[2006] EWLands LRA_9_2005 (07 April 2006)
LRA/9/2005
LANDS TRIBUNAL ACT 1949
Service Charges – Construction of Lease – Recovery of
notional rent of Caretaker's flat – Presumption against recovery of sums
exceeding expenditure – Clear words needed.
IN THE MATTER OF THE LEASEHOLD REFORM, HOUSING
AND
URBAN DEVELOMENT ACT 1993
AND IN THE MATTER OF 27/29 SLOANE GARDENS, LONDON
SWI
BETWEEN (1) THE EARL CADOGAN
(2) CADOGAN ESTATES LIMITED
Appellants
and
(1) 27/29 SLOANE GARDENS LIMITED
(2) WAYIL MAHDI Respondents
Re: House divided into Flats,
27 and 29 Sloane Gardens,
London SW1W 8EB
Before: His Honour Michael Rich QC
Sitting at Procession House, 110 New Bridge Street, London
EC4V 6JL
on Thursday 30 March 2006
K.S.Munro instructed by Pemberton Greenish for the
appellants
The First Respondent did not
appear
Barry Denyer –Green instructed by Ronald Fletcher &
Co for the Second Respondent.
The following cases are referred to in this decision:
Agavil Investment Co v Corner (CA 3rd October
1975)
Boldmark Ltd v Cohen [1986] 1EGLR 47
Cadogan v 44/46 Lower Sloane Street Management Company Ltd
and Henry McHale (LRA/29 & 30/ 2003)
Gilje v Charlegrove Securities Ltd [2000] 3 EGLR
89
Gilje v Charlegrove Securities Ltd (CA) [2002] 1EGLR 41
Killick v Second Covent Garden Property Co Ltd [1973]
1WLR 658
Lloyds Bank PLC v Bowker Orford [1992] 2 EGLR
44
DECISION ON PRELIMINARY ISSUE
Introduction
- This is the decision on a preliminary issue in an
appeal by the freeholders against the decision of the Leasehold Valuation
Tribunal for the London Rent Assessment Panel ("LVT") given on 26 November
2004, on the freeholders' application to determine the price to be paid by the
first respondent, as nominee purchaser under the Act, for the freehold of six
flats at the above address.
- On 6th April 2005, the President gave
permission to the appellants (to whom I will refer together as "the
freeholders") for an appeal on two grounds as follows:
(i) Whether the headlessee [that is the second respondent]
is entitled to recover a market rent for the caretaker's flat from the
lessees [that is the holders of the leases of the six flats which were
granted by the headlessee's predecessor in title, a majority of whom
have formed the first respondent as the nominee company to claim the
freehold]; and
(ii) the appropriate deferment rate to be applied to the
valuation of the reversionary
interests.
- The appeal on the second issue is to be heard with a
number of other appeals raising the same issue as to deferment rates, which
are beginning on 5th June 2006. The first ground of appeal has
therefore been heard as a preliminary issue.
- The LVT's valuation of the price to be paid by the
first respondent included £107,076 as being part of the value of the
headlessee's interest attributable to his entitlement to recover from the
lessees a market rent for the caretaker's flat. The effect of that entitlement
upon the price to be paid and the two reversioners' share of that price is
complicated. In trying to calculate it, I have discovered what I believe to be
an arithmetical error in the LVT's determination which was neither canvassed
in the course of the appeal nor is the subject of any appeal. The effect of
the LVT's finding that the headlessee was entitled to receive a notional rent
for the Caretaker's flat increases his share of the price, as I calculate it,
by over £150,000. This arises partly because the price is some £78,000 higher,
but almost as importantly because the freeholder's share of the marriage value
is reduced. This has the effect that the headlessee's entitlement to a
notional rent reduces the freeholder's share of the price to be paid by the
nominee purchaser by some £75,000: hence the freeholders' appeal.
