Service charges — Expenditure items including ‘any other beneficial services’ — Whether landlord entitled to recover costs of external repairs and internal decoration and/or repairs of common parts, capital expenditure, fees of managing agents and notional rent of caretaker’s flat
lessor owns the reversion to two leases of parts of 15-19 Cavendish Place,
London W1, held respectively by the first and second defendants — Save for one
matter the leases were in common form — The lessee covenanting to pay the
lessor, by way of service charge, the cost of providing specified services
including: lifts, a resident caretaker who shall be employed, housed and
uniformed, the cleaning and lighting of common parts, provision of constant hot
water and ‘any other beneficial services which may properly be provided by the
lessors’ — The lessor sought declarations that it was entitled to recover by
way of service charge: (1) the costs of external repairs to the building; (2)
the costs of the internal decoration and/or repairs of the common parts of the
building (as between the plaintiff and the first defendants); (3) the costs of
repairs beyond the repairing covenant of the second defendants; (4) the costs
of capital as opposed to revenue expenditure in respect of plant and equipment
providing hot water to the lavatories, the heating of the common parts and the
provision of lifts; (5) the costs of employing managing agents to carry out and
provide the specified services; and (6) the notional provision of accommodation
in the building for a caretaker
external repairs and internal decorations and/or repairs of the common parts
was not recoverable as not being ‘beneficial services’ — In any event, in
relation to the second defendants’ lease, its liability to contribute towards
repair and decoration of the building was fixed by the parties by a clause
relating to the lessee’s liability for external and internal repairs and
decorations — The specified services are not limited to revenue items and the
lessors were entitled to recover the ‘total cost’ of providing the services —
The lessors are entitled to recover the cost of employing managing agents to
organise and supervise the provision of services — The lessors were entitled to
claim a due proportion of the notional provision of accommodation in the
building for a caretaker
The following
cases are referred to in this report.
Agavil
Investment Co v Corner unreported, October 3
1975
Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240; [1950] 2 All ER
618, CA
Metropolitan
Properties Co (FGC) Ltd v Lannon [1968] 1
All ER 354; [1968] 1 WLR 815; (1967) 19 P&CR 169; [1968] RVR 236; 204 EG
1199
O’May v City of London Real Property Co Ltd [1983] 2 AC 726;
[1982] 2 WLR 407; [1982] 1 All ER 660; (1982) 43 P&CR 351; 261 EG 1185,
[1982] 1 EGLR 76, HL
Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237, HL
Yorkbrook
Investments Ltd v Batten [1985] 2 EGLR 100;
(1985) 276 EG 545, CA
By an
originating summons the plaintiff, Lloyds Bank plc, sought declarations and
other relief relating to the construction of two underleases dated April 22
1985 and April 30 1986, the terms of which were held respectively by the first
defendants, Bowker Orford, and the second defendants, JAB International
Furnishing Ltd.
John Haines
(instructed by Allen & Overy) appeared for the plaintiff; James Thom
(instructed by Malkins) represented the first defendants; and Jonathan Brock
(instructed by Hartwig) represented the second defendants.
Giving
judgment, MR DAVID NEUBERGER QC said: These proceedings are concerned
with the service charges which the plaintiff as lessor can seek from the first
defendants and the second defendants, who are respectively the lessees of the
second and third floors and of the fourth and fifth floors of a building being
15-19 defendants; and Jonathan Brock (instructed by Hartwig) represented the
second defendants.
The first
defendants’ lease is an underlease dated April 22 1985 and is for a term of 10
years from September 29 1984. In order to deal with the issues it is necessary
to refer to certain provisions of the lease. The demised premises essentially
consist of the second and third floors of the building including the common
parts and are defined as extending to the internal surface of the boundary
walls. In the reddendum and by clause 3(34) the first defendants covenant to
pay the service charge, which is defined by reference to Part IV of the
schedule to the lease (‘Part IV’). Part IV has two sections. Para 1 of section
1 is in the following terms:
The lessee
shall pay to the lessors by way of additional rent the due proportion . . . of
the total cost to the lessors in any service charge period beginning or ending
during the term of providing the services specified in section 2 of this Part
of the Schedule and defraying the costs and expenses relating and incidental to
such services.
Para 2 defines
the due proportions. Paras 3 and 4 are concerned with the manner of payment of
the service charge. Para 5 entitles the lessors to a more immediate payment in
respect of any service charge resulting from ‘the lessors being required . . .
to incur heavy or exceptional expenditure which forms part of the service
charge’. Para 6 provides that the lessee should not be entitled to object to
the service charge on certain grounds, including:
The
employment of managing agents to carry out and provide on the lessors’ behalf
services under this Part of this Schedule.
