Geyfords Ltd v O’Sullivan, Grinter, Shaw, Morgan, Bonsor

The development, Woodcote Court, was a mixed use one, constructed in the 1930s.

On the ground floor there was a car showroom, garage and workshop where the landlord freeholder, Geyfords, carried out business.

On the first and second floors there were twelve flats:

• Seven were let on short term tenancies;
• The remaining five were let on long leases. Geyfords was the landlord under these leases, and had been since the leases were granted.

Each residential long lessee was required to pay, by way of service charge, one twelfth of various “costs expenses outgoings and matters”, including:

“All other expenses (if any) incurred by the Lessors or their managing agents in and about the maintenance and proper and convenient management and running of the Development”.

The parties were in dispute as to whether legal costs were recoverable by way of service charge under that clause.

The £54,000 bill in search of a home had been incurred by the landlord in two sets of proceedings: one county court and one in the LVT.

The county court proceedings

In September 2010, the landlord sued three long lessees for non-payment of an interim service charge demand of £12,000 odd in connection with major works.

The claim was ultimately settled by a consent order in January 2012 on these terms:

• Each lessee would pay £8,000 within 28 days, and the balance when the landlord delivered the final tender for the works;
• The landlord would pay £8,000 for each of the seven flats it let on short term tenancies;
• Each side would bear its own costs of the proceedings.

The LVT proceedings

In March 2012, all five long lessees made a section 27A application to the LVT. They sought a determination for the years 2005-2013.

The lessees represented themselves, but the landlord engaged solicitors and Counsel.

The LVT’s determination was four-pronged:

• The landlord was entitled to recover most of the costs that it had claimed;
• It had no jurisdiction to determine the application made by the three lessees who had been involved in the county court claim;
• The interim demand that had been the subject of the county court claim was reasonable in respect of the remaining two long lessees who had not been parties to the claim, and
• It declined to make a section 20C order. It made no determination as to whether the costs were actually recoverable under the lease.

The landlord sought to recover its legal fees through the service charge.

Perhaps unsurprisingly, a dispute arose as to the lessees’ liability to pay those costs. In the end, in November 2014, the landlord made a section 27A application for a determination of that liability.

The FTT decided that the word “running” added nothing to the meaning of “management”.

It concluded that “management” was not wide enough to encompass the recovery of legal costs incurred in a dispute with the very lessees from whom it was seeking to recovery those costs through the service charge.

It decided that the legal costs claimed were not recoverable under the lease, but granted permission to appeal, not having found the question an easy one.

Arnold v Britton [2015] UKSC 37

Martin Rodger QC began by reciting Lord Neuberger’s overview of contractual interpretation in Arnold:

“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 then turned to three of the seven factors identified by Lord Neuberger in Arnold, setting out in full those which he considered to be relevant to the case before him:

“17. First, the reliance placed in some cases on commercial commonsense and surrounding circumstances (e.g. in Chartbrook) [2009] AC 1101 paras. 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed.  The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision.  Unlike commercial commonsense and the surrounding circumstances, the parties have control over the language they use in a contract and, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

“18. Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning.  That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it.  However that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning.  If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve….

“23. Seventhly, 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”.”

“Running and management”

“The starting point of the interpretative process is the language used, in its immediate context, and the technique of stripping away synonyms in order to isolate what the reader considers to be the critical expression risks diluting the cumulative impact of the words the draftsman and the parties have chosen to employ. That is particularly the case where, as here, the language used is relatively economical”.

With that observation, Martin Rodger QC began his review of the FTT’s decision.

Neither “running” nor “management” clearly included nor excluded the recovery of legal costs:

• “Running” was more suggestive of day to day hands-on actions;
• “Management” was more long term or strategic;
• Together, the words were more applicable to dealings with the condition of the building and its surrounds, rather than litigation about the rights and obligations of the lessees.

The phrase “proper and convenient” also suggested that the recoverable costs were intended to be the costs of routine, rather than exceptional, expenditure.

Reston v Hudson [1990] 2 EGLR 51

This case led Martin Rodger QC to the conclusion that “management” may sometimes include litigation and obtaining professional, including legal, advice.

In Reston, the landlord issued proceedings to determine whether he was responsible for the cost of repairing the windows in the building.

The lease allowed him to recover “the costs of management of the estate”.

The High Court judge held that the legal costs of the landlord’s claim did fall within the meaning of management.

That decision was justified, in Martin Rodger QC’s judgment, because the leases were unclear, and the proceedings were of concern to all of the lessees and the landlord.

Sella House Ltd v Mears [1989] 1 EGLR 65

Conversely, this well-known case caused Martin Rodger QC to row back from applying Reston to a case where the landlord claimed payment from an individual lessee.

In Sella House, the crucial clauses allowed the landlord to recover the costs of:

• A managing agent “or other person who may be managing the Building”, and
• “Other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building”.

The Court of Appeal held that the clause did not allow the recovery of the landlord’s legal costs.

In Taylor LJ’s judgment, legal costs should be recoverable in cases where a lease contained “a clause in clear and unambiguous terms”.