- In these circumstances, it is the headlessee who has
responded to the appeal on this preliminary issue, and the first respondent
not only does not appear, but has written to the Tribunal to say that they
accept the freeholders' grounds of appeal on this point.
Terms of the leases
- The freeholders granted the headlease of the
premises to the headlessee's predecessor in title on 15th February
1979. It was for a term expiring on 29th September 2045, at a
ground rent rising by stages from £750 initially to £3,000 in the last 25
years. It was granted in consideration of a premium of £30,000 and a covenant
(clause III) to carry out building works to convert the premises into flats
and maisonettes in accordance with plans which were agreed in a memorandum
dated 8th August 1981. These included the provision of a
caretaker's flat in the front part of the basement of the premises.
- By clause XI the headlessee covenanted not to use
the premises
"otherwise than as self-contained flats and/or
self-contained maisonettes as shown on the drawings .. with a
Caretaker's flat in the basement of the demised premises also where
shown on the said Drawings."
And by clause XII (c) the headlessee further covenanted:
"To provide for the demised premises throughout the term a
full-time caretaker .. who shall reside in the Caretaker's flat
rent-free as a licensee on a service basis
.."
By clause XIX (d) underlettings are permitted only at rents which are not
less than the rent reserved under the headlease apportioned over the flats and
maisonette disregarding the Caretaker's flat.
- It has been agreed that the underlease granted on
18th October 1989 in respect of Flat 2 is in a standard form. It
was granted for a premium of £260,000 and at a ground rent of £125 a year
rising to £500, for a term expiring on 26th September 2045 By
clause 5(5)(p) of the underlease the lessor covenanted with his lessee to
observe the covenants of the headlease.
- The provisions as to service charge which the LVT
had to construe were as follows:
(i) By clause 4(6) the lessee covenanted to pay the Service
Charge in the manner provided in the Fifth
Schedule
(ii) The Fifth Schedule defined the Service Charge as the
due proportion of the Service Charge Expenditure which was defined in
the following terms:
" "Service Charge Expenditure" means the total expenditure
incurred by the Lessor in any Accounting Period in carrying out its
obligations under Clause5(5) of this Underlease and all other costs
expenses outgoings and matters incurred in connection with the
management and running of the Building including without prejudice to or
limitation of the generality of the foregoing the following:- [there
follow thirteen sub-paragraphs to which I will return so far as is
necessary]"
(iii) Sub-paragraph (iv) reads as
follows:
"The cost of employing maintaining and providing
accommodation in the building for a caretaker including the provision of
uniforms and boiler suits and including an annual sum equivalent to
the market rent of any accommodation provided rent-free by the
Lessor and general and water rates and gas and electricity charges
in respect of such accommodation" [I have added the italics in order to
assist reference back]
LVT's Decision
- The LVT having set out these provisions referred
to a Decision in the Lands Tribunal, to which I was a party, Cadogan v
44/46 Lower Sloane Street Management Company Ltd and Henry McHale (LRA/29
& 30/ 2003) ("the McHale case") in which it had been held that the
intermediate landlord was not entitled to recover a notional rent for the
caretaker's flat in those premises. They concluded however, that under the
words of the present leases, the construction that a notional market rent was
payable was "unavoidable" even though it might entitle the headlessee to
recover a sum in excess of the costs of providing services.
- The effect of that decision is that the headlessee
is held to be entitled to charge the lessees a due proportion of the market
rental value of the Caretaker's flat, even although he has neither forgone
such rent nor expended it. He has not forgone the rent because he would not be
able to let the flat out, without breach of the covenants in the headlease to
keep it as a Caretaker's flat and to provide a rent-free Caretaker's flat,
which covenants he has covenanted with the lessees in their underleases to
observe. Nor, of course, has he expended any rent in order to provide the flat
At most his predecessor incurred cost in providing it, but long before any
current Accounting Period. It is on that point of construction that the
freeholders appeal.
