Landlord and tenant–Long lease of flat–Service charge–Effect of section 91A of Housing Finance Act 1972–Covenant by lessees to pay interim sums on account of prospective liability for annual contributions towards lessors’ expenditure in carrying out their obligations under lease–As a result of section 91A a service charge can be recovered only in respect of expenditure already incurred, not prospective expenditure–Interim sums held to be part of service charge and hence, being payments in advance, not recoverable by lessors–Alternative suggestion that lessors might recover from lessees cost of borrowing money to meet expenditure required by lease–Held that there was nothing in lease to authorise such a claim–No help to be derived from the doctrine of ‘The Moorcock’ or from the implied term principle in Finchbourne v Rodrigues–Lessors not entitled to require lessees to make interim payments provided for in lease on account of estimated or proposed expenditure–An ‘unfortunate conclusion’ for these and other lessors
This was an
originating summons taken out by the lessors, Frobisher (Second Investments)
Ltd, to which the lessees, Kiloran Trust Co Ltd and Vernon Aidan Ravenscroft
were defendants. The summons, which related to flat 34, Campden House,
Sheffield Terrace, Kensington, London W8, sought four declarations, namely, (1)
that interim payments provided for in the lease dated November 25 1965 between
the parties’ predecessors in title were charges to which section 91A of the
Housing Finance Act 1972 applied; (2) that the lessors were entitled to require
such payments to be made in advance of expenditure; (3) that the lessors were
entitled to recover from the lessees the appropriate proportion of the cost of
borrowing moneys to meet expenditure under the lease until the contributions to
the lessors fell due under the lease; and (4) that the lessors were entitled to
recover from the lessees the amounts required to reimburse the lessors’
managing agents for the cost of borrowing in order to effect expenditure for
the purpose of the lease.
B K Levy
(instructed by Lieberman, Leigh & Co) appeared on behalf of the plaintiff
lessors; Paul de la Piquerie (instructed by Thwaytes) represented the
defendants.
Giving
judgment, WALTON J said: The matter before me arises out of the impact of
section 91A of the Housing Finance Act 1972, which was added by the Housing Act
1974, upon a lease, in a fairly standard form. The lease was made on November
25 1965 between Campden House Chambers Ltd, as lessors, and George Maylam and
Deborah Smith, as lessees. The reversion is now vested in the plaintiffs,
Frobisher (Second Investments) Ltd, and the lease is now vested in the
defendants, Kiloran Trust Co Ltd and Vernon Aidan Ravenscroft.
The lease was
a demise in consideration of the payment of a premium of a flat in a block of
property described in the first schedule to the lease as Campden House, 29
Sheffield Terrace in the Royal Borough of Kensington. The lease is a long lease
at a low rent, so that the provisions of the Rent Acts do not apply to it. By
the fourth clause of the lease the lessors covenanted with the lessee ‘from
time to time and at all times during the said term to observe and perform each
and every of the obligations on the lessors’ part set out in the Seventh
Schedule.’ That is in substance the
services to be provided by the lessors, which I will have to look at a little
more closely in a moment. The lessees undertook to pay in respect of that ‘the
contribution,’ and we will see in a moment how ‘the contribution’ is in fact
defined.
The schedule
of matters which the landlord undertook to do were the kind of things that one
frequently finds in a block of flats; for example, keeping the reserved
property in good order, repair and condition, keeping the property insured,
paying all premiums necessary for effecting and maintaining insurance, to apply
all moneys received under insurance in respect of loss or damage in rebuilding
and reinstating the property, to pay the charges incurred in the water rates on
the whole of the property, electricity charges in connection with part of the
property, the cost of maintaining and renting a public GPO telephone, and a
clause, to which I shall have to refer in more detail later, but for present
purposes may be taken as the reasonable and proper fees payable by the lessors
to its managing agents for the time being for carrying out the general
management and administration of the property. Then there was another clause
concerning the cleaning and maintaining of the part of the reserved property,
the dustbins, paying the rent and performing the covenants in the head lease.
Then there are matters with which we are not concerned, employing and
maintaining a porter, providing a supply of hot water, and repairing and
keeping in runing order the lifts.
