Case No. UKUT-169-(LC)-UTLC-Case-Number:-LC-2021-607

The law about the interpretation of service charge clauses32.It is uncontroversial that the leading authority on the construction of leases is Arnold v Britton [2015] UKSC 36. Lord Neuberger said this at [15]:“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but(vi) disregarding subjective evidence of any party’s intentions.”33.At paragraph 23 Lord Neuberger went on to say:“… reference was made in argument to service charge clauses being construed ‘restrictively’. I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. Even if (which it is unnecessary to decide) a landlord may have simpler remedies than a tenant to enforce service charge provisions, that is not relevant to the issue of how one interprets the contractual machinery for assessing the tenant’s contribution. The origin of the adverb was in a judgment of Rix LJ in McHale v Earl Cadogan [2010] HLR 412, para 17. What he 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’.”34.In the absence of any “special rule of interpretation” for service charge clauses we have to be careful not to misunderstand dicta in a number of earlier cases, on which Mr Lovedaygrove relied, which stressed the need for clarity before a particular item would be found to be included in such a clause. Examples are Sella House Limited v Mears [1989] 1 E.G.L.R. 65, Gilje v Charlgrove Securities Limited [2003] EWHC 1284 (Ch) and Phillips v Francis [2014] EWCA Civ 1395 where Sir Terence Etherton C said at [74] that:“if the parties to a lease intend that the lessor shall be entitled to receive payment from the tenant in addition to the rent, that obligation and its extent will be clearly spelled out in the lease.”35.Those dicta have not been overruled or disapproved, but in the light of Arnold v Britton we know that those dicta do not require the lease to be construed restrictively and that the obligation to pay a service charge is not required to be any more clearly expressed than any other obligation. Mr Datta points out that Mummery LJ in Gilje v Charlgrove Securities Limited [2003] EWHC Civ 1777 at [32] regarded the requirement of clarity as an example of the contra proferentem rule, which means that a lease drafted by the landlord is to be construed against the landlord in case of ambiguity.36.The problem in the present appeal is not ambiguity in the sense that a particular word or phrase may have more than one meaning. It is that an obligation in general terms is inevitably open to interpretation and a decision has to be made as to what specific obligations fall within it. Clause 4(4)(g)(ii) entitles the landlord, and obliges it if it considers it necessary or advisable, to employ professionals for the proper maintenance (etc) of the building. It is obvious, I suggest, that that includes taking specialist advice for example from a surveyor if necessary when the roof is damaged in a storm and requires replacement. There is no lack of clarity even though the specific work is not spelled out explicitly, and that clarity arises from the context of the obligation, following as it does the landlord’s obligation to maintain and repair the structure of the building. The employment of professionals in those circumstances clearly belongs within the general words of the service charge. In saying that I echo Lord Neuberger’s words at paragraph 23 of Arnold v Britton. But do those general words, and the words of clause 4(4)(l), include instructing legal professionals and expert witnesses in litigation against a third party, or in connection with an objection to a third party’s planning application? In order to answer that question the Tribunal has to go through the factors set out in Arnold v Britton (see [32] above), bearing in mind Lord Neuberger’s instruction not to bring within the general words something that does not clearly belong there. Litigation costs as service charges37.The question whether litigation costs can fall within service charges has been considered on a number of occasions. These cases have to be regarded with caution because some of them pre-date Arnold v Britton and the reminder in that case that service charge clauses are not to be construed restrictively; and they all differ in the terms under consideration, the type of litigation in question, and the surrounding circumstances, and no general rule can be discerned. So I am not going to go through them all, but the following examples are helpful.38.In Sella House Limited v Mears (above) the court did not allow the recovery of legal costs incurred in recovering rent from tenants of the building; the clause in question was in identical terms to clause 4(4)(g)(ii) in the present case but with the omission of the word “solicitors”, so the result might be regarded as unsurprising.39.In Liverpool Quays Management Limited v Moscardini [2012] UKUT 244 (LC) the President, George Bartlett QC, accepted that a lease entitled the management company to include in the service charges the legal costs incurred in recovering rent and service charges from lessees; but he did not accept that it could also charge the legal costs incurred in pursuing the developer for defects in the building. The clause in question was a broadly-worded “sweeper” clause, and the President had this to say about such clauses:“26. Paragraph 19 is expressed so widely that I find it hard to see what it might cover. As expressed (“All costs and expenses…of whatsoever