Approach to construction of service charge
provisions
- In the McHale case (sitting with Mr Rose
FRICS) I said without reference to authority:
"The underlease should not be construed as entitling the
underlessor to recover as part of the maintenance charge [as the
underleases in that case called the service charges] a sum in excess of
the cost of providing the services, unless such construction is
unavoidable."
- I have, in the course of argument on this appeal,
been reminded of an unreported decision of the Court of Appeal in Agavil
Investment Co v Corner (CA 3rd October 1975), of which it
appears from my decision in the Lands Tribunal and in the Central London
County Court in Gilje v Charlegrove Securities Ltd [2000] 3EGLR 89, I
was then provided with a copy of the transcript. Although a transcript was not
available during argument in this case, much of what was said has been quoted
in reported cases to which I was referred. Since the hearing I have been
provided with a transcript of Agavil, thanks to the assiduity of Mr
Denyer-Green.
- In Agavil the Court of Appeal upheld the
landlord's entitlement to recover a notional rent for a caretaker's flat. They
found the case so clear that they did not call on the respondent to the
appeal. Cairns LJ said :
"When I come to construe this lease, on the face of it, it
does seem to me that the loss to the landlords by giving up this flat
for the occupation of a caretaker, and therefore being unable to let the
flat to a tenant, falls reasonably within the words in paragraph 1 of
the Schedule 'costs or expenses incurred by them in carrying out their
obligations ' under Clause 3(b)(v) of the lease
"
The sub-clause provided for "reimbursement of cost expenses and matters
mentioned in the schedule". The Schedule was in three paragraphs:
"1. The costs charges and expenses incurred by the Lessor in
carrying out the obligations under Clause 3 of this lease" which
included to "employ a caretaker for the Buildings whether resident upon
the premises or otherwise"
Paragraph 2 dealt with "outgoings" which were held not to
arise.
Paragraph 3 was "The expenses .. of the services provided by
the Lessor .. in connection with .. the .. caretaker's
accommodation"
- In construing the words of the lease, the Court of
Appeal refused to construe the word "reimburse" restrictively, and construed
the words "costs" and "expenses" by reference to their context. On this basis
Cairns LJ held that "reimburse" in the context of reference to sums "payable"
as well as paid meant no more than "indemnify". "Incurred" was "an appropriate
word to use in connection with any cost falling upon the landlord, including
their forgoing an advantage they would otherwise have had." The context in
which "costs and expenses" are used included "matters". In such context the
fact that the lease specifically provided for accommodating the caretaker
outside the building and in such case the recovery of the cost of doing so
was, as Mr Neuberger QC said, in his decision in Lloyds Bank PLC v Bowker
Orford [1992] 2EGLR 44 at p 47F, only a "supporting buttress for the
conclusion .. already reached on the meaning of the words in the lease."
- I sought to follow the Court of Appeal's approach
to the construing of words in their context when I said in Gilje at p.
92G
"I thought it wrong, in the context of the present
underleases, to construe "monies expended" as being exclusive of costs
borne in other ways"
Slade LJ in Boldmark Ltd v Cohen [1986] 1EGLR 47 at p. 49K drew
attention to the fact that Goff LJ had described the meaning ascribed to the
words in the Agavil lease as a "liberal meaning". The court
nevertheless said:
"the onus must fall on the [landlords] to show that under
this particular lease the [tenants] have contracted to pay [the disputed
item]"
- When my decision in Gilje was considered by
the Court of Appeal (reported at [2002] 1EGLR 41) they likewise referred to
the decision in Agavil. Their approach to the construction of lease
provisions such as the present was stated by Laws LJ at para 27 as follows:
"The landlord seeks to recover money from the tenant. On
ordinary principles, there must be clear terms in the contractual
provisions said to entitle him to do so. The lease, moreover (my
underlining) was drafted, or proffered, by the landlord. It falls to be
construed contra proferentem."
