‘Curiouser and curiouser!’ cried the judge…

A run of recent service charge cases has highlighted the perils of bad drafting and signing up to contracts without reading them thoroughly.

Together, they spin a sanguine tale of the importance of being earnest with the written word - both in putting it to paper and in understanding it at the time of signing.

Where such failings do arise, to what extent will a court or tribunal will be willing (or able) to “rescue” a party from their consequences? The answer, as ever, largely turns on the individual facts of each case. In this post, I look at three interesting cases where varying approaches were taken.

The interpretation of “curious” drafting

In Mark Skelton v DBS Homes (Kings Hill), the Upper Tribunal (Lands Chamber) (UT) came to the landlord’s rescue despite a catalogue of ‘errors and curiosities’ in the drafting of the lease.

The service charge provisions were variously described by the UT as ‘unusual’, ill-drafted’ or and ‘curiously drafted’.

This case, unusually in service charge disputes, was not about whether the service charge had been reasonably incurred but rather whether it was payable at all.

Key issue:

Whether the on account demands for payment of service charge based on an estimate (not actual expenditure) served a couple of years after the close of the relevant accounting period- were in fact valid demands.

Held:

The UT held that the service charge was payable.

Reasoning

• The paragraph of the lease supposedly dealing with how the tenant was to be liable for the service charge was omitted from the. The UT looked to the general purpose of the service charge provisions –enabling the landlord to recover from each tenant their share of expenditure which it incurs in undertaking its obligations. They held that it was clear that the parties intended the landlord to be able to recover (even though the lease may have been less than clear).
• Time was not of the essence nor was there a penalty for late preparation of the service charge accounts.
• The landlord’s obligations to provide services was not qualified or conditional on the tenant making service charge payments
• The lease did not make provision for the landlord to claim any shortfall between what it spend and what was received by way of interim payment from tenants- it could only demand a supplemental charge if it had omitted an item from a service charge account- but only during a service charge accounting period if it appeared that the interim charge would be too little
• The demand in question was made in accordance with a properly prepared estimate even though the landlord did not send the tenant the estimate as it was required to do.
• Even so -the landlord did not need to re-issue a demand–but the tenant was not obliged to pay it until it received the estimate.
• Section 20B of the Landlord and Tenant Act 1985, requiring demands for charges to be made within 18 months of incurring the expense did not apply as the landlord’s demand on-account rather than for costs actually incurred
• As the landlord could not claim any shortfall in the service charge but had to provide the services, the UT could not read the landlord’s service charge obligations as requiring strict compliance or otherwise go without any payment at all.

Practical tip(s):

Check; check; (and re-check) documents to make sure that clauses are not missed, ambiguous - or indeed curious! A tool like LexisDraft can take off some of the strain and help you get the job done quicker.

Distinguishing between rent and service charges

The Gateway Leeds Management v Naghash concerned the interpretation of service charge provisions in lease  and whether or not costs of providing the gym, the concierge office and the state of the art CCTV system in the building could be classed as service charges within the meaning of the Landlord and Tenant Act 1985, s 18 (LTA 1985).

Key issues:

Section 18 of the LTA 1985 limits the amount that may be recovered from residential tenants of long leases by way either of service or administration charges. In both cases the landlord may recover no more than is ‘reasonable’, as the amount is:

• a payment for services, repairs, maintenance etc.
• variable in whole or in part, in accordance with the costs the landlord incurs

Were the rent payments made by a Management Co. (Manco) in connection with providing the gym, concierge office and the CCTV system services, costs within the meaning of section 18 of the LTA – even though they were not services or repairs and did not vary in accordance with expenditure but were set and only escalated in accordance with the retail prices index?

If they weren’t service charge costs the first tier tribunal had no jurisdiction to determine the dispute.

Held:

The Manco was not obliged to provide the gym but if it did  the costs associated with providing the facility would be recoverable as service charge

The fact that part of this cost was renting the facility for the gym did not convert the payment from service charge to rent- it was enough that the cost to the tenant could vary as indeed they might when the current lease of the gym premises comes to an end and the Manco, to continue to provide the facility, may then be required to pay an additional rent.

The same reasoning could be applied to the fixed charges for the CCTV equipment at that point the cost could no matter be capable of being varied from time to time.

Reasoning:

• The flat leases did not require tenants to contribute to the rent paid for the concierge office or gym or to the finance costs paid for the CCTV equipment.
• The Manco could charge for the provision of the gym, concierge facilities and the CCTV.
• The lease did include the CCTV and concierge office costs as those which could be recovered as service charge but was less clear on the gym.
• Two of the leases did not include the standard wording for the rest of the leases making reference specifically to the gym as one of the services to be provided but nonetheless in these leases the Manco was still required ‘To carry out all such other services and to make all payments necessary in respect of the Estate Common Parts in the interest of good estate management and as determined from time to time by the Company…’.

Practical tip(s):

Where services which are likely to require the landlord or Manco to make fixed payments- such as rent or financing costs- service charge provisions should make it clear that these fixed payments are part of the recoverable costs of providing the service.

No rescue from this bad bargain

Arnold v Britton concerned 99 year leases of ‘modest’ holiday chalets entered into in the 1970s onwards. The lease made provision for service charge starting at £90 in the first year (or first three years) which were then increased by 10% per annum compounded. In the last year of term, on current rates, the service charge would be in excess of £1m.

Key Issue:

The lessees applied to court to cap remedy this ‘absurd’ result arguing that the service charge clause was supposed to mean that the charge was capped at £90 in the first year and thereafter to a cap rising by the rate of 10% per annum.

Held:

Whilst recognizing that a service charge of £1m for a chalet occupied for 8 months of the year is somewhat extreme, the Court of Appeal (CA) refused to imply such a cap holding it was not the court’s function to rewrite the lessees out of a bad bargain. The lessees ought to be right- but in order to hold that they were, the meaning of the lease would need to be subverted.

Reasoning:

The case is a good example of the application of the law to interpreting the facts-finding for the tenants would mean:

• Distorting the proper construction of the language would rewrite the parties’ bargain
• There was no mention of a ‘cap’ in the lease nor was it necessary to imply a cap to make sense of the clause in question as written
• the lease could not be changed into one which it was not- the landlord was not limited to recovering no more or less than his expenditure
• the parties had agreed formula for calculation of the service charge and could not then complain that what they were required to pay had no relation to what the landlord had outlaid or received
• the provisions were analogous with pre-agreed liquidated damages clauses and in any event, the parties knew up front where they stood
• There may have been surrounding circumstances which could be taken into account in interpreting the clause- inflation was high at the time the leases were made, and the parties could objectively be expected to want to deal with it in the lease.
• The lessees knew what bargain they were making and it was not for the court to mend a bad bargain where there is no claim for rectification

Practical tip(s):

Consider carefully the implications of referring particular market forces or practice at the time of drafting escalation clauses as these may become out of date or, as in this case, have absurd consequences. Consider rather providing for increases by reference to recognized and adjustable economic indices.

Source: LexisNexis Purpose Built
‘Curiouser and curiouser!’ cried the judge…