Now, one of
the covenants on the part of the lessee contained in the sixth schedule is that
the lessee will pay the rent and ‘the contribution’ and the interim sums on the
days and in the manner stipulated in this lease. That takes us on to the eighth
schedule, which deals with ‘the contribution,’ and ‘the contribution’ is a
yearly sum equal to a percentage, which would vary from flat to flat, but in
the case of the flat with which we are concerned is 0.3 per cent
of the amount
which the Lessors shall from time to time have expended during the year
immediately preceding the date next hereunder mentioned in (a) meeting the
outgoings costs expenses and liabilities incurred by them in carrying out their
obligations under the provisions of the Seventh Schedule hereto (except
paragraphs 6 and 7 thereof) and (b) in paying from time to time the costs and
expenses of and incidental to making repairing maintaining amending and
cleansing all or any ways roads pavements gutters sewers channels drains pipes
watercourses walls party walls party structures fences and other conveniences
which shall belong to or be used for the Premises in common with any other part
or parts of the Property or which shall form part of the Reserved Property such
contribution to be paid on the 25th day of March in every year. The amount of
such Contribution shall be ascertained and certified by the Lessors’ Managing
Agents acting as experts and not as arbitrators once each year throughout the
term on the 25th day of March in each year (or if such ascertainment shall not
take place on the said 25th day of March then
though such amount had been ascertained on the aforesaid 25th day of March)
commencing on the 25th day of March 1964 and such certificate shall contain
full details and figures relating to all the component elements comprised
therein and a copy thereof shall be supplied to the Lessee at the request of
the Lessee and without charge to him (but not more frequently than once in
every yearly period. . . .)
Then it is
provided first of all:
That the
Lessee shall (if required by the Lessors) Pay such a sum on account of the
Contribution payable by the Lessee under this Schedule as the Lessors’ Managing
Agents shall certify as being a reasonable interim sum (in this Lease referred
to as ‘interim sum’ or in the plural as ‘interim sums’) to be paid on account
of the Contribution. Such interim sums shall be paid (if required as aforesaid)
half yearly in advance on the 25th day of March and the 29th day of September
in every year commencing on the quarter day next following the date of this
Lease in respect of the period from the date hereof to the next following half
yearly day.
Then (2):
That the Contribution
payable by the Lessee hereunder (or such balance as shall remain after giving
credit for any interim sum) shall be paid by the Lessee or any proper balance
found to be repayable to the Lessee shall be so repaid to him on the 24th day
of June next following the year ending on the 25th day of March to which such
contributions shall relate or as soon thereafter as may be possible.
Then there is
a proviso limiting the contribution for a comparatively short period from the
commencement of the lease; and it is finally provided:
That (without
prejudice to any other remedy or right) the Lessors shall not be entitled to
re-enter under the provisions in that behalf herein contained in respect of
non-payment only of any interim sum.
So the general
scheme is quite clear: twice a year, on March 25 and September 29, the lessees
are required to pay interim sums certified by the managing agents as being
reasonable. At the end of the year at the next March 25 or shortly thereafter
there is worked out what the contribution properly comes to. The sums which
have been paid on account are set against that, and then either the lessee has
to pay the balance, if it is a balance against him, or if it is a balance in
his favour, he receives the balance back.
There can, I
think, be no doubt whatsoever, and it is not challenged in any way, that the
contribution proper is in fact a service charge. For present purposes–that is
to say, for the purposes of section 91A of the Housing Finance Act 1972–the
expression ‘service charge’ means
any charge
for services, repairs, maintenance or insurance, being a charge which is
payable as part of, or in addition to, the rent, and which varies or may vary
according to any costs (including charges for overheads) incurred from time to
time by or on behalf of the landlord or any superior landlord.
That is a
definition to be found in section 90(12) of the Housing Finance Act 1972, and
it applies to section 91A, because in subsection (7) of section 91A there is to
be found this definition:
In this
section ‘chargeable items’ means any items for which a service charge may be
payable and other expressions used in this section have the meanings assigned
to them by section 90 (12) above.
