Service Charges & Estate Management Update – December 2012
1st December 2012
Arnold v Britten  EWHC 3451 (Ch)
There is no special principle that a service charge clause in a lease (1) should not be construed (in the absence of clear words) so as to entitle the landlord to a profit over and above reimbursement of his costs incurred in providing the relevant services; or (2) should be construed restrictively.
This dispute concerns the interpretation of service charge provisions in long leases of holiday chalets. It was not disputed that the chalets were dwellings. The relevant clause (clause 3(2)) in one of the leases was a covenant by the lessee in the following terms:
“To pay to the Lessors without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent Three year period or part thereof.”
There were several minor variations of this clause in the leases of other chalets but all were very similar.
The lessor claimed a declaration that each version of clause 3(2) obliges the lessee to pay a fixed sum of £90 in the first year of the term and thereafter a fixed sum which rises at the rate of 10% per annum and a further declaration that the sum payable pursuant to each version of clause 3(2) was not a “service charge” within the meaning of s.18 of the LTA 1985 (because it provided for a fixed charge and not a charge which varied with the cost of relevant services). The lessees’ response to the claim stated that the lessees’ position was that each version of clause 3(2) provided for a variable service charge with a cap of £90 in the first year of the term and thereafter a cap which rose at the rate of 10% per annum.
At first instance the judge (HHJ Jarman QC sitting in the Cardiff County Court) identified the lessees’ submission as being that the words “limited to” should be implied into the clause. He then concluded that he preferred the lessees’ submissions to those of the lessor. He felt that the purpose of the clause was to allow the lessor to recover her costs and not to make a profit.
The order made by the court consisted of declarations that:
- Upon a true construction of clause 3(2), the lessees are liable to pay a proportionate part of the expenses and outgoings incurred by the lessor in the repair maintenance renewal and provision of services set out in the leases;
- The above charge was limited to a yearly sum of £90 and VAT (if any) for the first year of the term and increasing by 10% for every subsequent year of the term; and
- The above charge was a “service charge” within the meaning of section 18(1) of the Landlord and Tenant Act 1985.
Counsel for the lessees, relying on Woodfall para 7.175 and Jollybird v Fairzone  2 EGLR 55, submitted that there was a principle that a service charge provision should not be construed (in the absence of clear words) so as to entitle the landlord to a profit over and above reimbursement of his costs incurred in providing the relevant services. Further, he submitted that there was a principle that service charge provisions should be construed restrictively.
Morgan J said at  “The statement in Woodfall contains an element of truth where the clause which falls to be construed allows a landlord to recover a sum calculated by reference to the cost of services. In such a case, the word “cost” would not normally be construed to include anything by way of profit to the landlord in addition to reimbursement of the actual costs. Furthermore, a typical service charge clause does not provide for the landlord to make a profit in addition to the cost of services. Beyond that, where there is a dispute about a non-typical service charge provision, I doubt if the proposition in the textbook is of much help to a court asked to construe that provision. I do not see why a service charge clause in a lease should be subject to a special principle. If there were a special principle about charging for services, it should apply generally and not be confined to leases. I consider that what is required is that the court must examine the wording of the charging provision in its context and against all the admissible background and in the light of the apparent commercial purpose of the clause and then decide what the provision means and how it operates. In other words, the court applies the general principles … as to the construction of commercial instruments.”
Morgan J took the same view as regards the lessees’ submission that service charge clauses should be interpreted restrictively. In so doing, he explained Rix LJ’s “general remarks” in McHale v Cadogan at  that “service charge provisions have been construed restrictively” as meaning “that if a landlord wants to be entitled to charge for some particular work or service, it is reasonably to be expected that the landlord will specify that work or service in any list of recoverable matters and that general words will not be read in an extensive way to cover matters which could have been adequately specified.”
Allowing the appeal, he found that, as a matter of language, the words used strongly point to the meaning that the lessee is to pay £90 etc by way of charge for the lessor’s services. It follows that the clauses do not provide for the payment of a variable service charge.
The vast majority of service charge clauses provide that the lessee is to contribute towards the lessor’s costs. In such cases, there will be no question of the lessor being able to make a profit. This case is, however, likely to be of some assistance to landlords in rare cases where the service charge provisions are non-typical.
Campbell v Daejan Properties Ltd  EWCA Civ 5103
In a claim for rectification by construction, the trial judge (Roth J) accepted the landlord’s (Daejan) contention that “premises” meant “house” in a service charge clause in a lease and granted a declaration to that effect. Allowing the appeal, the Court of Appeal held that it was far from clear that the parties had made a mistake in the drafting of the lease. The clause was to be construed with its actual wording without substituting the word “house” for “premises”.
A traditional Georgian house in Wimpole Street, London W1 had been converted into doctors’ waiting rooms on the ground and first floors, a second floor flat and third and fourth floor maisonette. The property has been extended to the rear and the basement and ground floor levels. There are three separate flat roofs over these extensions. The maisonette is demised by a lease granted in 1958 and extended in 1999 in the same terms (subject to some modifications not relevant to the issues in the case) under the 1993 Act. As Lloyd LJ put it “the lease contains a somewhat bewildering variety of provisions defining the leaseholder’s obligation to contribute to expenditure incurred by the lessor.” The lessee covenanted, inter alia, to contribute 31.25% of the rates, 40% of the insurance expenditure and 42.1% to the cost of central heating. According to the floor area the premises is 29.2% of the whole and when separately rated, their rateable value is 26% of the whole. The critical clause is 2(xxv) under which 40% of the cost of performing the covenant in clause 3(iii) is due. By that clause the lessor covenanted “to keep the roof and outside walls of the premises in good repair etc.” (my emphasis).
