Landlord and tenant – Service charges – Apportionment – Residential leaseholders in mixed use development challenging apportionment of estate service charges – First-tier Tribunal finding that provision to change method of apportionment limited to changing way individual items of expenditure apportioned – Whether landlord having discretion to vary method of apportionment – Appeal dismissed
Fitzroy Place was a mixed development on the site of the former Middlesex Hospital north of Oxford Street in central London comprising six blocks. Two were wholly commercial, comprising offices on upper floors with shops and restaurants on the ground floor.
The remaining blocks were wholly residential and contained 235 private flats and 54 flats allocated as affordable housing. The private residential leases were in a standard form.
An issue arose between the respondent residential leaseholders and the freeholder, the head-leaseholder, and the management company responsible for the delivery of services and the collection of service charges (the appellants) concerning, amongst other things, the apportionment of service charges.
The appellants applied to the First-tier Tribunal seeking a determination under section 27A of the Landlord and Tenant Act 1985 of the service charges payable by all residential leaseholders.
The FTT determined that the discretion conferred by paragraph 6.2 of the leases to substitute a method of apportionment different from that required by paragraph 6.1 was limited to changing the way in which individual items of expenditure were apportioned. It did not provide the company with a licence to adopt a wholly new basis of apportionment for all expenditure. The apportionment of estate service charges following such methodology was not in accordance with the provisions of the private residential leases. The appellants appealed.
Held: The appeal was dismissed.
(1) The court’s task was to ascertain the objective meaning of the language which the parties had chosen to express their agreement. The court had to consider the contract as a whole and, depending on the nature, formality, and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. The interpretative exercise was unitary, involving an iterative process by which each suggested interpretation was checked against the provisions of the contract and its commercial consequences investigated.
While commercial common sense was an important factor to be taken into account, a court should be very slow to reject the natural meaning of a provision as correct simply because it appeared to be imprudent for one of the parties to have agreed. The meaning of a clause was usually to be gleaned from the language of the provision. Where the parties had used unambiguous language, the court had to apply it; if there were two possible constructions, the court was entitled to prefer the construction consistent with common sense: EMFC Loan Syndications LLP v The Resort Group plc [2021] EWCA Civ 844 considered.
(2) The meaning of paragraph 6 was clear. The whole paragraph was about the ascertainment of the tenant’s proportion throughout the term of the lease. The parties had anticipated the possibility that change might be required, but they had agreed detailed provisions about the extent and circumstances of the change to be permitted.
The discretion conferred by paragraph 6(2) to substitute a method of apportionment different from that required by paragraph 6.1 was to allow the appellants, within the general framework of an apportionment according to net internal area required by paragraph 6.1, to adopt another method of apportionment of a particular type or item of expenditure if to do so was fair and reasonable. That discretion was limited to changing the way in which individual items of expenditure were apportioned and did not provide the company with a licence to adopt a wholly new basis of apportionment for all expenditure.
(3) The opening lines in paragraph 6(2) identified matters which might justify the adoption of a different apportionment to the limited extent contemplated in that paragraph. Those were “the nature of any expenditure or item of expenditure incurred, or the premises in the block or the estate as the case may be which benefit from it or otherwise”. The landlord or the service company might reallocate a particular type of expenditure or a particular item of expenditure if it was fair and reasonable to do so, having regard to the nature of that expenditure or the premises in the block or in another part of the estate which benefitted from that expenditure “or otherwise”. If only one or two flats benefitted from a particular item of expenditure the whole of that item might be charged to them; if only one or two flats gained no benefit from an item of expenditure they might be exempted from contributing towards it.
(4) A consideration of “commercial common sense” supported a limited interpretation of clause 6.2. The residential blocks comprised very expensive flats and the services provided on the estate were elaborate. The parties had agreed a “primary” basis of apportionment and a means by which that primary method might be recalculated, while preserving its basic design. It was unlikely in that context that they would also agree an entirely open-ended discretion of the sort suggested by the appellants. That would bypass the primary method of the apportionment and put the residential tenants substantially at the mercy of the landlord’s commercial interests.
It might be in the landlord’s interests to reapportion service charges to the disadvantage of the residential tenants and to the advantage of the commercial tenants because the extent to which the total occupational costs of the commercial premises were represented by service charges was likely to reduce the rent which the premises commanded. The fact that any such reapportionment had to be fair and reasonable would be some protection but could still lead to a significant change in the service charges payable by the residential leaseholders.
(5) Therefore, the FTT was right in its conclusion that the power in paragraph 6.2 might only be exercised on an ad hoc basis in relation to particular items or types of expenditure and might not be relied on, as the appellants sought to do, to justify the abandonment of the primary method of apportionment described in paragraph 6.1.
Katrina Mather (instructed by Bryan Cave Leighton Paisner LLP) appeared for the appellants; The first and second respondents did not appear and were not represented; Edward Blakeney (instructed by Keystone Law) appeared for the third respondent; Alexander Whatley (instructed by Direct Access) appeared for the fourth respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Fitzroy Place Residential Ltd and others v Lovitt and others
