Louise Clark analyses a matter of construction and satisfaction of pre-conditions.
Key points
- When construing service charge clauses, words should be given their natural and ordinary meaning
- Costs relating to “any application or request for approval or consent” do not extend to the costs of legal proceedings
- Where a clause requires a demand for payment to be made, liability does not arise until the demand is made
The High Court has considered whether a service charge clause extends to payment of litigation costs in Kaushal Corporation v O’Connor [2023] EWHC 618 (KB); [2023] PLSCS 51, an appeal from the Central London County Court.
The background
The defendant/respondent was the sole shareholder of Red Rooster Restaurants, a company which was the lessee of basement and ground-floor commercial premises at 84 Westbourne Grove, London W2. The respondent provided a personal guarantee on assignment of the lease to RRR in 2005. The claimant/appellant acquired the freehold of the property in 2012.
The parties fell out and RRR sought unsuccessfully to assign the lease: the appellant rejected three prospective assignees. RRR then went into liquidation. The liquidator brought proceedings against the appellant for unreasonably withholding consent to the proposed assignments. The claim failed and RRR was ordered to pay the appellant’s costs, to be assessed if not agreed.
The appellant subsequently forfeited the lease but did not pursue an assessment of the costs. It was still possible for the appellant to pursue the assessment, although, by the date of the appeal hearing, the delay in doing so amounted to six years and five months. Should such an assessment be pursued, the court has powers to disallow all or part of the costs being assessed for misconduct.
The appellant sought to recover from the respondent, as guarantor, around £200,000 in legal fees, relying on the following service charges clause: “…the tenant shall pay on demand all fees charges costs disbursements and expenses including… legal charges… incurred or expended by the landlord… of and incidental to and/or in contemplation of… any application or request for any approval or consent required by this lease…”
The county court judge ruled that litigation costs did not as a matter of construction fall within the clause, and that a failure to demand payment from RRR was fatal to the claim against the guarantor.
There were two questions for determination on the appeal:
1. Were the legal fees incurred by the appellant in the proceedings brought by RRR covered by the service charges clause?
2. If so, did the appellant comply with the clause by making a demand of RRR for them?
The law
There is no contra proferentem rule against a landlord when interpreting service charge clauses – the standard rules of construction apply.
In construing the service charge clause, the court was required to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge – the matrix of fact – which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
Previous negotiations and expressions of subjective intent are inadmissible: they are only admissible in an action for rectification. Words should be given their natural and ordinary meaning, and commercial common sense cannot be applied retrospectively: see Arnold v Britton and others [2015] EGLR 53; [2015] UKSC 36.
The court reviewed the following authorities in considering the appeal.
- In Sella House Ltd v Mears [1989] 1 EGLR 65, the landlord failed to recover solicitors’ and counsel’s costs of recovering rent arrears. The clause covered the costs of employing managing agents and accountants, but there was no reference to “proceedings”, “counsel” or “solicitors”.
- In Morgan and others v Stainer [1993] 2 EGLR 73, the landlord failed to recover from a tenant, through a service charge clause, “legal and other costs” incurred but not awarded by the court in proceedings with the same tenant. The court ruled that if the landlord’s position was right in law, it would have been awarded its costs.
- In Freeholders of 69 Marina, St Leonards-on-Sea v Oram [2011] EWCA Civ 1258; [2011] PLSCS 263, the landlord succeeded in recovering costs incurred before tribunal proceedings under a clause which covered expenses incurred by the landlord in or in contemplation of proceedings under section 146 of the Law of Property Act 1925 and all solicitors’ costs incurred in service of notices and schedules relating to wants of repair.
- In Khan v Tower Hamlets [2022] EWCA Civ 831, the landlord recovered legal costs under a clause which specified solicitors’ and counsel’s fees incurred in or in contemplation of any proceedings under sections 146 and 147 of the 1925 Act, including those relating to the preparation and service of notices and schedules.
The decision
The High Court dismissed the appeal and endorsed the judge’s reasoning.
The words used clearly covered legal fees of “any application or request for any approval for consent”. There was no reference to proceedings arising in connection with any application or request. So, on a plain reading of the wording, it did not cover the costs of proceedings. There was no commercial, common-sense need for the court to interpret the clause as covering the legal costs of proceedings because the court would award them at the end of the claim to the correct party.
The words “on demand” were a pre-condition of tenant liability under the service charge clause. A demand must have been made by the appellant to RRR for the costs of the legal proceedings. Since the costs had not been assessed, could a demand be made, and for what sum? Not only was there no pleaded allegation that a demand for payment had been made, but there was no evidence that the appellant had ever demanded payment from the tenant. The guarantor was not liable.
Louise Clark is a property law consultant and mediator