The difficulty
which is created by section 91A lies in this, that if one reads the opening
words of section 91A, it is I think abundantly clear that a service charge strictu
sensu can be recovered only in respect of expenditure which has already
been incurred or defrayed by the landlord and cannot be recovered in respect of
prospective matters, however clear it is that those matters, when actually
carried out, will be properly chargeable items and costs proper to be brought
into account as part of the service charge.
That is
because section 91A in its opening words–and I intend to read only the opening
words because there are very grave difficulties thereafter, with which,
fortunately, I am in no wise concerned in this case–begins as follows:
A service
charge shall only be recoverable from the tenant of a flat–(a) in respect of
the provision of chargeable items to a reasonable standard; and (b) to the
extent that the liability incurred or amount defrayed by the landlord in
respect of the provision of such items is reasonable. . . .
Mr de la
Piquerie, on behalf of the tenants, has argued that that result is brought about
not only by the wording of section 91A(1)(b) but also by the wording of
91A(1)(a), ‘A service charge shall only be recoverable from the tenant of a
flat–(a) in respect of the provision of chargeable items to a reasonable
standard.’ But, in my judgment, he is
putting too great a burden on that wording, and if that wording stood alone,
there would be no reason to restrict the service charge that may be recovered
to past items. But, however, when one gets to (b), ‘to the extent that the
liability incurred or amount defrayed by the landlord in respect of the
provision of such items is reasonable . . .’, it appears to me perfectly clear
that the landlord must have defrayed the cost, or at any rate incurred
liability to pay the cost, before it can be recovered from the tenant.
Therefore, I
am faced in this case with the simple point–simple, that is, to state, but
difficult to solve–as to whether the interim sums are or are not properly to be
designated as a service charge. In my judgment, they are to be so designated.
It seems to me that the wording of the lease is too strong to enable me to do
anything else, because the first proviso to the eighth schedule, which I have
already read, provides that the interim sums are to be paid on account of the
contribution or, spelling that out, the interim sums are sums paid on account
of the service charge, and it appears to me that sums paid on account of the
service charge are part of the service charge.
Mr Levy, for
the landlords, has sought to argue that the interim sums are a kind of trust
fund or moneys held by the lessors’ managing agents as stakeholders, and that
therefore they really have nothing to do with the service charge, save that
when the contribution is ascertained and becomes payable, then the lessors’ managing
agents, on behalf of the tenants, are entitled to put those moneys towards the
discharge of the contribution, and that is the first time that those moneys
become part of or are used to discharge the service charge.
But that seems
to me to ignore the realities of the matter. Clearly the interim sums are paid
so as to enable the managing agents to have money in hand to discharge the
costs of the lessors, which are properly recoverable by means of the
contribution, as and when they arise without waiting for the contribution to be
ascertained; and because that is so, it appears to me that the suggested
analogies of the lessors’ managing agents being stakeholders or alternatively
trustees of the money just will not fit the circumstances of the case in any way
at all. They are not stakeholders of the money, because stakeholders hold the
money of third parties, to be applied in a particular way when a particular
event happens. But I cannot see that there is anything in the lease to prevent
the lessors’ managing agents from applying the moneys as they receive them to
whatever appropriate purpose they think fit. Indeed, we know that that is
precisely what happens, because in fact the managing agents maintain a separate
service charge bank account, and they maintain that to meet the day-to-day
costs during the year. Similarly it seems to me that there is no possibility
here of treating the moneys as trust moneys in any way. First of all, one does
not import the question of trust into a matter of this nature, which is a
purely commercial matter, unless one has to do so, but, even more importantly,
if those moneys were trust moneys to be applied in the way that has been
suggested, only at the end of the year in meeting the contribution, it seems to
me that it would be the duty of the managing agents to keep all those moneys
together all during the year until the specified event happened, and that that
is not what is intended is perfectly apparent.
So it seems to
me that the provision for repayment if by any chance the interim sums do exceed
the contribution payable by the lessee is a matter which very sensibly rests
purely in contract as between the landlord and the tenant and does not in any
way rest in trust or on some concept of the managing agents being stakeholders.