Section 2 of
Part IV reads as follows:
1. Two lifts
for the use of the occupiers of the demised premises shall be provided and
maintained in good repair and proper working order . . .
2. A resident
caretaker should be employed housed and uniformed generally to be responsible
for the upkeep and security of the building . . .
3. The
entrance halls corridors staircases lifts and all parts of the building used in
common with the other tenants thereof and lavatories . . . shall be cleaned and
after dark . . . lighted . . .
4. Constant
hot water shall be provided in the lavatories . . .
5. Any other
beneficial services which may properly be provided by the lessors.
I should also
refer to two of the lessor’s covenants. Clause 5(3) is a covenant to use its
best endeavours to keep the external parts of the building in good substantial
repair and condition. Clause 5(4) is a covenant to use its best endeavours to
afford the services set out in section 2 of Part IV of the schedule (‘section
2’).
The second
defendants’ lease is dated April 30 1986 and is also an underlease and is for a
term of 10 years from June 24 1986. The only relevant difference between the
first defendants’ underlease and the second defendants’ underlease is that the
latter contains a lessee’s covenant in the following terms:
To pay the
lessors on demand a fair and proper proportion to be determined by the lessors
or their surveyors of the expense of repairing renewing decorating and maintaining
or rebuilding any party walls fences gutters drains roadways pavements entrance
ways stairs and passages access ways and service areas which are or may be used
or enjoyed by an occupier of the demised premises and the building in common
with any other person or persons.
The
originating summons originally contained a money claim and used a rather widely
expressed prayer for declaratory relief. Very helpfully, counsel have agreed
the issues of principle upon which they seek the court’s assistance.
The first
question is, as between the plaintiff and the first defendants: is the
plaintiff entitled to claim a due proportion of the costs of external repairs
to the building (‘external repairs’)? On
behalf of the plaintiff it is rightly accepted that external repairs would have
to be caught by para 5 of section 2 (‘para 5’) in order to fall with the
service charge. It will be recalled that para 5 refers to:
Any other
beneficial services which may properly be provided by the lessors.
It is quite
rightly said that these are very wide words and it is also said that there is
no reason for cutting down their natural meaning. It is true that the words of
para 5 are potentially very wide in their scope but they must, clearly, be ‘in
the context of the lease as a whole’.
In this
connection, it is, in my judgment, of considerable importance that there is an
express covenant by the lessor, in clause 5(3), to carry out external repairs.
For that reason alone, I consider that external repairs cannot fall within para
5. First, it would mean that the lessor had covenanted twice to carry out
external repairs: namely through clause 5(3) and also through clause 5(4) when
read together with para 5. It is true that the lessee covenants to pay the
service charge twice, once through the reddendum and once through clause 3(34),
but that cannot be a reason for concluding that the lessor has covenanted twice
to carry out the same work. Second, there would be a conflict between the
absolute obligation (subject to using best endeavours) to effect external
repairs under clause 5(3) and the wide discretion to do so under para 5. Third,
given that the parties had the concept of external repairs so clearly in mind
in clause 5(3), it would be remarkable if they did not expressly deal with them
in section 2 if they had intended external repairs to be included in the ambit
of section 2.
Accordingly, I
answer the first question in the negative. It is right to say that further
arguments were raised in support of this conclusion by the defendants but, in
view of the above reasoning, I do not consider it necessary to deal with them.
I turn, then,
to the second question, which asks, as between the plaintiff and the first
defendants, whether the plaintiff is entitled to claim a due proportion of the
internal decoration and/or repairs of the common parts of the building. In my
judgment, that is a more difficult question to decide.
The plaintiff
again relies on the wide words of para 5. Against that it is said that the
repair and decoration of the common parts does not fall within para 5 for two
main reasons: first, paras 1 to 4 of section 2 form a genus, so that
para 5 should be construed ejusdem generis, with the result that it does
not extend to repair and decoration of the common part; second, that the repair
and decoration do not constitute a service within the concept of ‘beneficial
services’ in para 5.
In my
judgment, these two arguments involve putting the same point in different ways.
As Mr Brock submitted, a word such as ‘services’ has a variety of meanings,
some of which shade into others. The precise meaning of the word in para 5 must
depend on its context. There is no doubt that repair and decoration can be
within the concept of ‘services’: thus a service-charge provision in a 99-year
lease of a residential flat will almost always include an obligation to
contribute towards external and structural repairs which will be expressly
within the definition of ‘services’. On the other hand, in the context of a
short-term letting of an office suite, the adjective ‘serviced’ together with a
provision that the tenant is expected to pay a contribution towards the
‘services’ would not carry with it an obligation to pay for repairs but would
be treated as limited to items such as heating, lighting, telephone etc.
