[2024] UKUT 63 (LC)

The FTT granted permission to appeal its decision. The only issue is whether the FTT was correct in its interpretation of paragraph 6.2.

On behalf of the appellants, Ms Mather started her submissions on the appeal by suggesting that only sub-paragraph 6.2(a) was relevant. That was an ambitious proposition and I do not accept it. It is contrary to well established principles of contractual interpretation. These were summarised by Carr LJ (as she then was) in EMFC Loan Syndications LLP v The Resort Group Plc [2021] EWCA Civ 844, at [56]-[58], and they demonstrate the need to consider the whole of the clause in the whole of its context in the Lease:

“56.

The relevant well-known legal principles of contractual construction are non-contentious and to be found in a series of recent cases, including Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900; Arnold v Britton and others [2015] UKSC 36; [2015] AC 1619 and Wood v Capita Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173.

57.

In summary only then, 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 the language in the contract to mean. It does so by focusing on the meaning of the relevant words in their documentary, factual and commercial context. That meaning has to be assessed in the light of the natural and ordinary meaning of the clause, any other relevant provisions of the contract, the overall purpose of the clause and the contract, the facts and circumstances known or assumed by the parties at the time that the document was executed and commercial common sense, but disregarding evidence of the parties' subjective intention. While commercial common sense is a very important factor to be taken into account, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed. The meaning of a clause is usually most obviously to be gleaned from the language of the provision. Where the parties have used unambiguous language, the court must apply it; if there are two possible constructions, the court is entitled to prefer the construction consistent with common sense and to reject the other (see Rainy Sky (supra) at [21] and [23]).

58.

In Wood v Capita Insurance Services Ltd (supra) at [9] to [11]) Lord Hodge JSC described the court's task as being to ascertain the objective meaning of the language which the parties have chosen to express their agreement. This is not a literalist exercise focused solely on a "parsing of the wording of the particular clause"; the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. The interpretative exercise is a unitary one involving an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences investigated.”

Ms Mather submitted that, on any reading of clause 6.2, the discretion given to the Landlord or the Company was very wide and the FTT had been wrong to give it a restricted meaning. The interpretation which it should have preferred could best be demonstrated by omitting surplus words and breaking the paragraph up into its constituent parts, which Ms Mather submitted were as follows:

When asked to comment on paragraph 6.2 in its wider context, and in particular on the significance of the statement in paragraph 6.1 that the Tenant’s Proportion was “to be calculated primarily on a comparison for the time being of the net internal area …”, Ms Mather submitted that this did not imply that paragraph 6.1 was to be the main method of apportionment throughout the term of the Lease. “Primarily” indicated that the parties appreciated that the method of apportionment might have to change. The Lease was for an exceptionally lengthy term and the Estate itself was complex and included a number of different uses; there was every reason for the parties to foresee that changes in the basis of apportionment, including wholesale change, might be required for any number of reasons. They had therefore agreed that the Landlord could substitute any alternative method of apportionment at any time provided only that it was fair and reasonable in the circumstances.

I do not accept Ms Mather’s submissions. The meaning of paragraph 6 as a whole is perfectly clear, as submitted by Mr Blakeney and Mr Whatley on behalf of the respondents. Its effect is as described by the FTT. My reasons for reaching that conclusion are these.

The whole of paragraph 6 is about the ascertainment of the Tenant’s Proportion throughout the term of the Lease. I agree with Ms Mather that the parties have anticipated the possibility that change might be required, but they have agreed detailed provisions about the extent and circumstances of the change which is to be permitted.

I place much greater weight than Ms Mather on the repeated use of “primarily” in paragraph 6.1. The Block Service Charge is to be “calculated primarily on a comparison for the time being of the net internal area” of the Premises and the Lettable Areas of the Block. The Estate Service Charge is to be “calculated primarily on a comparison for the time being of the net internal area” of the Premises and the Lettable Areas of the Estate. In this context, “primarily” means more than just “originally” or “first”, it means “mainly” or “mostly”, and indicates that the parties intend the Tenant’s Proportion to be calculated, for the most part, in the manner described in paragraph 6.1.

Paragraph 6.2 does not refer to the Tenant’s Proportion at all. That key expression is next encountered in paragraphs 6.3 and 6.4. That suggests that those paragraphs and paragraph 6.2 are performing different functions.

