12th June 2015
There is no general principle that service charge clauses should be construed “restrictively”: service charge clauses are not subject to any special rule of interpretation. The alarming consequence of an interpretation (for example, as regards a lease granted in 1980, the service charge would be over £2,500 in 2015 and over £550,000 by 2072) was not a convincing argument for departing from the natural meaning of the clause. The lessees’ appeal was dismissed.
Facts
The appellant lessees appealed against the decision of the Court of Appeal ([2013] EWCA Civ 902 – summarised in the August 2013 update) on the interpretation of their leases. The leases were long leases of holiday chalets at a leisure park. 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 essential issue was whether the clauses provided for annual compounded increases, at the rate of 10 per cent, in the charges payable, as the respondent landlord contended (and both Morgan J and the Court of Appeal held); or whether the figure given in the clauses was a cap up to which the landlord could recover the actual expenditure on the provision of services. The tenants’ case was that the effect of compounding was that the service charge was already over £3,000 per annum for the relatively limited services provided for the holiday chalets and, by the last year of the lease, the total would be over £1 million. The tenants argued that this was uncommercial and nonsensical and so required the clause to be regarded and read as a cap. The landlord submitted that there was no evident ambiguity or mistake in the wording; the landlord’s interpretation was not absurd since at the time the leases were made and at times thereafter annual inflation exceeded 10 per cent.
Decision on Appeal
the Supreme Court (Lord Neuberger, Lord Sumption, Lord Hughes and Lord Hodge; Lord Carnwath dissenting) dismissed the lessees’ appeal. Lord Neuberger, giving the lead judgment, emphasised seven factors relevant to the construction of contracts:
The Court held that the natural meaning of the clause 3(2) was clear: the first half of the clause provides that the lessee is to pay an annual charge to reimburse the lessor for the costs of providing the services which he covenants to provide, and the second half of the clause identifies how that service charge is to be calculated, namely as a fixed sum, with a fixed annual increase. The alarming consequence of this interpretation (for example, as regards a lease granted in 1980, the service charge would be over £2,500 in 2015 and over £550,000 by 2072) was not a convincing argument for departing from the natural meaning of clause 3(2).
Comment
This is a landmark case on the construction of service charge provisions. For many years, lessees have successfully argued that service charge clauses should be construed restrictively. Support for this proposition is found in Rix LJ’s judgment in McHale v Cadogan [2010] EWCA Civ 14, [2010] 1 EGLR 51. Lord Neuberger explained that what Rix LJ was saying, quite correctly, was that the court should not “bring within the general words of a service charge clause anything which does not clearly belong there”. This case makes clear that service charge clauses are not subject to any special rule of interpretation. It also clarifies that the courts must not, by invoking commercial common sense and the factual background, undermine the language of the provision in the contract.
Where the lease specifically permits improvements, consultation and consideration of the interests of the leaseholders who will be expected to contribute is likely to be a necessary ingredient in demonstrating that the cost has been reasonably incurred.
Facts
In 2011 and 2012 the respondent landlord undertook a programme of major works, which included the removal of the original cladding material from the exterior of the blocks and its replacement with new cladding material, after structural strengthening. The project was eligible to receive a contribution from a commercial energy company as part of the Community Energy Savings Programme (“CESP”). Not all of the work on the estates was eligible for a CESP contribution. The leases required the leaseholders to contribute to the cost of works of repair or improvement carried out to their own blocks, and not to the Estate as a whole but the Council shared the benefit of the CESP funding across the Estate (regardless of which blocks benefited).
First Instance
The LVT held that the costs of the major works had been reasonably incurred by the Council, and that the lessee was required to contribute towards them under the service charge provisions in her lease. The lessee appealed.
Decision on Appeal
The UT (Martin Rodger QC, Deputy President and P D McCrea FRICS) held (1) the element of improvement involved in the project to re-clad the Estates did not make any difference to the reasonableness of the Council’s decision to proceed with the work; (2) the treatment of the CESP funding had not been in accordance with the requirements of the lease.
Comment
Section 19 makes no express distinction between the cost of improvements and the cost of repairs but a different approach may be required to the issue of reasonableness when the works in question are repairs which the landlord is contractually obliged to carry out as against works of improvement over which it has a discretion: see Waaler v LB Hounslow [2015] UKUT 0017 (LC). In this case, the UT went further: where the lease specifically permits improvements, consultation and consideration of the interests of the leaseholders who will be expected to contribute is likely to be a necessary ingredient in demonstrating that the cost has been reasonably incurred.
Disclaimer
This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/ or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.