When one
considers paras 1 to 4 of section 2, it seems to me that they are items of a
sort which are much more akin to the latter type of services. They refer to
lifts, caretaker, security, cleaning and lighting of common parts, cleaning and
lighting of lavatories and constant hot water. In those circumstances, it seems
to me that it would not be right to construe para 5 as extending to items such
as repair or (while the point is perhaps more arguable) decoration. As Mr Thom
pointed out, para 5 is not phrased in such a way as to indicate that the
draftsman intended that paragraph to stand free of the preceding paragraphs. As
was pointed out by Devlin J in Chandris v Isbrandtsen-Moller Co Inc
[1951] 1 KB 240, draftsmen of legal documents are normally well aware of the
words and phrases which can be incorporated in a provision such as para 5 to
indicate that its construction should not be affected by more specific
provisions which immediately precede it.
In addition,
it does seem to me wrong to impute to the parties an intention to include
repairs and decoration of the common parts as an item within section 2 by
virtue of the terms of para 5 in circumstances where the cleaning and lighting
of common parts are expressly covered within that section and the parties had
expressly in mind the repair of the common parts as is evidenced by clause 4(5)
of the lease, which excludes landlords’ liability in respect of failure ‘to
cleanse repair heat or light any part of the building the use of which is
granted
is of assistance to the plaintiff’s case, but, although cleaning and lighting
of the common parts are within the lessor’s express liability, heating is not.
Furthermore, the repair of the common parts would be, in certain circumstances,
the lessor’s liability in tort in any event, and indeed I observe that clause
4(5) goes on to refer to the lessor’s potential liability in respect of the
common parts under the Occupiers’ Liability Act 1957 and under the Defective
Premises Act 1972. In these circumstances, I answer the second question in the
negative. I should add that these reasons reinforce the view I have reached in
relation to the first question.
The third
question asks whether, as between the plaintiff and the second defendants, the
plaintiff is entitled to claim a due proportion of the costs of repairs of the
building beyond the terms of clause 3(4) of the second defendants’ lease. It is
strictly unnecessary to answer this question because, for reasons already given
in relation to the first defendants’ lease, the same answers must, in my view,
apply to the second defendants. However, in case I am wrong on either of my
previous two conclusions, it is right briefly to deal with the second
defendants’ contention that, if the answer to either of the previous two
questions were in the affirmative, the second defendants’ liability in respect
of external repairs and internal repairs and decoration does not extend beyond
clause 3(4).
The second
defendants argue that the extent of the lessees’ liability to contribute
towards repair and decoration of the building has been fixed by the parties to
the second defendants’ lease by clause 3(4) and that, for this reason alone,
the answer to the first two questions ought, in the second defendants’ case, to
be in the negative, whatever the answer is in relation to the first defendants’
lease. I consider that contention is well founded. It would be unrealistic to
read para 5 in the second defendants’ lease in such a way as to enable the
lessor to add to the service charge over and above what the parties had
specifically agreed as to the extent of the lessees’ liability under clause
3(4).
Before turning
to the next questions, it is right to refer to a second argument raised by the
second defendants. This argument relied on the fact that the second defendants’
lease was granted pursuant to negotiations in relation to proceedings brought
by the second defendants under Part II of the Landlord and Tenant Act 1954 for
a new tenancy. It is said on behalf of the second defendants that, in so far as
the service-charge provisions of the present lease might otherwise lead to a
different conclusion, they should be construed in such a way as not to impose
any greater obligation with regard to service charges than the second
defendants had under their previous lease: this relies on the principle that
there is a strong presumption that any new lease granted by the court pursuant
to the 1954 Act will contain no more onerous service-charge provisions on the
tenants than the previous lease: see O’May v City of London Real
Property Co Ltd [1983] 2 AC 726.
I agree with
Mr Haines that this is a bad argument. First, the second defendants’ lease was
not granted by the court: it was granted pursuant to negotiations, and it is
quite conceivable that the second defendants could have agreed more onerous
service-charge obligations than they had under the previous lease in return for
some indulgence from the landlord which they would not have obtained from the
court. Second, the fact that the working of the service-charge provisions in
the instant lease may be different from the service-charge provisions in the
previous lease is, if anything, an indication that the parties intended the
service-charge provisions in the instant lease to be different from those in
the previous lease. Third, to look at a previous lease as the means of
construing the present lease appears to me to be running dangerously close to
contravening the principle that, when construing a document, one should not
look at the previous negotiations between the parties or any previous draft
passing between the parties: see the well-known observations of Lord
Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, especially at
pp 1384H to 1385A and at p 1385H.
