[2024] UKUT 15 (LC)

This is not the first time that the extent of the obligations imposed on right to buy leaseholders to contribute towards the cost of structural repairs has given rise to difficulty. This appeal raises questions about the effect of paragraph 14 of Schedule 6 which, so far as I am aware, have not previously been the subject of judicial consideration. In particular, I was referred to no authority in which the effect of paragraph 14(4) had been considered.

Nevertheless, important general guidance is available from the decision of the Court of Appeal in City of London v Leaseholders of Great Arthur House [2021] EWCA Civ 431. That case concerned the scope of the obligation of the tenants of flats in Great Arthur House to contribute towards the cost of “specified repairs”, an expression which was defined as “repairs to the structure and exterior of the premises not amounting to the making good of structural defects”. The issue was therefore quite specific but Lewison LJ (with whom Bean and Arnold LLJ agreed) made two general points which I bear in mind in this case.

The first (at [13]) was common ground between the parties in that case and was that “because the leases were granted pursuant to the right to buy, the legislative background is also an aid to interpretation of the covenants.” But as Lewison LJ went on to explain (at [34]): “although the legislative background is undoubtedly relevant to the interpretation of a contract, it is not necessarily determinative”.

The other general point to be taken from the Great Arthur House case is a reminder, at [38], that “there is no presumption that the cost of all works that the landlord is obliged to carry out can be passed on to the Lessees”.

Neither of the leases in this case is particularly well drafted. Each document has been amended, either in typescript or manuscript, to make significant changes to its original form. Before those changes the Lessee’s payment obligation under paragraph 12 of the Third Schedule extended to half of the Lessor’s costs of carrying out all of its obligations in the Fourth Schedule. In that original form, paragraphs 4 and 5 of the Fourth Schedule comprised a single obligation by the Lessor to keep the reserved premises in repair and in particular to keep the exterior of the property (excluding the roof) in repair. The effect of the original draft, if it had not been amended, would have been that the Lessee would have contributed towards the cost of repairing the whole of the exterior of the property excluding the roof, but including the reserved premises.

Quite how, or why, the original parties (who are no longer the parties to the leases), came to agree the terms which were finally executed is not a question which is relevant to the interpretation of those terms. The task for the Tribunal is to understand what the parties meant by the words which they used in their final form. In undertaking that exercise it is necessary to bear in mind that, in granting and receiving a right to buy lease, the parties are likely to have been influenced by the 1985 Act and the limitations which it imposed on the terms which they were free to agree.

The effect of the parties’ agreement in the lease of No. 146 is straightforward. As far as the Lessor’s obligations are concerned, paragraph 4 of the Fourth Schedule requires that it keep the whole of the reserved premises in repair. The reserved premises expressly include the roof, so paragraph 4 obliges the Lessor to repair the roof. Paragraph 5 is a separate obligation on the Lessor to repair the exterior of the property (but excluding the roof).

Although there may at first appear to be some inconsistency in these provisions, on closer consideration there is none. The inclusion of the roof in one of the Lessor’s Fourth Schedule repairing covenants and its exclusion from the other becomes explicable when read alongside paragraph 12 of the Third Schedule. Paragraph 12 requires the Lessee to contribute half of the costs incurred by the Lessor in carrying out its obligations under the Fourth Schedule, excluding paragraph 4 (the reserved premises obligation).

It follows that, having regard only to the express terms of the Lease of No. 146, the Lessee has no obligation to contribute towards the costs incurred by the Lessor in carrying out repairs to the roof, because the roof is specifically excluded from the parts of the property covered by paragraph 5 of the Fourth Schedule and the Lessee’s obligation in paragraph 12 of the Third Schedule does not include contributing to costs incurred in complying with paragraph 4 of the Fourth Schedule, which does extend to the roof.

Finally, paragraph 3 of the Third Schedule (the Lessee’s obligation to repair the demised premises) is not engaged at No. 146, because the roof is not part of the demised premises.

