ORCHARD TRADING ESTATE MANAGEMENT LTD. v JOHNSON SECURITY LTD. [2002] EWCA Civ 406

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BRISTOL DISTRICT REGISTRY
His Honour Judge Weeks Q.C.
[2002] EWCA Civ 406Case No Case No: CHANI/2001/1206/A3Venue Royal Courts of Justice, Strand,, London, WC2A 2LL
Between
ORCHARD TRADING ESTATE MANAGEMENT LTD.RespondentJOHNSON SECURITY LTD.Appellant
Before
Lord Justice Peter GibsonLord Justice MummeryMr. Paul Morgan Q.C. and Mr. Edward Cousins (instructed by Messrs Mishcon de Reya of London) for the RespondentMr. Anthony Radevsky and Mr. Charles Harpum(instructed by Messrs Bretherton Price Elgoods of Cheltenham) for the AppellantDate 26 March 2002
[1]Peter Gibson L.J.: On 18 May 2001 His Honour Judge Weeks Q.C., sitting as a Judge of the High Court, determined certain preliminary issues in favour of the Claimant, Orchard Trading Estate Ltd. (“Orchard”), and struck out three paragraphs of the Defence of the Defendant, Johnson Security Ltd (“Johnson”), in which those issues had been raised. By those paragraphs Johnson had sought to resist Orchard’s claim for payment of arrears of a rentcharge on the ground that it was invalid by reason of s. 2 Rentcharges Act 1977 (“the 1977 Act”). This appears to be the first case on the section to have been brought to the High Court and this court.[2]The background to the dispute is as follows. In the 1980s a small industrial estate, called the Orchard Trading Estate, was developed at Toddington in Gloucestershire. There were 15 industrial units in the estate. The estate had no public sewage facilities, but it had a private sewage system. Orchard was incorporated as a non profit-making company to administer the estate and to provide certain services in consideration of the payment to it by the owners of the units of a nominal rentcharge and a variable rentcharge. County & Suburban Developments Ltd (“C&S”) in 1977 owned the estate.[3]By a Transfer and Rentcharge Deed (“the Deed”) dated 24 November 1987 C&S transferred to Orchard certain parts of the estate needed for the provision of services to the owners and occupiers of the units, that is to say the roadways, an area called the service area on which were an electricity sub-station, a gas governor, sewage pumping equipment, a refuse compound and service media, and the new sewage works. The Deed provided for the nominal rentcharge and the variable rentcharge. I shall come to the detailed provisions of the Deed a little later.[4]By Transfers dated 10 August 1988 and 9 January 1989 C&S transferred Units 4 and 5 respectively on the estate to Johnson, subject to an apportioned part of the nominal rentcharge and the variable rentcharge. Johnson covenanted with Orchard that it would pay “the Estate Rentcharges secured on the Unit at the times and in the manner set out in [the Deed].”[5]The sewage system broke down. Orchard was prosecuted and fined for discharging effluent into a stream. Orchard replaced the system with a new system at considerable expense. While the previous system was closed, Orchard incurred heavy expenditure in making alternative arrangements for the disposal of the sewage. The total expenditure claimed in 1995 was £18,470. In 1997 the expenditure increased to £182,791. That included the fine and the costs ordered to be paid by Orchard (£7,123), legal costs (£23,000), effluent disposal (£30,364) and management fees (£20,262). It is now accepted by Orchard that the fine and the costs cannot be passed on to the unit owners.[6]By para. 3 of Sch. 4 to the Deed, certificates specifying the variable rentcharge payable by the owners of the units are to be supplied by Orchard to the owners. Certificates purporting to show what was payable for 1996 were served on the unit owners in 1997 and demand was made for payment. Johnson and four other owners of units refused to pay. Orchard commenced actions against the five unit owners on 15 December 1997, but they responded by claiming that the certificates were not in accord with the Deed. Orchard served new certificates for 1996, without prejudice to their claim that the earlier certificates were valid, and further certificates for 1997 and 1998. In 1999 Orchard demanded payment for the three years 1996 – 1998. Johnson and the other four unit owners again did not pay. Further actions were commenced against the five unit owners on 22 February 1999. Default judgments were obtained against them on 22 April 1999 but the judgments were set aside on 26 June 2000. The action against Johnson is the lead action.[7]By the Defence which Johnson was allowed to serve, in response to Orchard’s claim that Johnson had failed to pay monies due, it pleaded in paras. 3, 4 and 5 of the Defence:
“3. By reason of section 2 of the Rentcharges Act 1977 (‘the 1977 Act’) such parts of the 1987 deed as purported to create a rentcharge are void and of no effect. 4. Without prejudice to the generality of the foregoing, a rentcharge created after 22 nd August 1977 (the date of the coming into force of the 1977 Act) can only be created for the purposes specified in section 2(4)(b) of the 1977 Act. Clause 4.2 of the 1987 deed purports to include within the rentcharge the matters particularised under ‘service expenditure’ in clause 1.1 of the 1987 deed. ‘Service expenditure’ as defined in clause 1.1 includes matters which cannot be included in a rentcharge created after 22 nd August 1977. 5. Further to the matters pleaded in paragraph 4 above (and also without prejudice to the generality of paragraph 3 above) by reason of section 2(5) of the 1977 Act a rentcharge created after 22 nd August 1977 must only provide for the payment of a reasonable sum in respect of the performance by the rent owner of the relevant covenant. If, which is not admitted, the covenant as drafted would entitle the Claimant to recover such sums as it seeks to recover in this action, the Defendant will object that such is not reasonable in relation to the covenant. In the premises such a rentcharge would not be an estate rentcharge within the meaning of section 2(3)(c) of the 1977 Act.”
