Landlord and tenant – Covenant – Construction – Appellant freeholder appealing against dismissal of claim against respondent lessee and order for payment of 90% of respondent’s costs – Whether legal fees incurred by appellant, when successfully defending respondent’s claim for damages for unreasonable refusal of licence to assign, covered by service charges clause in lease – Whether order for costs constituting demand by appellant within meaning of covenant – Appeal dismissed
The respondent was the sole shareholder and director of a company (RRR) which was the lessee of the basement and ground floor of commercial premises at 84 Westbourne Grove, London, W2. The appellant, a company registered in the British Virgin Islands, became the freeholder of the property in 2012.
RRR ran a restaurant from the property when it took an assignment of the lease. The respondent provided a personal guarantee for RRR’s obligations under the lease. The appellant took an assignment of the freehold in 2012 and took the benefit of the guarantee.
The parties fell out over covenants and RRR decided to try to assign the lease. Three prospective assignees were put forward to the appellant for approval for assignment. All were rejected. RRR then went into liquidation and the liquidator brought proceedings against the appellant (claim 612) alleging that it had unreasonably refused consent for the proposed assignments. A district judge dismissed the action and ordered RRR to pay 90% of the appellant’s costs.
The appellant commenced proceedings against the respondent (claim 615) and judgment was entered for the rent arrears of £173,937 which were not contested. The rest of the claim was dismissed on all matters save as to £2,836 and the appellant was ordered to pay 90% of the respondent’s costs.
The appellant appealed. The issues were: (i) whether the legal fees incurred by the appellant when successfully defending claim 612, were covered by the service charges clause on its proper interpretation; and (ii) if so, whether the appellant complied with the clause by making a demand to RRR for the fees under the clause.
Held: The appeal was dismissed.
(1) Interpretation was the ascertainment of the meaning which the document would convey to a reasonable person with all the background knowledge reasonably available to the parties at the time of the contract. Subject to that, the background included anything which would have affected the way in which the language of the document would have been understood by a reasonable man. The law excluded from the admissible background previous negotiations of the parties and their declarations of subjective intent. They were admissible only in an action for rectification.
The rule that words should be given their “natural and ordinary meaning” reflected the common sense proposition that it was not easily accepted that people had made linguistic mistakes, particularly in formal documents. On the other hand, if one would conclude from the background that something must have gone wrong with the language, the law did not require judges to attribute to the parties an intention which they plainly could not have had: Philpots (Woking) v Surrey Conveyancers [1986] 1 EGLR 97, Melanesian Mission Trust Board v Australian Mutual Provident Society (1996) 74 P&CR 297 and Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896considered.
In some cases, an event subsequently occurred which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it was clear what the parties would have intended, the court would give effect to that intention. There was no general contra-proferentem rule when interpreting service charges clauses. The standard rules of construction applied: Sella House v Mears [1989] 1 EGLR 65, Morgan v Stainer [1993] 2 EGLR 73; Freeholders of 69 Marina v Oram [2011] EWCA Civ 1258; [2011] PLSCS 263, Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56; [2011] PLSCS 291, Arnold v Britton [2015] EGLR 53 and Khan v Tower Hamlets [2022] EWCA Civ 831 considered.
(2) In the present case, the service charge clause had two relevant parts. Firstly, the definition of the charges recoverable: The words used clearly covered legal fees. Secondly, the activity for which the landlord might recoup such costs from the tenant: Here the activity was defined clearly as: “any application or request for any approval or consent”. It did not say any proceedings arising in connection therewith. On a plain reading of the wording, it did not cover proceedings.
In addition, there was no commercial, common sense need for the court to interpret the clause to cover the legal costs of an action in court because the court would award them at the end of the claim to the correct party. So, an objective bystander would say that the clause did not cover court costs and did not need to be interpreted in such a way so as to say that it did. The judge’s interpretation was correct. The lease did not require the tenant to pay the court costs of claim 612 so the respondent guarantor was not liable so to do.
(3) The words “on demand” were a pre-condition of the liability under the service charge clause. Where the loan was repayable on demand, the making of a valid demand was a pre-condition of the debt becoming due. In order to constitute a valid demand, there had to be a clear intimation that payment was required; nothing more was necessary, and the word “demand” need not be used, neither was the validity of a demand lessened by its being clothed in the language of politeness; it had to be of a peremptory character and unconditional, but the nature of the language was immaterial provided it had this effect.
The relevant demand was a demand for the costs of claim 612 which were in a sum to be assessed and which never were assessed. It would be impossible to demand an unspecified sum and no demand for those was pleaded. In addition, RRR had been dissolved by early 2018 so could not have received any demand.
An order for costs did not constitute a demand by the appellant to RRR within the meaning of the covenant. The judge did not make any error either of law or of fact when ruling that the appellant had made no demand to RRR. Even if the service charge clause did allow for the recovery of legal fees, which on its true construction it did not, the fees had not been demanded so the precondition had not been fulfilled.
Daniel Dovar (instructed by Collyer Bristow Solicitors) appeared for the appellant; The respondent appeared by her litigation friend.
Eileen O’Grady, barrister
Click here to read a transcript of Kaushal Corporation v O’Connor