I realise, of
course, that that is a most unfortunate conclusion so far as the landlords are
concerned, but I have reached that conclusion on the argument which has been
placed before me. Having reached that conclusion, I did not require counsel to
address me upon it, but I am by no means certain that that is the only way of
putting the matter against the landlords. At the very lowest, the interim sums
are some form of security for the fact that the contribution will ultimately be
paid; and the opening words of section 91A are that a service charge shall only
be recoverable from the tenant of a flat to the extent that the liability
incurred etc; and it seems to me that even if one could, by some attribution of
a label, call the interim sums something other than ‘service charge,’ the
exemption of the interim sums would still be a matter of recovering the service
charge and thus invalidated by the opening words of section 91A(1).
This now leads
me on to the second point, which is this: Mr Levy says: ‘Well, if now it is
impossible to recover the costs in advance in this way, this is going to create
very difficult problems for the landlords,’ and I should not like the landlords
to think that I do not fully sympathise with the fact that that is precisely
and exactly what my decision will do. I can see their very great difficulties
which will result. What Mr Levy says is that it will mean that the landlords,
or the landlords’ managing agents, will have to borrow moneys in order to carry
out their obligations under the lease, and he naturally wishes on behalf of the
landlords to include the costs of the borrowed money–that is to say, the
interest which will be payable upon it–in the matters which can be recovered
from the tenants.
The only
clause in the lease, I think it is fair to say, to which he can really point as
providing any ground for such a submission is to be found in clause 3(iv) of
the seventh schedule. Of course, if it is in clause 3(iv) of the seventh
schedule, then it will be one of the matters which the tenant will have to
reimburse pursuant to the provisions of the eighth schedule. But I must now
read the clause in detail:
The
reasonable and proper fees payable by the Lessors to its Managing Agents for
the time being for carrying out the general management and administration of
the Property including (but without prejudice to the generality of the
foregoing) all fees payable to such Agents in connection with the collection of
the rents the Contribution and the interim sums payable by the respective owners
of the Flats the payment of the rent under the Head Lease and other outgoings
payable by the Lessors in respect of the property or any part thereof and the
preparation of all accounts in connection with the calculation and assessment
of the Contribution and interim sums and arrangements for the supervision of
any works which may be carried out pursuant to paragraph 1 of this Schedule and
(if undertaken by such Agents) preparation of Specifications in connection
therewith.
I am afraid
that at the end of the day I cannot find in there any real reference of any
description to ‘interest.’ It seems to
me that what that clause is dealing with are the fees payable to the managing
agents. They are fees payable for carrying out the general management and
administration of the property. Then the clause goes on to specify, without
prejudice to the generality of that phrase, various matters: fees payable to
the agents in connection with the collection of the rents, fees payable to the
agents in connection with the collection of the contribution, fees payable to
the agents in connection with the collection of the interim sums, fees payable
to the agents in connection with the payment of the rent under the head lease,
fees payable to the agents in connection with the payment of other bills
payable by the lessors in respect of the property or any part thereof, fees
payable to the agents in respect of the preparation of accounts and in
connection with the calculation and assessment of the contribution and interim
sums and fees payable to the agents in respect of the arrangements for the
supervision of any works and preparation of specifications. It does not seem to
me that one can fairly say that in that wording there is any general phrase
which one could fairly read as including interest payments of the general
nature with which we are dealing.
Moreover, it
would be very surprising indeed if one could, and for this reason: it may very
well be that the present landlord is an impecunious landlord–I know not–but the
landlord might, far from being impecunious, have very large sums of money under
his control, in which case he would not need to borrow any other money at all;
and if that were the situation and interest was going to be charged, one would
have expected to find a clause specifically dealing with it and mentioning the
interest on sums expended, or words to that effect, somewhere in the lease, and
one does not, unfortunately, find any such words.
Mr Levy then
says: ‘Well, be that so, it must be implied as a matter of necessary
implication, following the doctrine of The Moorcock (1889) 14 PD 64, in
this lease that if the statute were to render the payment of the service charge
in advance unlawful, the tenant would immediately start paying interest upon
moneys expended in the manner in which it will now become necessary for the
landlord to incur that interest.’