That was not, noted Martin Rodger QC, a statement of principle, even though it had frequently been relied upon for that purpose. It was simply an uncontroversial observation that “clear and unambiguous terms” are required in a lease to impose what Taylor LJ “obviously regarded as an onerous and unusual payment obligation”.

He continued:

“I refer to Sella House not for how the language of that lease struck the Court of Appeal, but because it illustrates the improbability that parties to a lease would regard general words as sufficient to express an intention that any shortfall in the landlord’s cost of litigation between them should be a charge on the whole body of leaseholders”.

Francis v Phillips [2014] EWCA Civ 1395

Martin Rodger QC’s next stop was our old bugbear, Francis v Phillips, in which Sir Terence Etherton, the Chancellor, identified a “broad principle” in service charge cases:

“ … it is reasonable to expect 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: see, for example, Gilje v Charlgrove Securities Ltd [2002] 1 EGLR 41 at [31] (Mummery LJ). It is to be expected that the tenant will wish to be fully aware of any such additional obligation on which his or her continuing right to possess the land and to occupy it may depend.

“It is to be expected that the lessor will wish to make such a continuing additional obligation clear because it arises under a lease which will subsist through successive ownerships of the reversion and the tenancy and because the lessor will not wish to be out of pocket in respect of services provided for the benefit of the tenant…”

Of this observation, Martin Rodger QC said: “an absence of clarity can therefore be treated as an orthodox aid to identifying the boundaries of payment obligations generally, including service charge obligations”.

Martin Rodger QC came straight to the point: in his view, the £54,000 could not be applied to the service charge under the disputed clause.

There were two reasons within the clause itself which drew him to the conclusion that the clause was intended to cover only routine and unexceptional expenditure:

• The words “proper and convenient” suggested that directly, and
• The fact that the landlord relied upon a sweeping up clause covering residual expenditure. The parties could not have intended that the landlord should recover its legal costs through a residual category of expenditure.

The lease contained other provisions which supported Martin Rodger QC’s interpretation.

Lessee-lessee covenants

First, there were covenants between lessees which were mutually enforceable by the following mechanism:

• The lessees covenanted with each other and with the landlord to that effect, and
• The obligations which the lessees were entitled to enforce were set out in the form of regulations in a schedule to the lease, and covered matters such as use, noise and nuisance.

For flats where leases had not been granted at the date of the lease in question, the landlord covenanted to include those regulations in the leases when it granted them.

The mutual obligations did not involve the landlord at all, and the landlord could not be compelled to take any action under them.

If it did decide to take action, there was no reason to believe that it was entitled to claim an indemnity for its legal costs.

Equally, individual leaseholders could take their own steps to enforce compliance with the regulations, but could not look to the landlord to do so on their behalf.

Lessee-lessee-landlord covenants

Next, there were covenants made by the lessee with both landlord and fellow lessees, under which the landlord agreed:

“That (if so required by the Lessee) the Lessors will enforce the covenants … entered into by the lessees of the other flats … on the lessee indemnifying the Lessors against all costs and expenses in respect of such enforcement and provided such security in respect of costs and expenses as the Lessors may reasonably require is provided by the Lessee.”

In those cases, a lessee could oblige the landlord to take action, but was required, on the wording of the covenant, to indemnify the landlord against any costs it incurred.

Enforcement action by the landlord against the lessee

Third, the landlord might decide to take its own action to enforce covenants made with the lessee alone. Those covenants included the lessee’s obligation to pay the service charge.

“It does not seem to me to be likely that the parties intended that leaseholders should be required to contribute towards costs incurred in litigation to enforce … obligations which the Lessors have undertaken on their own initiative”, observed Martin Rodger QC. 

Forfeiture/non-compliance with statute

Fourth, and finally, the lease contained covenants by the lessee:

• To pay “all costs, charges and expenses (including solicitors’ costs and surveyors’ fees)” incurred by the landlord incidental to the preparation and service of a notice under section 146 of the Law of Property Act 1925, or,
• If the lessee failed to comply with an Act of Parliament or other legislation, “at all times [to] keep the Lessors indemnified from and against all actions proceedings costs expenses claims and demands in respect thereof.”

In this case, Martin Rodger QC considered that the obligation to pay the “costs, charges and expenses (including solicitors’ costs and surveyors’ fees)” was “an example of clarity” when compared to the language of the disputed clause.

The overall purpose

Martin Rodger QC then stood back to take stock of the lease overall.

He noted that:

• Each long lessee was required to pay one twelfth of the costs of maintaining, repairing and decorating the building;
• The landlord, who occupied the ground floor for the purposes of its own car dealing business, was not required to meet any of that expenditure in its capacity as occupier of that ground floor, even though it benefited from the repairs, maintenance and redecoration.

“That arrangement”, he observed, “might be regarded as rather inequitable, but it makes it less likely that the parties can have intended that payment obligations which are, to a significant degree, for the [landlord’s] own benefit should be enforced entirely at the expense and risk of the leaseholders”.

