause 1 of the Fourth Schedule hereto. The amount of the increase in any year shall if any lessee shall so require be certified in writing by the Lessors’ Accountants whose certificates shall be final and binding upon the parties.
By clause 5(D) the lessors covenanted with the lessee as follows:
(D) That (subject to contribution and payment as hereinbefore provided) the Lessors will maintain repair redecorate and renew (a) the main structure and in particular the roof chimney stacks gutters and rainwater pipes of the Block (b) the gas and water pipes drains and electric cables and wires in under and upon the Block and enjoyed or used by the Lessee in common with the owners and lessees of the other flats (c) the entrance passages landings lifts and staircases of the Block so enjoyed or used by the Lessee in common as aforesaid (d) the boundary walls and fences of the Block and (e) the porter’s flat and such other premises and/or amenities as may be erected or provided for the common use of the tenants of the Block.
The fourth schedule to the lease set out the lessors’ yearly costs, expenses, outgoings and matters referred to in clause 4(ii) as follows:
1 The expenses of maintaining repairing redecorating and renewing (A) the main structure and in particular the roof chimney stacks gutters and rainwater pipes of the Block (B) the gas and water pipes drains and electric cables and wires in under or upon the Block and enjoyed or used by the Lessee in common with the owners and Lessees of the other flats (C) the entrances passages landings lifts and staircases of the Block so enjoyed or used by the Lessee in common as aforesaid and (D) the boundary walls and fences of the Block (E) the porter’s flat (F) such other premises and/or amenities as may be erected or provided for the common use of the tenants of the block.
2 The cost of cleaning and lighting the passages landings lifts staircases and other parts of the Block so enjoyed or used by the Lessee in common as aforesaid and of keeping the forecourt garden way and others parts of the Block in good condition and (as to the garden) in cultivation.
3 All rates taxes and outgoings (if any) payable in respect of the forecourt garden way and other parts of the Block.
4 The cost of insurance against third party risks in respect of the Block and any persons employed thereat by the Lessors if such insurance shall in fact be taken out by the Lessors.
5 The cost of employment of porters and gardeners and others in connection with the aforementioned service.
6 A reasonable rack rental and all usual outgoings of the porter’s flat.
7 There shall be added to the costs expenses and outgoings and matters referred to in the preceding paragraphs of this Schedule such sums as the Lessors may from time to time expend in respect to the general administration and management of the Block.
On September 29 1980 the reversion of the block Melvin Hall was purchased by Boldmark Ltd, the plaintiffs in the action and respondents to this appeal.
Disputes then arose between the parties, which resulted in proceedings in the Willesden County Court brought by the respondents against the appellants (Case No 8108750). These proceedings were in due course compromised under a consent order made in that court in the ‘Tomlin’ form on October 5 1982 and amended on January 12 1983. The schedule to that order contained a number of provisions by way of variation of the lease, setting out the basis upon which service charges were to be calculated and paid. However, since it has been common ground between counsel appearing before us that these provisions are not material to the issues which we have to decide, I need refer to them no further.
Regrettably, the consent order of 1982 did not put an end to the disputes between the parties. In reliance on clause 4(ii) and the fourth schedule to the lease, the respondents sought to debit the appellants with 2.6% of a number of items in respect of which the appellants claimed they were not entitled to debit them. In particular, the respondents claimed the right to:
charge as part of the expenditure under Schedule 4 to the lease (of which the defendants are liable to contribute 2.6%) such sums as the plaintiffs may incur during any calendar year in respect of reasonable interest payments reasonably incurred as a result of reasonable borrowing being made by the plaintiffs to finance the provision of the services set out in Schedule 4 to the Lease during a given calendar year pending receipt of reimbursement of such expenditure in accordance with Clause 4(ii) of the Lease.
On May 6 1983 the respondents issued proceedings against the appellants designed to resolve the outstanding disputes. In the prayer to their particulars of claim they sought certain declarations (including a declaration of their entitlement to recover interest in the terms which I have just quoted) and orders for payment of several sums of money. The particulars of claim were followed by a defence and counterclaim in which the appellants denied that the respondents had any such right to recover interest and claimed declarations that a number of specific items were not chargeable to them under the lease.