kind incurred by the Management Company”) it covers everything that the company might choose to spend money on, but if given effect to in this way it would render of no significance all the limitations contained, expressly or impliedly, in the earlier, specific paragraphs. For this reason, I do not think that it is possible to give effect to it in the terms in which it is expressed.”40.Clause 4(4)(l) in the present appeal is not so widely expressed, but the comment is a useful reminder that a “sweeper” clause should not be construed so as to bring into the service charge expenses of a kind that could not otherwise have been included.41.In Fairbairn v Etal Court Maintenance Ltd [2015] UKUT 639 (LC) the landlord was not able to recover as part of the service charge its legal costs and sums paid in settlement of proceedings brought against it by another leaseholder for disrepair. In Bretby Hall Management Company Limited v Pratt [2017] UKUT 70 (LC) the Tribunal (HHJ Behrens) found that a management company was able to recover as part of the service charge its costs incurred in connection with proceedings threatened against it, but never actually issued, by the lessee. The clause relied upon obliged the lessee to pay for:“All other expenses (if any) incurred by the Manager … and any legal or other costs reasonably and properly incurred by the Manager and otherwise not recovered in taking or defending proceedings (including any arbitration) arising out of any lease of any part of the Development or any claim by or against any lessee or tenant thereof or by any third party against the Manager as owner lessee or occupier of any part of the Development.”42.Assethold Limited v Watts [2014] UKUT 537 (LC) is the only decision of which counsel are aware in which it has been decided that a landlord’s litigation costs against a third party have been included in a service charge. Assethold Limited was the landlord of a block of 13 flats. The neighbouring landowner served notice upon Assethold Limited under the Party Wall Act 1996 of its intention to carry out work on the boundary between the two sites. Surveyors had been appointed but before agreement was reached the neighbour started work, and made a trial excavation for new foundations adjoining the wall of the block. The landlord issued proceedings and obtained, at a hearing on the day the proceedings were issued, an interim injunction requiring the neighbour to stop work; the injunction continued in force until a party wall award was published. The landlord sought to recover its costs of those proceedings from the lessees, relying upon a clause in materially identical terms to clause 4(4)(l) in the present case. The Deputy President said at [62]:“I am satisfied that, though general, the language of [the relevant provision] is sufficiently clear to entitle the appellant to recoup through the service charge the cost of engaging solicitors to take steps which in themselves are agreed to have been reasonable, to ensure that the protection afforded to the Building by a party wall award under the 1996 Act would not be lost. In my judgment those steps can appropriately be described as having been taken for the proper maintenance, safety, amenity and administration of the Building. There is nothing in the context or commercial purpose of the leases to suggest that the preservation of the Building from external interference ought not to be the responsibility of the Landlord. Indeed, the opposite is the case as the structure of the Building remains vested in the Landlord and the service charge puts it in a position to fund action for the common good which might be beyond the resources of individual tenants.”43.So it is certainly not the case that litigation costs against a third party can never be recovered under a service charge provision. It is significant that the clause in question in Assethold was almost identical to the one in question in this appeal. The decision is not binding on me but I give it very careful consideration before reaching a different conclusion in the context of this different lease and in the different circumstances of the present appeal, as I explain below.44.The most recent decision referred to by counsel on litigation costs was Kensquare v Boakye [2021] EWCA 1825, where the Court of Appeal had to consider the scope of an obligation by the tenant to pay:"The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building".45.It determined that the clause did not enable the landlord to recover its costs in proceedings brought by the tenant to determine the reasonableness and payability of service charges. Newey LJ said at [54]:“I have concluded that, read naturally, paragraph 5 does not extend to litigation costs. While the reference to "professional advisers" is apt to apply to lawyers, they are not mentioned specifically and nothing is said about legal proceedings. … [T]he focus is on management services rather than litigation and, to adapt words of Rix LJ which Lord Neuberger quoted in Arnold v Britton, a decision in favour of Kensquare would involve "bring[ing] within the general words of a service charge clause" something "which does not clearly belong there".”The construction of the service charge provisions in the appellants’ lease46.Bearing those principles and authorities in mind I consider the two sub-clauses relied upon by the respondent, 4(4)(g)(ii) and 4(4)(l) in light of the approach set out in Arnold v Britton.47.The Tribunal must first consider the natural and ordinary meaning of the words. For ease of reference I set out again the two sub-clauses relied upon by the respondent:“4(4)(g)(ii) To employ all such surveyors builders architects engineers tradesmen solicitors accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building.”