Focussing first on paragraphs 6.3 and 6.4, these provide a means for the Landlord or the Company “to vary the Tenant’s Proportion from time to time”. Such a variation is achieved by giving written notice, and it is permissible only as a consequence of one or more of the circumstances described in paragraph 6.3. These are “any alteration or addition to the Block(s) or the Estate or any alteration in the arrangements for provision of services therein or any other relevant circumstances”. Subject to the right to make another variation in future, this power allows the Landlord or the Company to effect a permanent change in the Tenant’s Proportion. But if that is correct (and Ms Mather did not suggest any alternative effect) what purpose was there in including that restricted right if paragraph 6.2 already provided power to make wholesale changes in the basis of apportionment without the procedural and substantive limitations in paragraphs 6.3 and 6.4?

Paragraph 6.2 does not purport to allow the Landlord or the Company to vary the Tenant’s Proportion. Instead it first permits them, in sub-paragraph (a), “to adopt such other method of calculation of the proportion of the expenditure to be attributed to the Premises as is fair and reasonable in the circumstances”. The reference to “adopt[ing]” another method of calculation is to be contrasted with “vary[ing] the Tenant’s Proportion” which is permitted by paragraph 6.3. The reference to “the expenditure” is not to a defined expression but is clearly intended to refer back to the opening lines of paragraph 6.2 and specifically to “any expenditure or item of expenditure incurred”.

The effect of paragraph 6.2 is therefore to allow the Landlord or the Company, within the general framework of an apportionment according to net internal area required by paragraph 6.1, to adopt another method of apportionment of a particular type or item of expenditure if to do so is fair and reasonable. This interpretation, which was the FTT’s interpretation, respects the parties’ intention that apportionment by area is to be the primary method of apportionment and avoids the power in paragraph 6.3 being entirely swallowed up by paragraph 6.2, and the procedural protections surrounding it being negated.

It is less clear whether the list in sub-paragraph 6.2(b) is intended to be a closed list of circumstances in which the discretion to adopt a different method of calculation for any expenditure or item of expenditure may be used, or is intended instead simply to illustrate how the power might be used. Whichever is the case, the list is informative. It allows the whole of “the expenditure” to be attributed to a particular flat, or a fair proportion of it to be attributed to one person and the remainder dealt with as normal, or the whole or part of the expenditure to be allocated “to a different head of expenditure”. I take the reference to a “head of expenditure” to mean one of the three heads or categories of expenditure in Part 3 of Schedule 6 i.e. Estate Services, Block Services, or Car Park Services. None of these examples (whether they are illustrative or exhaustive) would be apt to change the method of apportionment of the whole of the service charge expenditure on a permanent basis. It could never be fair and reasonable, for example, for the whole of the Estate expenditure to be allocated to one individual.

I do not think the words “or otherwise” in paragraph 6.2 will bear the weight Ms Mather places on them. The opening lines identify matters which may justify the adoption of a different apportionment to the limited extent contemplated in that paragraph. These are “the nature of any expenditure or item of expenditure incurred, or the premises in the Block or the Estate as the case may be which benefit from it or otherwise”. When read together with sub-paragraph 6.2(a) the intent is clear. The Landlord or the Company may reallocate a particular type of expenditure or a particular item of expenditure if it is fair and reasonable to do so having regard to the nature of that expenditure or the premises in this Block or in another part of the Estate which benefit from that expenditure “or otherwise” i.e. which benefit or which do not benefit from the expenditure. If only one or two flats benefit from a particular item of expenditure the whole of that item might be charged to them; if only one or two flats gain no benefit from an item of expenditure they might be exempted from contributing towards it.

A consideration of “commercial common sense” (or the interests and objective expectations of parties entering into this sort of relationship, as it might otherwise be described) also supports a limited interpretation of clause 6.2. These are very expensive flats and the services provided on the Estate are elaborate. The parties have agreed a “primary” basis of apportionment and a means by which that primary method may be recalculated, while preserving its basic design (paragraphs 6.3 and 6.4). It seems to me most unlikely in that context that they would also agree an entirely open ended discretion of the sort suggested by the appellants. That would bypass the primary method of the apportionment and put the residential tenants substantially at the mercy of the landlord’s commercial interests. It might well be in the landlord’s interests to reapportion service charges to the disadvantage of the residential tenants and to the advantage of the commercial tenants because the extent to which the total occupational costs of the commercial premises are represented by service charges is likely to reduce the rent which the premises command. The fact that any such reapportionment must be fair and reasonable would be some protection but could still lead to a significant change in the service charges payable by the residential leaseholders.

I am therefore satisfied that the FTT was right in its conclusion that the power in paragraph 6.2 may only be exercised on an ad hoc basis in relation to particular items or types of expenditure and may not be relied on, as the appellants seek to do, to justify the abandonment of the primary method of apportionment described in paragraph 6.1.