We have been told that the hearing before the learned judge, who heard oral evidence, lasted for some three and a half days. By that time, as he said in his judgment, the points at issue between the parties had been reduced to five. He dealt with all the outstanding issues in his judgment. On the amended counterclaim he made a number of declarations in favour of the appellant tenants. The correctness of these declarations is not challenged on this present appeal. His decision is challenged only in relation to costs and the first issue, which in his judgment he summarised as being ‘whether the plaintiff is entitled to recover interest payments on money borrowed to finance the fourth schedule expenditure’. His conclusion on this issue and the reasoning which led him to it is to be found in the following passage in his judgment:
I am satisfied that, on occasion, expenditure in discharge of the landlord’s covenants under Paragraphs 2-6 of the Fourth Schedule of advance contribution within the terms of the lease, as amended by the Tomlin Order, can exceed what the landlord is now entitled to demand from the tenants. And I am satisfied the words in Paragraph 7 to which I have referred are of a wide nature; the words ‘such sums as the Lessors may from time to time expend in respect to the general administration and management of the Block’ ought to be construed as including interest on such sums as they are required to find in discharge of its duties.
I say this because the matter was widely explored in the evidence. Of course the landlord is under an obligation to carry out works set out in the lease. There have been in this case disputes relating to the propriety of service charges sought to be made and at times payment or late payment by one or other tenant might arise or be made subsequent to receipt by the landlord of the monies lawfully raised by way of service charge. In the event of such late receipt or default of any tenant, in my judgment, it would not be open to the landlord to charge interest by way of service charge since that is not money expended in the general administration or management of the Block. In my judgment interest can only be recovered on sums spent before the lawful receipt of service charges and can only arise under Paragraphs 2-6 of the Fourth Schedule to the lease.
This reference to ‘the lawful receipt of service charges’, though not perhaps very clearly expressed, must, I think, be intended to refer|page:49| to the date when service charges become due. Effectively, therefore, the learned judge’s decision on the first issue (though I do not think that the wording of the final order drawn up to embody it entirely accurately or completely reflects it) was that the respondents are entitled to charge interest paid by them on money borrowed to finance expenditure on any of the specific items set out in the fourth schedule to the lease as being sums expended ‘in respect to the general administration and management of the block’, but subject to two important qualifications, namely, this entitlement to charge interest does not extend either (1) to interest paid in respect of money borrowed to finance expenditure on the items mentioned in para 1 of the fourth schedule (‘the first qualification’) or (2) to additional interest which has become payable on any borrowing because of the failure of any tenant or tenants in the block to pay their service charges on the due date (‘the second qualification’).
In relation to costs, the learned judge concluded his judgment thus:
This is analogous to the grant of the new lease under the Landlord and Tenant Act 1954 where the court exercises its jurisdiction to adjudicate between disputing parties. In monetary terms the defendant succeeded in defeating the plaintiff’s monetary claim; the declaration has gone the other way: I make therefore no order as to costs.
The appellants now appeal both from the part of the learned judge’s judgment relating to interest and from his order relating to costs, which they should submit should be varied whether or not their appeal on the first issue is successful.
We have had the benefit of very helpful argument on both sides. On the issue relating to interest, Mr Weeks, on behalf of the respondents, has sought to maintain both the conclusion and the reasoning of the learned judge. Further or alternatively, however, he has submitted that the word ‘cost’ in paras 2, 4 and 5 of the fourth schedule is by itself apt to include reasonable interest on money borrowed by the lessors to finance expenditure of the nature referred to in those respective paragraphs.
I find it convenient to begin by considering this latter submission and in this context to cite a short passage from the judgment of Cairns LJ in the unreported case of Agavil Investments Ltd v Corner (October 3 1975), where he said this:
In the court below dictionary meanings were cited as to the word ‘costs’ and, I think, the word ‘expenses’. I do not find such definitions helpful. These are words in common use, but with variable meaning, the meaning depending on the context. For example, if one spoke of the cost of a hat one would not be likely to include in that cost the bus fare for going to the shop to buy it; nor would one be likely to include something in respect of the loss of time while one was visiting the shop. On the other hand, if a man who had served on a jury were asked how much it had cost him, he would be very likely to include, in addition to the actual fare to and from the court, the amount that he had lost by way of losing a day’s work. So it is not the dictionary that will help on these matters, but consideration of the context and what the parties could reasonably be taken to have intended by the words in that context.