The position is more complicated at No. 96, an upper floor flat. There, by including the roof in the definition of the demised premises the parties expressly agreed that it was to be part of the premises which paragraph 3 of the Third Schedule requires the Lessee to keep in repair. Whether that obligation is enforceable having regard to paragraph 5 of Schedule 6 to the 1985 Act, especially in the absence of an obligation on the Lessor to contribute to the Lessee’s costs of repairing the structure and exterior of the demised premises, is not a question which arises on this appeal. This appeal is concerned only with the extent of the Lessor’s entitlement to recover the cost of the work that it has carried out to replace the roof.

The Lessor’s entitlement to recover the cost of repairing the roof is governed by paragraph 12 of the Third Schedule which obliges the Lessee to contribute half of the costs and expenses incurred by the Lessor in carrying out its obligations under the Fourth Schedule (excluding paragraph 4). At No. 96 the Fourth Schedule imposes no obligation on the Lessor to carry out any work to the roof at all. The roof is not part of the reserved premises and therefore does not fall within paragraph 4. The obligation in paragraph 5 to keep the exterior of the property in repair is subject to the express exclusion of the roof. On the face of it, therefore, the Fourth Schedule imposes no obligation to repair the roof and it follows that paragraph 12 of the Third Schedule does not require the Lessee to contribute towards the costs of any work which the Lessor carries out to the roof.

The FTT held that in the case of both flats the implied covenant introduced into the Leases by paragraph 14(2) of Schedule 6 to the 1985 Act not only required the Lessor to carry out repairs to the roof but did so by inserting the implied covenant into the Fourth Schedule thereby creating a contractual obligation on the part of the Lessee to contribute half the cost under paragraph 12 of the Third Schedule.

The FTT was clearly correct that the effect of paragraph 14(2) was to subject the Lessor to the implied covenant to keep the whole of the structure and exterior of the flat and the building in which it was situated in repair. So far as the roof of No. 146 is concerned, the implied covenant duplicates the Lessor’s obligation under paragraph 4 of the Fourth Schedule to keep the reserved premises (including the roof), in repair. At No. 96, the implied covenant is the only obligation on the Lessor to repair the roof.

But the covenant implied into the Lease by the statute says nothing about any corresponding obligation on the Lessee to contribute towards the costs incurred by the Lessor in complying with it. Moreover, paragraph 16A(1) of Schedule 6 leaves the parties free to agree whatever terms they choose about contributions by the tenant towards costs incurred by the landlord in discharging the implied obligations (provided those contributions do not exceed a reasonable part of those costs). In neither of these leases did they expressly agree anything about those costs. Nor can any obligation to contribute be implied. At No. 146 any suggested implication would be inconsistent with the express terms which exempt the Lessee from any responsibility for contributing towards the Lessor’s costs of repairing the roof. At No. 96, the lease works perfectly well with the only relevant obligation being the Lessor’s implied covenant to keep the structure of the building in repair without the need to imply any corresponding payment obligation on the Lessee’s part. It cannot be said that the absence of a service charge covering the implied obligation causes the lease to lack business efficacy since, as Lewison LJ pointed out in Great Arthur House, “there is no presumption that the cost of all works that the landlord is obliged to carry out can be passed on to the Lessees”.

The route by which the FTT found the appellant liable to contribute towards the cost of repairs to the roof does not seem to me to be justified. It relied on paragraph 14(4) of Schedule 6 as nullifying the parties’ agreement that landlord’s obligation to repair the exterior of the building was not to include an obligation to repair the roof. That is what it meant when it said in paragraph 62 of the decision that “the parties cannot contract out to the implied covenants unless it has been ordered by the County Court”. It was this part of the FTT’s reasoning that Mr Ward invited me to accept.

I do accept that the parties were not free to contract out of the statutory implied covenant. But that does not require any rewriting of paragraph 5. Paragraph 14(4) of Schedule 6 restricts the extent to which the parties may exclude or modify the obligations of the landlord under the covenants implied by paragraph 14. It has no effect on their express covenants, whether or not they are inconsistent with paragraph 14; the implied covenant to repair the structure and exterior of the dwelling and of the building is an additional obligation, the meaning of which is clear and which applies unamended. So far as it goes, the express obligation in paragraph 5 of the Fourth Schedule duplicates but is not inconsistent with the implied obligation. In both leases the Lessor is obliged by the statutory implied covenant to repair the roof, notwithstanding the exclusion of the roof from the separate covenant at paragraph 5 of the Fourth Schedule.

