[2025] UKUT 232 (LC)

It is common ground that the decision of the Supreme Court in Arnold v Britton [2015] UKSC 36 is the leading authority on the construction of the lease and of the clause in question. Lord Neuberger said this at paragraph 25:

“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 Limited v Persimmon Homes Limited [2009] AC 1101, para. 14. It does so by focussing on the meaning of the relevant words ... 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 commonsense, but (vi) disregarding subjective evidence of any party's intentions."

He added:

“ … 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. .... The origin of the adverb was in the 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".

There have been a number of Court of Appeal decisions about whether a landlord’s legal costs can be recovered as part of the service charge. The oldest, and the one to which all subsequent cases refer, was Sella House Ltd v Mears [1989] 21 HLR 14. The obligations of the landlord, for which the lessees had to pay, were as follows:

“5(4)(j)(i) To employ at the Lessors’ discretion a firm of Managing Agents and Chartered Accountants to manage the Building and discharge all proper fees salaries charges and expenses payable to such agents or such other person who may be managing the Building including the cost of computing and collecting the rents and service charges in respect of the Building or any parts thereof.

(ii)

To employ all such surveyors builders architects engineers tradesmen accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building.”

It will be seen that the wording of (i) above is identical to that of clause 5(11) in the Northwood Hall lease except that the latter also includes the final words “and the ancillary costs in connection therewith”. The Northwood Hall lease, on the other hand, does not include any equivalent to clause 5(4)(j)(ii) in the Sella House lease. The Sella House lease also included clauses in very similar terms to the Northwood Hall clauses 5(12) (landlord covenants to enforce the terms of the lease against other tenants at the lessee’s request and subject to the lessee’s indemnity) and 3(7) (lessee’s covenant to pay costs incidental to the preparation and service of a section 146 notice).

The question in Sella House was whether the landlord was entitled to include in the service charge the cost of recovering rent and unpaid service charges from some of the tenants, including litigation costs comprising solicitor’s and counsel’s fees. The Court of Appeal decided that the landlord was not so entitled. Taylor LJ said at page 156:

“The scope of (j)(i) is concerned with management. In (j)(ii) it is with maintenance, safety and administration. On the respondents argument a tenant, paying his rent and service charge regularly, would be liable via the service charge to subsidise the landlord's legal costs of suing his co-tenants, if they were all defaulters. For my part, I should require to see a clause in clear and unambiguous terms before being persuaded that that result was intended by the parties.”

The requirement for “clear and unambiguous terms” is important, but it does not mean that there has to be an express reference to legal costs or to lawyers for such costs to be recoverable. That can be seen from two decisions of the Tribunal.

First, in Geyfords Limited v O’Sullivan [2015] UKUT 683 (LC) the Tribunal (the Deputy President, Martin Rodger KC) had to decide whether a landlord could recover through the service charge its costs of litigation against leaseholders over unpaid service charges. The lease entitled it to recover expenses incurred “in and about the maintenance and proper and convenient management and running of the Development.” The Deputy President said:

“36.

The words “proper and convenient management and running”, used in the context of a mixed residential and commercial building, are not words which have a precise meaning which either clearly includes or clearly excludes the activity of litigating over the collection or quantification of sums required to repair the building. …

37.

I think the F-tT was right to acknowledge that “management” may sometimes include obtaining professional advice, including legal advice, and I agree … that in some circumstances it might involve litigation.”

However, the Deputy President concluded that the words of the clause were not sufficiently clear to cover the costs of proceedings against defaulting leaseholders.

Second, in Assethold Limited v Watts [2012] UKUT 537 (LC) the landlord was required by the lease:

“To do or cause to be done all works installations acts matters and things as in the reasonable discretion of the Landlord may be considered necessary or desirable for the proper maintenance safety amenity and administration of the Development.”

The landlord had taken proceedings against an immediate neighbour and obtained an injunction to prevent excavations that threatened the structure of the building. The Tribunal held that the landlord’s costs were recoverable through the service charge pursuant to the clause set out above. The Deputy President said:

“58.