I now turn to
consider the remaining questions, which apply equally to the first and second
defendants. It is convenient to consider the first three questions together.
These ask whether the plaintiff is entitled to claim a due proportion of
capital as opposed to revenue expenditure in respect of:
(a) plant and equipment
providing hot water to the lavatories in the building;
(b) the heating of the common
parts of the building;
(c) the provision of lifts
in the building.
The defendants
both accept that they are liable for revenue items in respect of hot water
(under para 4 of section 2), heating of common parts (under para 5 of section
2) and lifts (under para 1 of section 2). They deny liability for capital
expenditure.
I propose to
answer these three questions in the affirmative. I can see no reason for
reading the paragraphs of section 2 in a restrictive sense as being limited to
revenue items, particularly when one reads section 2 together with para 1 of
section 1. The difference between capital and revenue items is not always
entirely easy to define and, while the concept may be well known in areas such
as revenue law, it does not seem to me that they naturally apply to contractual
relationships such as leases.
Para 1 of
section 1 refers to the ‘total cost’ of providing the services and it seems to
me that, as a matter of normal language, that would extend, for example, to
replacing a boiler which supplies hot water to the lavatories if the present
boiler has broken down and is incapable of repair. The meaning of ‘cost’ can
obviously vary in context to context, just as the meaning of ‘services’ will
depend upon its context.
My view is
reinforced by three further factors. First, there is, in my judgment, a clear
indication in section 2 itself that the parties envisaged the possibility of
there being included therein an item which, on any view, would be a capital
item. It will be recalled that para 1 of section 2 refers to ‘Two lifts . . .
[being] provided and maintained . . .’. If a substantial part of the lift
system were not working, and could not work without replacement, it seems to me
clear that the lessor would be failing in its express obligation if it did not
‘provide’ a new system. Second, as already mentioned, para 5 of section 1
specifically envisages the lessor’s incurring ‘heavy or exceptional
expenditure’ as part of the service charge and, on the basis that my view on
the first two questions is correct, it is hard to see what heavy or exceptional
expenditure could be involved in relation to the items under section 2 unless
those sections extended to capital items. Third, while I accept Mr Thom’s point
that the terms of the lease were different (in particular it was a ‘clear’
lease for 99 years for a flat), it seems to me that the observations of Wood J
(with whom O’Connor LJ agreed) in Yorkbrook Investments Ltd v Batten
[1985] 2 EGLR 100, are relevant. At p 103K to M he said:
The
plaintiffs’ covenant was, and is, to provide ‘a good sufficient and constant
supply of hot water and an adequate supply of heating in the hotwater
radiators’. How they achieved this was a matter for them . . . If one analyses
the causes of breakdown, they were all . . . the result of antiquated and
unserviceable equipment which should have been replaced to enable the
plaintiffs to comply with their obligations. The learned judge had been
persuaded . . . to take the view that the defendant could not expect the
plaintiffs to renew or replace much of this system. . . . we cannot accept that
this argument was well founded. Upon the evidence before him . . . the
breakdown in this system could and should have been avoided by the plaintiffs.
The solution was within their control; the reason for not expending capital had
already been made clear.
In view of the
principle which I have already mentioned and applied, namely that one must
construe the words and provisions of a lease principally by reference to the
lease itself, one should approach any authority on the basis that the same
words or clauses can have totally different meanings in different documents. I
am thus far from saying that the decision and reasoning of the Court of Appeal
in Yorkbrook is conclusive on this point, but I do draw comfort from it
in reaching my conclusion on this aspect.
The next
question asks whether the plaintiff is entitled to claim a due proportion of
the costs of replacement of the electrical system in the building. The
background to this question is that the electrical installations in the
building, and in particular the distribution frame, the distribution boards and
certain defective cables, needed removing and replacing. In addition, some of
the lighting in the common parts was repaired and extra lighting provided.
The repairs to
the old lighting in the common parts clearly fall within para 3 of section 2.
Although the defendants argue to the contrary, it seems to me clear that the
provision of new lighting also falls within that section. Para 3 is not worded
in such a way as to exclude the possibility of the landlord’s having to
provide, and being able to charge for, further lighting in the common parts,
where appropriate.
In so far as
the electrical work was required so as to enable the lessor to comply with its
obligation to provide any of the services in paras 1 to 5 of section 2, the
cost is recoverable for reasons already given in relation to capital
expenditure. In so far as the electrical work
5. For the reasons already given in relation to the second question, I do not
consider that it does.