In 2005 and 2006 Daejan carried out substantial works of repair and maintenance to the house. There was a dispute as to Mrs Campbell’s contribution which caused Daejan to issue the instant proceedings. Daejan argued that “house” should be substituted for “premises” in clause 3(iii). At first instance, Roth J accepted Daejan’s interpretation, the effect being that Mrs Campbell is liable to pay 40% of the repair costs of the entire house.
On appeal, giving the leading judgment, Jackson LJ was unable to accept that there was a clear mistake in clause 3(iii). There was no obvious pattern in the various service charge provisions which led to the conclusion that the parties must have intended the lessee to pay 40% of the repair cost of all roofs and outside walls (i.e. not just the roof and external walls to the maisonette). The clause was not commercially nonsensical. The appeal was allowed and the declaration set aside.
There is no presumption in construing a lease that the service charge provisions will enable the landlord to recover all of his expenditure: see Rapid Results College Ltd v Angel  1 EGLR 53 as 55, column 1. The decision in Campbell v Daejan just goes to show that a lease will not be rectified by construction simply because the service charge provisions are peculiar. As Lloyd LJ commented “the provisions of the lease do pose some puzzles for the reader. One may wonder whether everything in the lease is as it was intended to be, or search for an explanation of some of the odder features.” This is not, however, sufficient by itself to establish that the parties made a clear mistake.
An alternative to a claim for rectification is an application to vary the service charge provisions of a lease pursuant to Part IV of the Landlord and Tenant Act 1987.
Marshall Dixon & Others v Wellington Close Management Limited  UKUT 95 (LC)
The relevant date for establishing if the requisite numbers consent to and do not oppose an application to vary leases under s.37 of the LTA 1987 is the date when the application is made, not the date of hearing. Any consent received or opposition expressed after that time is not material to the question of compliance with section 37(5)(b).
The LVT allowed to an application to vary 132 leases, each one being of a flat in a development, consisting of three blocks. The application was prompted by the need to deal with the disrepair of the exterior cladding of the blocks.
The LVT’s directions included an invitation to any lessees who wished to oppose the application to notify the tribunal within 21 days of receipt of the directions. At the hearing, the LVT held that the requisite number consented to and did not oppose the application.
On appeal, the President held that the relevant date for establishing if the requisite number consent to and do not oppose the application is the date when the application is made, not the date of hearing. On the facts, at the date when the application was made the requisite number had been established.
St John’s Wood Leases Limited v O’Neil  UKUT 374 (LC)
In this appeal against a s20C determination under the Landlord and Tenant Act 1985, HHJ Gerald and NJ Rose FRICS decided that the LVT’s decision that the landlord should not be able to recover any of its costs through the service charge, and should pay the tenant’s hearing fee, should be set aside. The Lands Chamber substituted its own decision; the landlord was entitled to recover 90% of its costs of the LVT, and all of its costs of the appeal.
The grounds of appeal were: (i) the LVT erred in law in approaching the issue of costs as one which follow the event rather than what is just and equitable; (ii) the LVT was wrong to find that the tenant had obtained a number of sufficient concessions or had “overall succeeded on the majority of issues”; and (iii) the LVT, had failed to give any or any sufficient reasons. All three of these grounds succeeded.
The Lands Chambers’ decision reviews the authorities on s20C, and repeats that the test is what is just and equitable in the circumstances. At paragraph 18, however, the decision gives some suggestion occasions on which a s20C order may be hard to resist: where the landlord is unable to show that the charges had been incurred or paid; if they were disallowed or greatly reduced because the landlord’s evidence as to reasonableness was most unsatisfactory. However, “if the gap between the position of the landlord and tenant is relatively small but the tenant’s evidence is on balance preferred resulting in a small reduction, it may well be less likely that a s20C order would be made.”
The facts of this particular case give some further illustration. On some issues, relating to service charge years before the appointment of the current managing agent, no evidence to support service charges claimed could be provided by the landlord, or it was clear they were not within the service charge provisions. The Lands Chamber thus decided that the landlord should be prevented from recovering its costs in relation to those issues.
However, in relation to the majority of the issues, the balance fell towards the landlord. Some of the issues which the tenant applicant to the LVT raised were found to be outside the LVT’s jurisdiction. “Where a landlord has been put to the cost of attending and preparing for a hearing for three (of five) issues which are not proceeded with, there would have to be compelling reasons to justify a section 20C order in respect of those costs…” (para 37). It was also “wrong in principle” to deprive the landlord of costs of other issues that the tenant raised but did not pursue “unless there is some good reason making it just and equitable to do otherwise”. It was “incumbent upon the [tenant] to familiarise him or herself with jurisdictional and procedural rules” (para 39). Finally, in this case, there was a significant amount of negotiation between the parties before the LVT hearing during which both parties made concessions. That should not prevent the landlord from recovering its costs. “Much of what has passed between landlord and tenant is what one might well expect as part of the normal to-ing and fro-ing and give-and-take between landlord (by managing agent) and tenant” (para 45). In the circumstances of this case, the costs of these negotiations should be recoverable through the service charge.
This decision, although it restates the law, shows the workings of a s20C decision in practice, and sets out in details the factors, in this case, which led to the Lands Chambers’ decision. It emphasises the need for such an analysis except when the outcome is clear, and encourages LVT’s to give more detailed reasons.