Landlord and Tenant Act 1985 – Service charge – Subleases of flats – Managing agent – Respondent landlord seeking to recover costs of employing managing agent as part of service charge payable by appellant tenants – Whether such costs properly recoverable under terms of subleases – Whether leasehold valuation tribunal erring in disallowing respondent’s legal fees on a ground not raised by parties – Appellants’ appeal dismissed – Respondent’s cross-appeal allowed in part.
The first appellant was the tenant of one of 85 flats in two blocks in a mixed-use development. The second appellant was a residents’ association representing the tenants of the flats. The tenants held under long subleases that provided for the payment of a service charge to the respondent landlord. The charge included the respondent’s expenses of managing and administering the property and protecting its amenities “and for that purpose if necessary employing a firm of managing agents (provided always that the payment of such managing agents shall be met exclusively from the fees more particularly detailed in para 2 hereto”. The reference to para 2 in fact made no sense since that paragraph made no provision for fees and dealt only with expenditure on the maintenance of service installations.
The appellants applied to the leasehold valuation tribunal (LVT), under section 27A(1) of the Landlord and Tenant Act 1985, for a determination of the service charges properly payable for the years 2003 to 2010. The LVT made various deductions from the charges demanded by the respondent, including a 10% reduction in management fees to reflect failures by the respondents’ managing agent. It also disallowed recovery of legal fees incurred by the respondent in chasing unpaid service charges on the ground that these had been invoiced not to the respondent but to another company in its group.
Both sides appealed against certain aspects of the LVT’s decision. The appellants raised a new point in relation to management fees, contending that the relevant provisions of the subleases did not permit recovery of any fees at all for employing managing agents. They submitted that the subleases contained a clear proviso intended to limit recovery, namely that the cost of managing agents could be met only from the fees detailed in para 2, and that, since para 2 made no provision for fees, the respondents were unable to recover anything.
The respondent contended that, inter alia, the LVT had erred in disallowing its legal fees on a ground that had not been raised by the parties.
Held: The appeal was dismissed; the cross-appeal was allowed in part.
(1) The reference in the subleases to managing agents’ fees being met from fees detailed in para 2 made no sense since para 2 referred to expenditure, not income or fees, and the subject matter of that expenditure, namely service installations, had nothing in particular to do with the appointment of managing agents. However, the provisions of the subleases had to be construed against the background knowledge that would reasonably have been available to the parties at the time of contracting, in order to get as close as possible to the meaning that the parties had intended: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363; [2007] Bus LR 1336; [2007] PLSCS 87 applied. That background knowledge included the fact that it was entirely normal for two blocks containing 85 flats to be managed not by the landlords but by a firm of managing agents on their behalf, and for the costs of those agents to be payable as part of the service charge. The subleases clearly envisaged that the flats could be managed by managing agents and made specific for payment of the costs of employing them. However, by a proviso, the subleases purported to provide that the cost of managing agents should be made from a specific source of funds that, because of a drafting error, could not be identified. To hold that no costs could be recovered because the source of funds could not be identified would run contrary to the clear intention of the subleases that the cost of managing agents should largely be recoverable. In the absence of any discernable means of limiting the costs in the subleases, the only sensible meaning that could be given to the relevant provisions was that managing agents’ fees were limited to those that were reasonable. On that approach, the LVT’s decision on managing agents’ fees contained no error of law.
(2) The LVT had disallowed the respondent’s legal fees by reference to a specific matter that, pursuant to the rules of natural justice, should have raised to enable the parties to comment and call evidence on that matter. Not to do so had been unfair and unlawful: Thinc Group Ltd v Armstrong [2012] EWCA Civ 1227 and Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14; (1985) 275 EG 1134 applied. The matter was remitted to the LVT for re-determination of the issue of legal fees.
David Warner (instructed by Direct Access) appeared for the appellants; Patrick Darby (instructed by Shakespeares, of Solihull) appeared for the respondents.
Sally Dobson, barrister