He then said at paragraph 28:
"At the end of the day, I do not consider that a reasonable
tenant or prospective tenant, reading the underlease that was proffered
to him, would perceive that para 4(2)(1) obliged him to contribute to
the notional cost to the landlord of providing the caretaker's flat.
Such construction has to emerge clearly and plainly from the words that
are used. It does not do so. On that short ground, I would .. dismiss
the appeal."
- I think that in these passages, unless read
carefully, Laws LJ may appear to be conflating two separate principles of
construction. That is why I have underlined his use of the word "moreover"
which indicates that he was not treating the requirement of clear terms as the
same as the contra proferentem rule which as Mr Denyer-Green reminds
me, by reference to the short judgement of Cairns LJ in Killick v Second
Covent Garden Property Co Ltd [1973] 1WLR 658 at p.663, requires an
ambiguity before it can be called in aid. Cairns LJ referred to the rule
properly so-called in Agavil as follows:
".. it is a rule which only applies where, apart from it,
considerations on one side or the other are evenly balanced, and I do
not find that to be the position here."
- Although Mummery LJ, in his judgement in
Gilje, also used the expression "contra proferentem" he did so
in supporting an approach to the construction of these clauses which in effect
raises a presumption against recovery of charges unless the provision is in
clear terms. He referred to a statement in the Encyclopaedia of Forms and
Precedents relating to the drafting of provisions in leases for service
charges as follows:
"It is stated as follows:
The draftsman should bear in mind that the courts tend to
construe service charge provisions restrictively and are unlikely to
allow recovery for items which are not clearly
included.
Cited as authority are three cases, all decided in the
1980s. They include decisions of this court. .. The proposition is
obvious. .. the proposition reflects a particular application of the
general principle of construction in the contra proferentem
rule."
- I would therefore regard my use in McHale
of the word "unavoidable" as merely a shorthand for the approach which we
adopted in that case, which was not criticised in the present case and which,
on review of authority appears to me to have been correct. I would however,
for the purposes of this Decision, spell out the considerations more fully.
The approach has I believe to be as follows:
(i) It is for the landlord to show that a reasonable tenant
would perceive that the underlease obliged him to make the payment
sought.
(ii) Such conclusion must emerge clearly and plainly from
the words used.
(iii) Thus if the words used could reasonably be read as
providing for some other circumstance, the landlord will fail to
discharge the onus upon him.
(iv) This does not however permit the rejection of the
natural meaning of the words in their context on the basis of some other
fanciful meaning or purpose, and the context may justify a "liberal"
meaning.
(v) If consideration of the clause leaves an ambiguity then
the ambiguity will be resolved against the landlord as
"proferror".
Conclusion
- Mr Munro's first submission was that the headlease
prohibited the recovery of a notional rent for the Caretaker's flat from the
lessees. He was however unable to direct my attention to any provision of the
headlease which had that effect. By clause XI (c) the flat is to be provided
to the Caretaker rent-free. That does not preclude a provision in any
underlease to charge a rent to the underlessee for the flat granted to the
underlessee, fixed by reference to the market value of the Caretaker's flat.
No more does it, in my judgement, prohibit the requirement of a covenant to
pay the same sum under the name of service charge but recoverable as rent. On
its proper construction there is nothing in the headlease to affect the
question to be decided, save that it is part of the context under which the
under-leases must be construed, that the headlessee is bound to provide a
Caretaker and to accommodate him rent-free. Mr Munro accepted that such
obligations could sensibly be imposed by the freeholders for estate management
reasons, namely to avoid the risk of any caretaker obtaining security of
tenure, but to maintain the standard of the premises for the benefit not only
of the demised premises but also the surrounding area.
- The question is therefore whether the provision in
paragraph 1(1)(iv) of the 5th schedule to the underlease which I
have italicised in setting it out in paragraph 9 above, clearly and plainly
provides for the recovery of a notional rent being "an annual sum equivalent
to the market rent of any accommodation provided rent-free by the Lessor" by
way of "providing accommodation in the Building for a caretaker".