The next
question asks whether the plaintiff is entitled to claim a due proportion of
the employment of managing agents to carry out and provide the services under
section 2. The plaintiff put its case in two ways: first, under para 6(5) of
section 1 and, second, under para 1 of section 1. So far as para 6(5) is
concerned, I do not consider that the plaintiff’s contention is well founded.
Para 6 is not concerned with adding to the types of service which the landlord
can charge: it is concerned merely with shutting off objections which might
otherwise be open to tenants to items which fall within section 2. In the
absence of para 6(5), the lessees might be able to argue that they should not
be liable for an item otherwise falling within para 5 on the basis that it was
provided on the managing agents’ decision rather than that of the landlord.
Further, reading para 6(5) as a whole, it does not seem to me that, as a matter
of normal language, it is apt to entitle the landlord to charge for managing
agents. Accordingly, both in view of the context of para 6(5) and in view of
its natural meaning, I reject this basis on which the plaintiff puts its case.
However, I
consider the plaintiff is on much stronger ground in relying on para 1 of
section 1. As I have already said, the expression ‘a total cost to the lessors
. . . of providing the services’ is a wide one, and I think that, as a matter
of normal language, it would include the cost of employing managing agents to
organise and supervise the provision of such services. While I accept that it
is rather remote an authority, I derive a little support for this view from the
approach of the Court of Appeal to the concept of ‘services’ in the Rent Acts
in FGC Metropolitan Properties Co Ltd v Lannon [1968] 1 WLR 815.
Of course, if,
as may well be the case, the managing agents are employed partly for the
organising and supervision of the section 2 services and partly for other
services (eg organising and supervising repairs and/or collection of rent)
there would have to be an apportionment of their charges to the lessor that the
defendants’ liability in respect of such charges would only extend to, and in
so far as they relate to, the provision of the section 2 services. On that
qualified basis, I answer this question in the affirmative.
The final
question asks whether the plaintiff is entitled to claim a due proportion of
the notional provision of accommodation in the building for a caretaker
employed under para 2 of section 2. In my opinion, the answer to this question
is in the affirmative.
First, I note
that in this para 2 there is not merely a reference to the provision of a
resident caretaker but also that he is to be ‘housed’. This obviously supports
the contention that the cost of such housing should be part of the service
charge. That argument is supported by the fact that the cost of the other two
requirements in relation to the resident caretaker, namely that he be
’employed’ and ‘uniformed’, can obviously be included in the service charge.
It is true
that the cost of housing him is in one sense a notional cost, because the
plaintiff owns the accommodation, which I understand to be on the top floor of
the building, but, in reality, it seems to me that this is a cost in the sense
of money forgone, as opposed to money spent. In this connection I derive
considerable assistance from the unreported decision of the Court of Appeal in Agavil
Investment Co v Corner (October 3 1975). In that case, a tenant of a
flat in a block of flats covenanted to reimburse the landlord the ‘costs and
expenses’ of providing certain services and one of the services which the
landlord covenanted to provide was a resident porter who was to be housed in
the block or elsewhere. The landlord made a flat in the block available and was
held to be entitled to recover the rent he had forgone as a result of providing
this accommodation for the caretaker. The defendants seem to distinguish this
decision on a number of bases. First, it is said that the decision was
concerned with a block of flats, whereas the present case is concerned with a
building which is put to essentially commercial uses: I cannot see that as
involving any distinction of principle. Second, and more strongly, it is
pointed out that the tenant’s argument in Agavil and its difficulties
once one appreciated that the landlord was not obliged to house the caretaker
in the building and, therefore, could rent accommodation elsewhere for him, in
which case the tenant would have had to accept that the cost of such
accommodation could be included in the service charge. As I read the leading
judgment in that case, namely that of Cairns LJ, that point represented a
supporting buttress for the conclusion he had already reached on the meaning of
the words in the lease, rather than one of the groups for his conclusion.
Third, it is said that the service-charge provisions in Agavil
specifically require the tenant to pay towards certain costs to the landlord of
providing accommodation for the caretaker, such as the payment of rates etc,
whereas here there is no such provision. In my opinion, in so far as that is
relevant, it renders the landlord’s argument in the instant case stronger than
that in Agavil: if the lease enumerates a number of aspects of the cost
of the provision of the caretaker’s flat for which the tenant is liable, there
is obviously a fairly formidable argument open to the tenant that the parties
cannot have intended any further aspects of the cost of the caretaker’s flat to
be included in the service charge.
Declaration
accordingly. First defendants to pay one-third of the plaintiff’s costs. Second
defendants to pay one-third of the plaintiff’s costs up to date of payment into
court and no order as to costs thereafter.