While the
doctrine of The Moorcock is a very useful doctrine indeed, and I would
be the last person to refuse to apply it if I thought it could be properly
applied, Mr de la Piquerie for the tenant says that so far from the tenant
saying ‘Of course that must be the case,’ if he was asked at the commencement
of the lease ‘Supposing the statute intervened to make your payments in advance
unlawful, I assume that you will be quite willing to pay interest upon the
moneys that the landlord has to borrow?’
so far from saying ‘Of course,’ the tenant might very well reply ‘Well,
I don’t know about that. I shall want to know a very great deal more about the
whole matter. I am not sure I am going to agree to that.’
Whether that
be so or not, I do not think that in fact one can apply the doctrine of The
Moorcock, because I know of no case–and Mr Levy has been unable to cite any
case to me–in which the doctrine of The Moorcock has been applied when
there has been a disturbance to contractual arrangements as the result of a
statute. It seems to me that if there is a disturbance of contractual
relationships because a statute intervenes, then it must be left to the statute
to say what is to happen consequentially upon its intervention, and that one
cannot foist upon the parties what some outside body thinks would have been
what they would have agreed to in circumstances which neither of them can
possibly have contemplated under any circumstances. Indeed, if I am right on
the construction that I have given to section 91A–and I say ‘if I am right,’
because, unfortunately, this appears to be the first case on that section, and
it is likely, I imagine, to go to a higher court–the legislature has set its
face against the tenant paying in advance for anything except liabilities
actually incurred by the landlord; and in order to imply a clause taking the
fullest possible advantage of that fact, which could undoubtedly be done in
future leases, one would have to reconstruct the whole system of liability
completely; and it seems to me that it is not a proper use of The Moorcock
to imply a term reconstructing the position as between the landlord and tenant
only partially.
Therefore, for
those reasons, I feel unable to accept Mr Levy’s submissions on The Moorcock
on that point of principle. Moreover, although I do not, having done that, need
to decide it, I feel at any rate a lurking suspicion that if the tenant had
been asked, ‘What are the parties going to do if statute intervenes to
frustrate any part of your bargain?’ he
would have said, ‘Well, that must be left to statute. I am not going to agree
to any particular term in advance,’ because it must be recalled that implied
terms do not, as it were, get written into the contract as one goes along. One
goes back
the term to which both of you would agree if asked by the officious
bystander?’ It seems to me that it must
at the very least be dubious whether the tenant would not have said, ‘Well, if
statute intervenes, I shall have to read the statute and see what it says. I am
not going to agree in advance what is going to happen.’
Mr Levy
pressed me on this aspect of the case very much with the decision in Finchbourne
Ltd v Rodrigues [1976] 3 All ER 581, where the Court of Appeal had
no hesitation in implying a term that various matters should be carried out
fairly and reasonably in a lease and that maintenance of the property should
not be left to the landlords’ discretion to adopt the highest conceivable
standard of maintenance for the block of flats and to charge the tenant with
that cost. It seems to me that that case, as it were, speaks for itself.
Obviously, in order to give business efficacy to a block of flats leased in the
Mile End Road, one assumes a Mile End Road standard of maintenance, just as if
the flats were in Park Lane one would assume a Park Lane standard of
maintenance. It seems to me that the readiness of the Court of Appeal to adopt,
as it were, the current standard for the block of flats in that particular case
does not in any way assist me in this matter at all.
Therefore, at
the end of the day, for those reasons, I have come to the conclusion that the
interim payments for which provision is made in the proviso to the eighth
schedule to the lease are charges to which section 91A of the Housing Finance
Act 1972, as amended by the Housing Act 1974, applies, and I have come to the
conclusion that the plaintiff is not entitled to require the said, or any,
interim payments to be made in advance on account of estimated or proposed
expenditure to be incurred for the purposes referred to in the seventh schedule
to the said lease, or for any of such purposes, before such expenditure has
been incurred; and also I have come to the conclusion that the plaintiffs are
not entitled to recover from the defendants as lessees the appropriate
proportion of the cost of borrowing in the financial market the moneys required
to make the expenditure referred to in the said seventh and eighth schedules
until such time as the payments referred to in the said eighth schedule are
made to the plaintiffs, nor would that in the slightest be changed if instead
of the plaintiffs as lessors incurring the interest charges, those charges were
incurred by the managing agents themselves.
Declarations
were made accordingly. There was no order as to costs.