In the light of these observations, I turn to consider which of their possible variable meanings the words ‘expenses’ and ‘cost’ bear in paras 1 to 6 of the fourth schedule to the lease. In my opinion it is quite clear that in the particular context of para 1 the word ‘expenses’ does not include interest. The second proviso to clause 4(ii) of the lease gives the lessors the right in effect to claim a payment in advance on account of anticipated para 1 expenditure (which clause 5(D) obliges them to incur). The lessors having been given this specific right, it cannot have been the parties’ intention that the lessors, in reliance on the word ‘expenses’, should also be entitled to claim interest on money borrowed to effect para 1 expenditure. And indeed Mr Weeks did not so contend. He accepted that the word ‘expenses’ in the context of that paragraph does not include interest. He also accepted that the phrases ‘all rates taxes and outgoings’ in para 3 and ‘all usual outgoings’ in para 6 of the fourth schedule cannot be said to include interest on borrowings effected by the lessors; these phrases plainly refer to the actual moneys paid by the lessor in discharge of these items. However, he submitted that the presence of the word ‘cost’ in paras 2, 4 and 5 gives rise to different considerations. He referred us to Hinds v Buenos Ayres Grand National Tramways Co Ltd [1906] 2 Ch 654, in which Warrington J, in the course of holding that the company concerned was entitled to charge interest on money borrowed for the purpose of constructing works to capital account, said this (at p 660):
the money is borrowed for that particular purpose — the £10,000. They have to pay interest on that £10,000 during the period that construction is taking place. In my opinion that asset which they are so constructing costs them not only the £10,000, but the £10,000 plus the amount of interest during that period of construction.
He also referred us to an observation of Lord Upjohn in Chancery Lane Safe Deposit & Offices Co Ltd v IRC [1966] AC 85 where, in the context of section 170 of the Income Tax Act 1952, he said this at p 124: ‘The cost of hiring money to rebuild a house is just as much a capital cost as the cost of hiring labour to do the rebuilding.’
I do not doubt that in some contexts a reference to the ‘cost’ of doing a particular work will be perfectly apt to include interest on money borrowed to do it. However, I find it impossible to read the word in this broad sense in paras 2, 4, and 5 of the fourth schedule to this lease. These paragraphs have to be read in their own context. They follow para 1, where the reference to ‘expenses’ clearly refers simply to the moneys actually paid by the lessors in maintaining, repairing, redecorating and renewing the items there mentioned. They are accompanied by paras 3 and 6, which no less clearly refer simply to the moneys actually paid by the lessors in discharge of the rates, taxes and outgoings there mentioned. In the context of this schedule, I find it impossible to read the references to costs in paras 2, 4 and 5 as referring to anything more than the moneys actually paid by the lessors to the persons providing the services in question and for any necessary equipment. I would therefore reject Mr Weeks’ alternative submission on the issue of interest.
His principal submission on this issue may, I think, be fairly summarised as follows. When the lessors borrow money for the purpose of effecting expenditure on any fourth schedule items, and have to pay interest on such borrowings, they are expending sums ‘in respect to the general administration and management of the Block’ within the meaning of para 7 of the fourth schedule. They are therefore entitled to recover from the lessees their proportionate share of interest on such borrowings, subject to the first and second qualifications already mentioned, by which, Mr Weeks accepted, the respondents’ rights of recovery must on any footing be limited. He submitted that the whole purpose of the fourth schedule, in conjunction with clause 4(ii) of the lease, must have been to achieve a situation in which the lessors would ultimately make neither a profit nor a loss in managing the block on behalf of all the tenants and in incurring direct and indirect expenses in so doing. The words of para 7 are, as he termed them, ‘final sweeping up’ provisions designed for this purpose and should be read liberally. In support of this submission he referred to the decision in Agavil Investments Ltd v Corner (supra) where the Court of Appeal, adopting what Goff LJ described as a ‘liberal meaning’, held that, in the context of the lease before it, loss to the landlords by giving up a flat for the occupation of a caretaker fell within the words ‘costs or expenses incurred by them in carrying out their obligations’ under a particular clause of the lease.
I have considerable sympathy with these submissions. The learned judge found as a fact that without default by any of the tenants in payment of the ground rents and service charges, the lessors might be forced to borrow in order to discharge their management functions. If they are not permitted to debit the tenants with interest on their borrowing, they may find themselves substantially out of pocket. I see no reason in principle why a lease should not provide for a landlord to be compensated for reasonable interest payments of this nature. (Mr Wood, on behalf of the appellants, has not sought to suggest that if the lease in the present case on its true construction does operate to impose a contractual obligation on the appellants to pay an interest, such obligation has been eliminated by the provisions of Schedule 19 to the Housing Act 1980, which include certain statutory restrictions on the imposition of service charges.) It seems to me that in some contexts a provision of this nature might be a sensible one. I would even accept that in some other contexts a reference in general terms to expenditure in respect of the general administration of a block of flats might perhaps, on a liberal construction, be capable of including an interest element.