But, for the reasons I have already given in paragraphs 54 and 56 above, I do not accept that the implied covenant requires that the leases be read as if the words “(excluding the roof thereof)” did not appear in paragraph 5 of the Fourth Schedule.

It follows that when the respondent replaced the roof of No. 96 it was not carrying out any obligation under the Fourth Schedule. It was complying with the implied covenant. When it replaced the roof of No. 146 it was complying with the implied covenant and additionally with its obligation to keep the reserved premises in repair, but that obligation is excluded from the Lessee’s contribution obligation by paragraph 12 of the Third Schedule.

That leaves only Mr Ward’s fall-back argument based on the concluding words in paragraph 12 of the Third Schedule and the grant of easements, quasi-easements and rights of shelter and support by paragraph 3 of the First Schedule. Once again it is necessary to look at each of the two leases separately.

The roof was included in the demise of No. 96. The additional rights given to the Lessee by the First Schedule were not rights over the demised premises themselves. The roof was demised and was therefore fully under the control of the Lessee. It was not necessary, or possible, for the Lessor to grant rights, easements or quasi-easements over the roof.

As for No. 146, I will assume that paragraph 3 of the First Schedule entitles the ground floor flat to receive shelter from the first floor flat and the roof over it. On that assumption I nevertheless find it impossible to accept that the parties intended the cost of maintaining the roof and the structure of the upper flat thereby to become part of the Lessee’s liability under paragraph 12 of the Third Schedule. They had crafted paragraph 12 to create a liability to contribute towards the cost of repairing the whole of the exterior of the property except the roof. It seems probable that the purpose of distinguishing between the reserved premises and the remainder of the exterior of the building was specifically to exempt the Lessee from a liability to pay for repairs to the roof. But whether that was their intention or not, the parties specifically excluded the roof from the Lessee’s service charge liability in the Third and Fourth Schedules. It is impossible to believe that at the same time they intended, by their obscure reference to the costs of “enabling the Lessee to enjoy the Rights contained in the First Schedule”, thereby to make the Lessee liable for half the cost of repairs to the roof. Had that been their intention it could have been achieved by simply omitting the words “(excluding the roof thereof)” from paragraph 4 of the Fourth Schedule.

The rights included in the First Schedule also included, at paragraph 5, an express right for the Lessee repair, renew or rebuild the demised premises or any part of the property giving shelter or protection to the demised premises, presumably at his own expense. In view of that entitlement, and the express exclusion of the cost of repairs to the roof from the liability otherwise described in paragraph 12 of the Third Schedule, I do not read the reference in paragraph 12 to the costs of “enabling” the Lessee to enjoy the rights contained in the First Schedule as covering the cost of repairs to building components for which liability had already been assigned or excluded. That reference seems to me to be more apt to refer to costs of other matters, not already covered by the Fourth Schedule. In particular, paragraph 6 of the First Schedule grants a right of way over land coloured yellow and grey on the lease plan, subject to paying half the expense of maintaining and keeping the surface of that land in repair. The plan available to the parties is not coloured, but I assume the land coloured yellow and grey represents the two halves of the shared footpath leading to the building from the public highway (the land coloured yellow is included in the demise of each flat and is described as “part of the footpath”). It seems to me to be likely that the additional obligation to contribute to the costs of enabling the Lessee to enjoy the First Schedule rights was a reference to the contribution obligation in paragraph 6 of the First Schedule.

In any event, I was reminded by Mr Crozier of the explanation of the proposition that service charge provisions should be construed “restrictively” given by Lord Neuberger of Abbotsbury PSC in Arnold v Britton [2015] UKSC 36, at [23], namely that “… the court should not ‘bring within the general words of a service charge clause anything which does not clearly belong there’”. The cost of repairing the roof is not clearly brought within the service charge obligation by the reference in paragraph 12 of the Third Schedule to the costs of “enabling the Lessee to enjoy the rights contained in the First Schedule”. For that reason also the cost is not recoverable.