The interpretation of residential leases and, in particular, the provisions concerning the recovery of costs, continues to be fertile ground for decisions from the higher appellate courts.
This article addresses one of those: Kensquare Ltd v Boakye [2021] EWCA Civ 1725; [2021] PLSCS 199 and, more specifically, what the Court of Appeal did not decide and where there remain questions to be answered.
Interim service charges
The first part of the judgment dealt with the interim service charge machinery found in Mary Boakye’s lease. One notable point from Newey LJ (giving the judgment of the court) was that “parties should… more readily be taken to have intended time to be of the essence in the context of interim service charges”.
The question then is whether that proposition applies equally in the context of commercial leases. The matters to which Newey LJ attributed significant weight in reaching his decision would suggest it does: the importance for tenants to be able to ascertain their service charge liability and to budget are present in both the residential and commercial property spheres. Such a conclusion also finds support in Leonora Investment Co Ltd v Mott MacDonald Ltd [2008] EWHC 136 (QB); [2008] PLSCS 217 (upheld on appeal: [2008] EWCA Civ 857).
Other questions remain. Kensquare recognises that time need not be of the essence for an interim service charge machinery, not least where the wording expressly says so. But how would that take effect in practice if payment is due on the usual quarter days and the lease does not expressly cater for late demands? Such an issue was expressly highlighted by Newey LJ at paragraph 32(iv).
Perhaps most likely, although there remains scope for argument, is that the landlord could not recover those increased sums that would have fallen due on past quarter days (and they are left to be recovered at the end-of-year balancing exercise) but those due in the future would be increased in accordance with the notice.
Whatever the answer to this or to similar questions, Kensquare reinforces the need for a particular focus on the clause in question and the manner in which it was objectively intended to operate.
Legal costs as administration charges
What about the other issues on appeal? During oral argument, the Court of Appeal seemed keen to avoid a conclusion that could have rendered a company such as Kensquare insolvent if it could not recover costs as administration charges from a defaulting tenant. On one view, that should not have played on their mind at all – see Fairbairn v Etal Court Maintenance Ltd [2015] UKUT 639 (LC); [2015] EGLR 16. But arguments that the identity of the landlord should influence the construction of a lease (it forming part of the matrix of fact) may be encountered more frequently, particularly with the proliferation of tenant-run management companies and freeholders.
Kensquare has, however, confirmed that the costs of proceedings in the First-tier Tribunal are “for the purpose of” a section 146 notice. Yet the Court of Appeal did not deal with the meaning of costs “incidental to” the preparation of a section 146 notice. When granting permission to appeal, Arnold LJ considered that the apparent conflict between Contractreal Ltd v Davies [2001] EWCA Civ 928 and Freeholders of 69 Marina, St Leonard’s-on-Sea v Oram [2011] EWCA Civ 1258; [2011] PLSCS 263 in respect of this phrase was deserving of resolution. However, the judgment did not address this at all, and it will now have to be considered on another occasion. When added to the frequent criticisms of other elements of the decision in 69 Marina, that decision appears ripe to be reviewed and, at least in some respects, overturned.
Legal costs as service charges
Similarly, the third issue on appeal raised questions as to the correctness of Iperion Investments Corporation v Broadwalk House Residents Ltd [1995] 2 EGLR 47. That too was recognised by Arnold LJ at the grant of permission to appeal stage, yet it also went unresolved by the Court of Appeal. While the decision in Kensquare is the latest in a line of authorities confirming the approach set out in Sella House Ltd v Mears [1989] 1 EGLR 65 – ie the need for clear and unambiguous terms for legal costs to be recovered through the service charge – it would be of assistance for the Court of Appeal to consider the various authorities and how they fit together. Is there, as was argued on behalf of Boakye, a focus on the specific type of litigation in question – compare that with which Sella House was concerned (recovery of service charges; legal fees not recoverable) to that in Iperion (forfeiture and unauthorised alterations; legal fees recoverable) – rather than litigation in a general sense?
It also seems that Kensquare is at odds with the recent decision in Eshraghi v 7/9 Avenue Road (London House) Ltd [2020] UKUT 208 (LC) – there the Upper Tribunal said “good estate management requires that service charges be collected, including by proceedings if necessary”. Accordingly, if the costs of such proceedings were not recovered directly from the tenant, they could be put through the service charge as part of “good estate management”. That does not sit easily with Newey LJ’s statement that “management” was focused on management services rather than litigation, but it was left unclear whether Eshraghi was to be overturned or distinguished.
Afterword
Decisions such as Kensquare have and will continue to have a significant impact given the sheer number of leasehold properties in existence. While Kensquare has provided some answers to some questions, there remain a number of matters that await resolution in future cases.
Edward Blakeney is a barrister at Tanfield Chambers