However, it has to be accepted that, though the parties to this lease clearly contemplated that the cost to the lessors of the fourth schedule items might in due course come to exceed £3,000, they never provided for the reimbursement of interest on borrowings by clear and unambiguous words. With some regret, I have come to the conclusion that the provisions of para 7 of the fourth schedule to this particular lease, on their proper construction, are not capable of including payments by way of interest.
First, the crucial phrase in para 7 (‘such sums as the Lessors may from time to time expend in respect to the general administration and|page:50| management of the Block’) is introduced by the words ‘There shall be added to the costs expenses and outgoings and matters referred to in the preceding paragraphs of this Schedule’. Paras 1 to 6 had referred to a number of specific services to be rendered or provided by the lessors. In this context the natural meaning to attribute to the crucial phrase in para 7 is, in my opinion, as referring to sums expended by the lessors in doing additional acts of administration and management beyond those specified in paras 1 to 6; if the mention of the items specified in paras 1 to 6 had been intended to give the lessors a right to claim reimbursement for interest in respect of such items, the natural place to provide for this would have been in those paras themselves, not para 7.
Second, the conclusion that the crucial phrase in para 7 must bear what I have described as its natural meaning is strongly reinforced by the following consideration. If the general wording of that phrase were to be read as capable of including interest paid by the lessors on borrowings for para 7 purposes, two important qualifications, of the nature indicated above, would then have to be imported into the paragraph as a matter of necessary implication. For, as the learned judge recognised, and Mr Weeks accepted, it cannot have been the intention of the parties that the lessors should be entitled to reimbursement from the lessee either in respect of interest paid on borrowings for para 1 purposes (in view of the second proviso to clause 4(ii)) or in respect of additional interest which the lessors find themselves obliged to pay as the result of defaults on the part of other tenants in the block. The adoption of the wide construction of para 7 urged on behalf of the respondents becomes infinitely more difficult if one has at the same time to import with it restrictions, by necessary implication, so as to qualify the apparently unqualified generality of the crucial phrase.
Third, the correctness or otherwise of this construction may, in my opinion, be fairly tested by looking at its practical consequences. If in any particular year the lessors, without the necessity to borrow, have sufficient liquid resources to pay for the paras 2 to 6 items and choose to pay for them out of such resources, they will be deprived for the time being of the use of the moneys concerned. Yet there will be no question of their being able to claim reimbursement from the lessees in respect of lost interest. Mr Weeks (in my opinion rightly) expressly conceded that the crucial phrase in para 7 would not on any construction be wide enough to include a claim for interest on notional borrowing. If the construction urged on behalf of the lessors were correct then, as Mr Wood pointed out on behalf of the appellants, the extent of the lessee’s liability for service charges would depend on the personal circumstances of the lessors or their policy in arranging their financial affairs. If in any particular year of the tenancy they were impecunious, they would have to borrow, and the lessee’s liability for service charges would be correspondingly increased. If, on the other hand, they had sufficient resources to render borrowing unnecessary, the extent of the lessee’s liability would depend on whether the lessors chose, as a matter of financial policy, to borrow. It would, of course, be perfectly possible for parties to a lease by clear words to contract in terms which subjected the tenant to a liability for service charges which would vary according to circumstances of this nature, over which he had no control. For my part, however, I would be slow to construe general phraseology of uncertain import (such as the crucial phrase in para 7) in such a way as to produce these potentially anomalous results.
In the end, the onus must fall on the respondents to show that under this particular lease the appellants have contracted to pay the interest claimed. For the reasons stated, I do not think they have discharged this onus. I would therefore reverse the decision of the learned judge on this issue.
As regards the question of costs, Mr Wood submitted that, even if the learned judge’s decision on the first issue was correct, he still erred in principle in drawing an analogy between this case and applications under the Landlord and Tenant Act 1954, and in making no order for costs. In the light of the decision of this court on the first issue, I think it unnecessary to express any view on this submission. The effect of our decision is that, save in respect of one relatively minor item relating to surveyor’s fees, the appellants have successfully resisted all the respondents’ claims made in this section. It follows, in my opinion, that the appeal should be allowed with costs in this court and the court below. I would set aside the relevant parts of the learned judge’s order. I would grant the appellants a declaration that upon the true construction of the provisions relating to service charges contained in the lease, as varied by the consent order, the respondents as landlords are not entitled to recover from the appellants as tenants any interest in respect of borrowings effected by the respondents. I would further order that the respondents pay to the appellants their costs of this appeal to be taxed and of the hearing in the court below to be taxed upon County Court scale 3.
MAY and LLOYD LJJ agreed and did not add anything.
The appeal was allowed with costs in the Court of Appeal and below. Leave to appeal to the House of Lords was refused.