“4(4)(l) Without prejudice to the foregoing to do or cause to be done all such works installations acts matters and things as in the reasonable discretion of the Lessor may be considered necessary or advisable for the proper maintenance safety amenity and administration of the Building.”48.The appellants are required to pay by way of service charge the cost of the landlord fulfilling its obligations under clause 4, and these are the parts of clause 4 that the respondent relies upon. The costs incurred by the landlord are the legal and professional costs of defending the second and Third Claims and of objecting to the planning application in 2018. 49.Principally Mr Datta points to clause 4(4)(l); he notes that it is a “sweeping provision”; he argues that the costs incurred were “necessary or advisable for the proper maintenance safety and amenity of the building”. He points out that the FTT and the High Court found that the respondent had valid concerns about the structure of the building, and that the lessees (other than the appellants) had reasonable concerns about the amenity of the building. He relies upon the passage quoted above (at [42]) from Assethold Limited v Watts. As to clause 4(4)(g)(ii) he points to the specific reference to solicitors, and argues that counsel would therefore fall within “other professional persons”, and says that the employment of professionals was desirable for the safety and administration of the building, in protecting the legitimate interests of the respondent and the lessees in the structural integrity, amenity and value of the building and of the individual flats, both in the litigation and in the pursuit of planning objections.50.I agree that the respondent, and the lessees, were motivated by concern for the structural integrity and safety of the building, and that the respondent and the lessees other than the appellants were legitimately motivated by concern about amenity. But that motivation does not assist in determining whether these are the sort of costs that fall within the general words of the sub-clause. It is not the case that any action whatsoever undertaken out of concern for, or interest in, the structure and amenity of the building falls within the landlord’s obligations under the sub-clause. The natural and ordinary meaning of the words by itself does not tell us how far the landlord’s obligations extend, although I would observe that they do not naturally suggest the inclusion of litigation against third parties, nor of objecting to a planning application.51.To understand the scope of the sub-clauses we have to move on to “the other relevant provisions of the lease”. Mr Loveday first points to the preceding and surrounding parts of clause 4(4), which are for the most part about the practical upkeep of the building – repair, decoration, insurance, cleaning, rates, staff, television aerials, fire extinguishers, entry phone, and some specific financial matters. Mr Loveday points out that the closing words of each sub-clause, beginning “as may be necessary or desirable” and “as may be considered necessary or desirable” are there to limit the purposes of the employment of professionals and the doing of “acts matters or things”; the words refer back to the landlord’s primary obligations set out in the rest of the clause, and should not be seen as widening the landlord’s obligations. Clause 4(4)(l) in particular is a sweeper clause and should not be regarded as extending the range of what the landlord can do. He observes that the obligations in clause 4(4) are spelt out in some detail; if the landlord is specifically required to maintain the fire extinguishers and the entry phone (and the lessees to pay for its doing so), for example, then the parties would have made specific provision if the landlord was obliged to defend litigation or to object to a neighbour’s planning application (and the lessees to pay for its doing so). The focus of clause 4(4) is on managing and maintaining the building, not on actions to be taken against neighbours or in relation to neighbouring land. Clause 4(4) seems to me to have the same focus and purpose as the clause in issue in Kensquare v Boakye (see [44] above], and that is the case even though solicitors are referred to in 4(4)(g)(ii); the clause is about management and there is no hint of litigation. I agree with Mr Loveday’s analysis.52.Moreover, the lease does make specific mention of other kinds of litigation that the respondent must undertake and the lessees must pay for. I referred above to the provision for the lessee to pay for the landlord’s costs of enforcing the covenants of the other lessees in clause 4(3). The lease also contains provision at clause 2(6) for the lessee to pay the costs of enforcing the lessee’s own covenants to decorate and repair the flat, and to pay the landlord’s costs in relation to forfeiture proceedings (a “69 Marina clause”) at clause 2(9). Mr Loveday argues that if the parties had intended the lessee to have to fund the cost of defending proceedings brought by third parties or of objecting to planning applications they would have