Life at the date of the lease

Moving away from study of the lease itself, Martin Rodger QC focused on the law as it was at the date when the leases were granted in 1978:

• Landlords generally enforced payment of service charges by forfeiture action;
• A lessee generally only avoided forfeiture by paying – or arranging for his/her mortgage lender to pay – the outstanding service charge and the legal costs of the forfeiture action;
• Section 81 of the Housing Act 1996 was nearly twenty years away. Forfeiture was unfettered by the need to obtain a determination of the amount of service charge.

The consequence was that:

• “In 1978, the parties would not have contemplated that the [landlord] might be required to incur expenditure in establishing the quantum of the service charge before a statutory tribunal operating in a largely costs-free jurisdiction;
• “Service charge disputes were determined in the County Court, where the successful party would recoup its costs from the unsuccessful party;
• “The joint expectation would therefore have been that (barring any change to those ground rules) the [landlord] would not find itself out of pocket if it proved necessary to collect service charge contributions by legal action, and so would have no need to recoup its legal expenses through the service charge”.

Plainly there might be an exception if the landlord’s claim for payment was dismissed, or the parties settled the claim without provision for the landlord to recover all of its costs.

If that was the case, it struck Martin Rodger QC as even less likely that the lease should allow for the unrecovered costs to go through the service charge as part of the “proper and convenient management and running of the Development”. 

A (very short) history lesson

The forerunner to section 19 of the Landlord and Tenant Act 1985 was section 91A of the Housing Finance Act 1972.

Although in many ways similar to section 19, section 91A did not include the landlord’s costs of management within the definition of “service charge”.

In 1978 therefore, there was no statutory provision for challenging a landlord’s management costs, if those costs were put through the service charge.

A pre-1985-Act court might have implied a term limiting recoverable service charges to those which were reasonable, but Martin Rodger QC took the view that the absence of statutory provision limiting the costs of management to those which were reasonable was “a further reason for construing the language as insufficiently clear to extend to the cost of litigation between the parties themselves”.

Commercial common sense

“Commercial common sense would lead one to expect the employment of clear language to impose onerous and unpredictable burdens”, observed Martin Rodger QC, pithily, giving two reasons for rejecting the landlord’s arguments under this heading.

First, the landlord was the more commercial party and carried on a business from one third of the building.

The landlord would not expect the occupiers of a different part of the building to pay the costs of recovering the money owed to it for the upkeep of its third of the building.

Second, the landlord was entitled to continue its short term lets of the flats retained by it. If the disputed phrase had the broad scope for which the landlord argued, the landlord would be able to recover through the service charge the costs of running and managing the short term tenancies, including for example the cost of proceedings to recover unpaid rent.

The language of the long leases were nowhere near clear enough for that to be an option for the landlord here.

The appeal was dismissed.

A matter of impression

In Paddington Walk Management Ltd v Governors of the Peabody Trust [2010] L&T R 6, HHJ Hazel Marshall QC observed several times that the meaning of certain phrases was a “matter of impression”. One of those phrases was the definition of “qualifying works” in section 20ZA of the 1985 Act.

She said:

“90. “Qualifying works” means, “works on a building or any other premises”. That is not a very illuminating definition. [Counsel for the landlord] reminds me of the history where, of course, the Act originally provided protection in relation to works on a building. She says that window cleaning is not “works on a building” or “building works” because it falls more naturally in the category of “services”. By definition, it is “cleaning”, which itself is part of “services” and not “works”.

“91. [Counsel for the lessee] says it is “works” and it is works being done “on a building”. Window cleaning is not that different from stone cleaning, which itself is not that different from maintenance work on stone surfaces. There is really no ground for distinguishing any form of such works that are being done, and window cleaning works, therefore, fall within the definition.

“92. It is again a short point and a matter of impression. I prefer [the landlord’s] argument. Window cleaning may be “work” and even “work on a building” but it is not, in my judgment, “works on a building”. Works on a building comprise matters that one would naturally regard as being “building works” and it does not seem to me that window cleaning naturally falls within that concept.

“93. I therefore find that on that issue, [the landlord] is correct and consequently this was not a contract for “qualifying works”. It follows that the question of the imposition of the cap on any expenditure does not arise”.

It strikes me that the same point can be made on the meaning of phrases in a lease. A disputed phrase may have one meaning, strictly and technically interpreted, but the direct opposite on a more purposive, teleological – some might say looser – analysis.

Rectification and obsolescence

One of the topics discussed by Snowden J. at the Chancery Bar Association winter conference last weekend was decease of rectification as a remedy in financial instruments. Its decease, he suggested, was due partly to the rapidity at which financial instruments change hands, and the fact that their terms are rarely considered, let alone in detail.

The doctrine of rectification depends on the parties’ intentions not being reflected in the instrument or document which is the subject of the claim. Snowden J.’s thesis was that the speed of purchase and sale meant that the parties could not claim to have intended different wording because they simply had not read the instrument.

Listening to Snowden J., I could not help but think of leases, and the lack of knowledge of their contents all-too-frequently displayed by both landlords and lessees.

Does this mean that rectification has fallen off its perch in the leasehold world too? I don’t think so: in principle landlords and lessees generally have much more time to consider the terms of their agreement than traders.

Whether that time is put to use – and whether legal advice about the contents of a lease is given, good and/or noted – is however quite another question.

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