Landlord and tenant – Service charges – Construction of lease – Whether underlessees of flats in development obliged to indemnify in full respondent landlord’s expenses under headleases – Appellant residents’ association contending that provisions of underlease limiting recovery – Leasehold valuation tribunal finding for respondent – Appeal dismissed
The respondent held a 999-year headlease, granted in 2003, of land on which it had constructed a large mixed-use development, comprising two blocks containing private residential flats, affordable housing, retail units and an underground car park. The members of the appellant residents’ association held long underleases of flats in the development that contained complex service charge provisions requiring the tenants towards contribute to the “maintenance expenses” incurred by the respondent in accordance with its obligations as set out in a schedule. The charge comprised several elements, one of which was “building estate costs”, being a specified percentage of “the fair and reasonable proportion of either sums paid or incurred pursuant to the covenants performed pursuant to the Superior Lease”.
The appellant applied to the leasehold valuation tribunal (LVT), under section 27A of the Landlord and Tenant Act 1985, for a determination of the tenants’ liability to pay service charges for the years 2004-07. It sought to have almost two-thirds of the service charges disallowed on the ground that estate charges payable by the respondent under its headlease were not automatically recoverable in full from the tenants under the terms of their underleases. It contended that the respondent was instead required, under various parts of the service charge provisions, to demonstrate that: (i) the amount of the estate charge was properly payable under the headlease; (ii) it fell within the recoverable expenditure permitted under the heading of “building estate costs” in the underleases; (iii) the costs included work in respect of the maintained property as defined in the underlease; and (iv) the sums claimed from the tenants complied with the requirements of the 1985 Act. The LVT accepted the respondent’s argument that such a construction of the underleases would be contrary to business common sense and that the underlessees had been intended to indemnify it in full for expenses incurred in performing the covenants under the headlease. The LVT construed the underleases accordingly. The appellant appealed.
Held: The appeal was dismissed.
The appellant had fallen into error in trying to separate out the meaning of the words standing alone from their context in the transaction. Although the LVT had to construe the parties’ bargain as it was recorded in the underleases and not to rewrite it, it had been required to decide the point on the wording of the underleases in the context of the transaction as a single process, in order to get as close as possible to the meaning that the parties had intended: KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363; [2008] 1 P&CR 11 applied. The clumsy wording of the underleases did not support the conclusion for which the appellant contended.
The tenants’ underleases complicated documents that lacked clarity. When construing them, it was necessary to keep in mind the general structure of the bargain: Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 3 EGLR 119 applied. The overall structure was that the developer had taken a headlease, developed and then sold off the individual flats for substantial premiums on long underleases, requiring the underlessees to pay their appropriate part of the service charge and a modest rent. As a matter of business common sense, any arrangement under which the developer, having sold off the long underleases, had to pay for a substantial part of the service costs over the entirety of the underleases would be absurd. The objective was to enable the respondent to recover from the underlessees the sums that it had to expend in reimbursing the head lessor and in performing service functions for the underlessees.
Moreover, the parties’ solicitors would have been aware of alienation provisions in the headlease that permitted underletting only on terms that the underlessee covenanted to pay a fair proportion of the service charge. There was no evidence that any of them had taken the view that the service charge provisions in the underleases would leave a shortfall and their clients at risk of forfeiture. That provided support as to how the objective (but concerned) observer would regard the meaning of the provisions in question.
Although it would not be easy to clarify the intended meaning of the service charge provisions by a simple amendment of the underleases, the fact that it might be difficult to reformulate the terms so as to make the parties’ intentions clearer, or that the reformulation might differ substantially from the wording used in the underleases themselves, did not prevent the court from interpreting them so as to accord with the parties’ intended meaning: Chartbrook applied.
David Holland (instructed by Finers Stephens Innocent) appeared for the appellant; Patrick Rolfe (instructed by Howlett Clarke Solicitors LLP, of Brighton) appeared for the respondent.
Sally Dobson, barrister