- Mr Munro submits that clearly such sum is not
"expenditure" and so should not be recoverable as "Service Charge
Expenditure". I agree. He further submits that the enumerated thirteen
paragraphs are expressed to be "without prejudice to or limitation of the
generality of the forgoing" and could not therefore be taken to extend the
meaning of "Expenditure". Mr Denyer-Green has satisfied me that this is a
misconstruction of the definition which prefaces the thirteen sub-paragraphs.
I agree that it can be properly understood by enumerating the categories of
the definition as follows:
" 'Service Charge Expenditure' means (i) the total
expenditure incurred by the lessor in any Accounting Period in carrying
out its obligations under Clause 5(5) of this Underlease and (ii)
all other costs expenses outgoings and matters incurred in connection
with the maintenance management and running of the Building, including
without prejudice to or limitation of the generality of the forgoing
[the thirteen items]"
Thus the list is referable not, or not solely, to expenditure incurred in
carrying out the obligations of Clause 5(5), but also "other costs expenses
outgoings and matters". It may well be that an annual sum equivalent to the
market rent is not an expense or outgoing that has been incurred, and not a
cost incurred in the relevant accounting period, but it seems to me that if
force is to be given to the words used, it must fall within the "matters ..
including the cost of providing accommodation including [such] annual sum" I
accept Mr Denyer-Green's submission that the thirteen enumerated items include
at least one other item which is not an item of expenditure cost or outgoing.
Sub-paragraph (ix) provides for a requirement to contribute to a reserve fund,
which can be brought within the definition of "Service Charge Expenditure"
only as "a matter incurred in connection with the maintenance etc of
the Building".
- Mr Munro none the less submits that I should not
attribute what seems to me to be the natural meaning of "including .. the cost
of .. providing accommodation .. including an annual sum equivalent to the
market rent of any accommodation provided rent-free", because some other
natural meaning can be attributed to it. The provision could, he suggests,
have been inserted in order to enable the underlessor to recover a notional
rent if a variation of the head-lease entitled him to charge a rent for the
Caretaker's flat, so that if he continued to provide it rent-free he would
indeed be incurring a cost in rent foregone. This suggestion seems to me to be
entirely fanciful. Firstly the underlease has to be construed in the context
of the headlease whose covenants, including the obligation to provide a
Caretaker's flat rent-free the underlessor covenanted to observe. It would be
inconsistent with such obligation to make provision in case that covenant were
varied. Moreover it involves the assumption that the underlessee should act in
an entirely uncommercial way, by agreeing to pay an increased service charge
if, with no reference to him and with no benefit to him, the freeholders
should agree to vary the terms of the headlease. That is not an obligation
into which could be perceived that a reasonable tenant would enter.
- I am forced to the conclusion that unless the
words of the sub-paragraph are rejected they must be construed as entitling
the second respondent to recover a notional rent of the Caretaker's flat as
part of the Service Charge. That is the obligation that a reasonable tenant
would perceive that he was entering into. There is no ambiguity and no need or
right therefore to resort to the contra proferentem rule properly
so-called, as opposed to what Mummery LJ called "a particular application" of
it.
- I should note that no submission was made that the
notional rent would be irrecoverable by reason of s. 19 of the Landlord and
Tenant Act 1985. Apparently the multiplier applied to the market rent
determined by the LVT was agreed having regard to the possibility of
difficulty, but it is to be doubted whether a notional cost would fall within
the definition of "relevant costs" in s.18 of the Act.
- Accordingly the appeal on this ground will be
dismissed. The parties have agreed that there are no grounds on either side
for an application for costs under s.175 of the Commonhold and Leasehold
Reform Act 2002 and so there will be no order as to costs.
Dated 7 April 2006
His Honour Michael Rich QC