I accept that, as a general principle of interpretation, if contracting parties intend that a payment obligation such as a service charge should cover a particular type of expenditure they will wish to make that clear. Unclear language should therefore be read as having a narrower rather than a wider effect. Nonetheless, I do not think that principle should be pushed to the point where language which was clearly intended to encompass expenditure in a wide variety of situations which the parties have not explicitly catalogued should be so restrictively construed as to deprive it of any real effect. It seems to me to be wrong in principle to start from the proposition that, with certain types of expenditure, including the cost of legal services, unless specific words are employed no amount of general language will be sufficient to demonstrate an intention to include that expenditure within the scope of a service charge. Language may be clear, even though it is not specific.”

In No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119 [2021] EWCA Civ 1119. The landlord was there seeking to recover from a tenant a proportionate share of costs which the landlord had incurred in litigation with the tenant. The landlord relied on, among other things, service charge provisions referring to:

The Deputy President considered that "[t]he language is directed towards the provision of management services, not litigation",

In Kensquare Limited v Boakye [2021] EWCA Civ 1725 the service charge was defined to include:

“"The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building"

The Court of Appeal looked at the decisions in Sella House and in No 1 West India Quay; at paragraph 54 Newey LK (with whom Stuart-Smith and Andrews LJJ agreed) concluded

“54.

… 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. As in No. 1 West India Quay, the 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 [the landlord] would involve "bring[ing] within the general words of a service charge clause" something "which does not clearly belong there". The fact that paragraph 5 speaks of advisers and agents being employed "in connection with" the management of the Building, not "for" its management, does not seem to me to matter.”

Finally, in 89 Holland Park Management Limited v Dell [2023] EWCA Civ 1460 the clause in question again referred to the employment of professionals, at clause 4(4):

“(g)(i) At the Lessor's discretion to employ an Agent to manage the Building…

(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.

…

(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.”

The legal costs in question were incurred by the landlord in litigation against a neighbour in connection with a planning dispute and the landlord’s objection to a building proposed to be built next door. Such costs were not recoverable under the clause set out above. Falk LK said:

“37.

The key operative words of paragraphs (g)(ii) and (l) are "for the proper maintenance safety and administration of the Building" and "for the proper maintenance safety amenity and administration of the Building" respectively. In the context of a clause that clearly focuses on management and maintenance of the building itself, these words naturally refer to expenditure of that kind. In my view it would strain those words to read them as extending beyond costs incurred in maintaining and running the building, and keeping it safe.”

Falk LJ did not rule out the possibility of litigation costs being recoverable under the clauses in question. She said:

“44.

This does not mean that no litigation costs could ever fall within the general words of clause 4(4) (g)(ii) and (l). It might well be that certain costs would do so in appropriate circumstances, particularly if they relate to something for which the Lessor has a clear responsibility under the Lease. One example might be a dispute relating to poor workmanship on a repair. Another example, discussed in oral argument, might be a claim against the building's insurers after a refusal to pay out on a claim. But, as discussed below in relation to Assethold , the answer will depend on the particular expenditure in question.”

The unsuccessful appellant in Dell criticised the Tribunal’s decision on the basis that it had been unduly influenced by the “potentially ruinous cost” ([2022] UKUT 169 (LC), paragraph 57) of the litigation. Falk LJ agreed with the respondent that the Tribunal’s intention had been to refer to potential rather than too actual cost, but went on to say:

“what is critical here is the nature of the dispute in question. A dispute over a building repair or insurance claim might prove very expensive, but it would be of a different nature to a dispute of the kind in issue here, principally because the remainder of clause 4(4) provides the strongest indication of the sorts of expenditure that was intended to be covered.”

It is against that background of caselaw that the present appeal is argued. As one might expect, both parties lay particular emphasis both on Arnold v Britton and on Sella House.