said so. Again, I agree.53.The FTT in explaining its conclusion said this at paragraph [57]:“The costs can be said to relate to the maintenance and/or safety of the Building, particularly insofar as one of the key concerns related to the structural integrity of the Building could be compromised by the proposals … We also note that clause 4(4)(l) also makes specific reference to “amenity … of the Building”, which in our finding, can also cover challenges to Ms Hicks’ proposals on aesthetic grounds. Accordingly, the tribunal does not accept the argument that “other professionals” should be construed solely by reference to assisting with regard to management functions. In our determination, the wording of the clause is not so restrictive and, properly construed, extends to the type of costs in issue here, notwithstanding that there is no express reference to rights relating to building on “adjoining or contiguous land” in clause 4 or reference to spending to oppose planning applications.”54.I disagree; the FTT seems to me to give insufficient regard to the context in which the clauses appear, to the focus of clause 4(4) on the practical management and upkeep of the building, and to the presence elsewhere in the lease of express provisions relating to legal costs. 55.Moving on to the rest of the Arnold v Britton points, I note that the purpose of the clause is to fund the landlord’s obligations as landlord. It is not to support its wider interests as freeholder. The purpose of clause 4(4) itself is to ensure that the landlord maintains the building and employs staff and professionals where necessary. To read that as covering the cost of litigation with a third party or of objecting to planning permission is too great a stretch.56.What about the factual background that can be taken to have been in the original parties’ minds (disregarding their subjective intentions, which in any event are not known)? The garden plot is a much-litigated piece of land; the parties to the lease in 1989 and to the surrender and re-grant in 2007 are to be taken to have been aware of Radford v de Froberville [1977] 1 WLR 1262, being the litigation about the covenant between the original parties to it. True, as Mr Datta observes, by 2007 that was decades ago; but it is unusual for a restrictive covenant to give rise to litigation, and Mr Datta in his skeleton argument says that the parties would reasonably have had the possibility of the development of the adjacent land in their contemplation and therefore also the possibility of dispute. I conclude from that that had the original parties wanted to include in the lease an obligation for the lessees to pay service charges such as those in dispute here they would have expressly so provided rather than leaving future parties and the courts to infer such an obligation with difficulty from a clause that is essentially about the upkeep and management of the building.57.Finally (because there is no question of evidence of the original parties’ subjective intentions), I have to consider commercial common sense. Mr Loveday points to the extraordinary level of costs incurred by the respondent in the Second and Third Claim and in objecting to the planning application. I agree that an obligation in the lease for the landlord to incur and for the respondent to fund costs of this level is implausible. If these costs are part of the service charge then so are the costs of any litigation brought against or by the owner of the garden plot in future; landlord and lessees would have an extraordinary commitment to potentially ruinous costs. The existence of such obligations would not make commercial sense because they would make the lease and freehold unmarketable. It is most unlikely that the original parties intended this, and if they did they would have made express provision. Obligations on this scale cannot be gleaned from a provision that is focused upon the practical maintenance and management of the building. To go back to Lord Neuberger’s words at paragraph 23 of Arnold v Britton, these are not obligations that clearly belong in this clause.58.I repeat that the respondent was entitled to refuse consent to the development, and entitled to defend the legal proceedings (in which it was to a large extent successful). That is not the issue here; the issue here was whether the respondent was obliged to do so under clause 4(4) of the lease, to which my answer is no. 59.The circumstances pertaining in these proceedings are very different from those in Assethold Limited v Watts. In that case there was an immediate physical threat to the party wall, with physical incursion being commenced by the neighbour which had to be stopped. Actual damage was being caused. I have no doubt that the Tribunal’s decision in that case was correct. In the present case the structure of the building was not yet affected. Mr Datta argues that that distinction is, as he puts it, the opposite of “a stitch in time saves nine” and leaves the respondent obliged to wait until the last possible moment to take action. I do not accept that that is the consequence of that reasoning, and I make no decision about the level of threat or of damage that would bring legal proceedings within the scope of the clause, but the defence of the Second and Third Claim did not. And I have not succeeded in imagining any circumstances where objecting to a planning application made by a neighbour would fall within it.