(1) Dennis Phillips, (2) Royna Goddard v (1) Martin Francis, (2) Rebekah Katherine Francis [2012] EWHC 3650 (Ch), PART I

The backdrop to the case would appear to be idyllic: Point Curlew is a 25 acre holiday site at St Merryn, Cornwall, containing, amongst other things, more than 150 chalets let on 999 year leases. On 22 April 2008, the freehold of the site was conveyed Mr and Mrs Francis, who declared that they would bring it up to a first class standard. Unfortunately, the corollary of that declaration was that the lessees’ service charge bills rose, in some cases, threefold.

The certified service charges for the period 22 April to 31 December 2008 and the 12 months ending 31 December 2009 were £269,933.49 and £583,542.87 respectively. The latter certificate indicated that the costs included both wages of £95,000 for the Francises and £27,787.76, a 5% management charge. The lessees took action, which resulted, unusually for a service charge dispute, in a trial before a circuit judge in the county court.

Clause 3 obliged the landlord to provide the services listed in paragraphs 1-7 of Schedule 3.

Clause 4 limited the recoverable service charge to a proportion of “sums actually expended on the liabilities incurred by the Lessor … in connection with the management and maintenance of the Estate and … shall include the cost of the matters referred to in the Schedule 3 hereto”.

Schedule 3 contained 8 items for which the lessees were to pay. The two items at issue were paragraphs 6 and 8:

• “6. Management of the Estate … [staff and equipment costs] together with any amounts of fees paid to architects agents surveyors and solicitors employed by the Lessor in regard to the management of the Estate.
• “8. A management charge of five per centum (5%) of the total cost of the items referred to in this Schedule.

HHJ Cotter decided that paragraph 6 authorised the employment of a wide range of professionals and “agents” for the “management of the Estate”. Costs and charges could be incurred and recovered under that provision whether someone was:

• a self-employed or external professional;
• agent of the specific types stated, or
• “agent” within the general meaning of “agent”.

On the plain wording therefore, Mr and Mrs Francis were empowered to instruct an “agent” for “the management of the estate”, and recover the cost under paragraph 6 in addition to a 5% management charge under paragraph 8.

From what I can gather therefore, HHJ Cotter held that the Francises were entitled to recover both their £95,000 wages under paragraph 6, and the 5% management charge contained in paragraph 8. The problem with this conclusion is that it appeared to be a licence for double recovery of at least some of the Francises’ wages/charges.

The lessees appealed.

On the appeal, the lessees argued that double recovery could not have been intended and paragraphs 6 and 8 should be read as mutually exclusive:

• the only management charge payable to the lessors was under paragraph 8, namely, 5% of the aggregate amounts chargeable under paragraphs 1 to 7, alternatively
• the lessors could recover their management charges under either paragraph 6 or paragraph 8, but not both.

The lessors responded that:

• paragraph 6 covered cases in which they employed third party agents, whereas
• paragraph 8 entitled them to be paid for their own management services.

In the event, the Chancellor found his own solution:

“18. Paragraph 6 of Schedule 3 entitles the Lessor to reimbursement by the service charge of both the pay and expenses of “staff employed” and “fees paid” to “architects agents surveyors and solicitors” employed in regard to the management of the Estate. The context in which the word “agent” is used is by reference to the provision of some professional service required in connection with the management of the Estate. That is to be distinguished from the general management of the Estate. No doubt the professional agent may be a company in which the Lessor is interested, see Skilleter v Charles [1992] 1 EGLR 73, but the power to recover charges contained in paragraph 6 does not extend to nonprofessional management services provided by the Lessors either personally or through their management company.

“19. Accordingly, in my judgment, the appropriate limitation to prevent the double recovery which both parties agree cannot have been intended is to recognise that the “fees paid” referred to in paragraph 6 are limited to those charged to the Lessors by professional agents. As such they do not include the wages of £95,000 paid to Mr and Mrs Francis … Nor do they include payment for work of a non-professional nature charged by any agent, particularly one in which Mr and Mrs Francis are interested … In my view, the words “in regard to the management of the Estate” in the context of paragraph 6 as a whole are more limited than a power to appoint an “agent to manage” the Estate, that is recognised by paragraph 8 as a function of the owners.”

This case is an illustration of documentary context being key to the construction of a contractual document.

I can imagine the draftsman of the lease considering whether to use the title “managing agent” in paragraph 6, and discarding “managing” from the description in order to avoid argument as to whether the agent managing the estate had in fact to describe itself as a managing agent, and to ensure that if, for example, a land agent was employed, the cost of employing that agent was also recoverable.

The financial consequence of this decision was that the Francises’ personal management income fell from £95,000 to just 5% of the annual expenditure, which in 2010 was about £15,000. I suspect however that their failure to consult, reviewed and discussed in my second post on this case, was of more immediate concern to them.