[8]It is unnecessary to refer to other parts of the Defence save to notice that Johnson pleads in the alternative that if Orchard is entitled to recover sums in respect of the rentcharges, it is an implied term of any liability under such rentcharges that any sums sought to be recovered are a reasonable reimbursement of Orchard for sums necessarily incurred by it in a proper carrying out of its liabilities.[9]I come now to the statutory provisions. The 1977 Act implemented the recommendation of the Law Commission in its 1975 Report on Rentcharges (Law. Com. No. 68) that rentcharges attached to freehold land should for the future be prohibited with certain exceptions. In para. 46 of the Report the Commission puts the exceptions into four categories, of which the second is the material exception. This category was described in para. 48 as “rentcharges forming an integral part of schemes beneficial, directly or indirectly, to the land charged.” In para. 49 it was said that two schemes using rentcharges were in common use as a conveyancing device to improve the enforceability of positive covenants. One was to impose a nominal rentcharge affecting each unit for the benefit of the other units, the rentcharge being supported by positive covenants designed to preserve the development as a whole. The other scheme, more often employed in the larger developments, was for the setting up of a management company to look after such things as the maintenance and insurance of the development as a whole. The Commission continued in para. 50 and 51:
“50. Variations of these schemes are, of course, to be found in practice, but the rentcharges on which they all depend are clearly distinguishable from the ordinary vendor’s rentcharge: their rationale is plain to see and they are not imposed to provide a source of pure income profit to the rent owner. 51. It is essential, in our view, that these “covenant-supporting” or “service charge” rentcharges should form an exception to our proposed ban on the creation of new rentcharges....”
[10]The preamble to the 1977 Act describes it as “An Act to prohibit the creation .... of certain rentcharges”. By s. 1 “rentcharge” means any annual or other periodic sum charged on or issuing out of land except rent reserved by a lease or tenancy or any sum payable by way of interest.[11]S. 2, so far as material, is in this form:
“ 2 Creation of rentcharges prohibited (1) Subject to this section, no rentcharge may be created whether at law or in equity after the coming into force of this section. (2) Any instrument made after the coming into force of this section shall, to the extent that it purports to create a rentcharge the creation of which is prohibited by this section, be void. (3) This section does not prohibit the creation of a rentcharge – .... (c) which is an estate rentcharge; .... (4) For the purposes of this section “estate rentcharge” means (subject to subsection (5) below) a rentcharge created for the purpose – (a) of making covenants to be performed by the owner of the land affected by the rentcharge enforceable by the rent owner against the owner for the time being of the land; or (b) of meeting, or contributing towards, the cost of the performance by the rent owner of covenants for the provision of services, the carrying out of maintenance or repairs, the effecting of insurance or the making of any payment by him for the benefit of the land affected by the rentcharge or for the benefit of that and other land. (5) A rentcharge of more than a nominal amount shall not be treated as an estate rentcharge for the purposes of this section unless it represents a payment for the performance by the rent owner of any such covenant as is mentioned in subsection (4)(b) above which is reasonable in relation to that covenant.”
[12]The Deed is in this form, so far as material. Cl. 1 contains a number of definitions. They include “the Transferable Areas”, defined as, in effect, the units of the estate. The term “Service Expenditure” was defined as: “the costs expenses and outgoings incurred by [Orchard] in performing its covenants in clause 6 hereof including:-(i) the costs of and incidental to the determination and calculation of the rentcharges from each part of the Estate and the interim payments to be paid in respect thereof and the cost of preparing and distributing copies of the Certificate and the accounts prepared for the purpose thereof and the fees of [Orchard’s] accountant and(ii) the cost of and incidental to the administration and running of [Orchard] and the holding of meetings and the printing and circulation of rules and regulations affecting the Estate and(iii) all other expenditure incurred by [Orchard] in about the maintenance and proper and convenient management and running of the Estate including without prejudice to the generality of the foregoing the appointment and remuneration of managing and other agents contractors solicitors surveyors and accountants but after crediting the contribution towards any such costs expenses and outgoings payable by the owner of any land not comprised in the Estate”.[13]Cl. 2 contains a number of recitals including:
“2.3 [C&S] intend to dispose of the Estate in Units (both Existing Units and Future Units) and to give effect to this intention a scheme of disposal and management has been devised to maintain and enhance the amenities of the Estate. 2.4 [Orchard] has been incorporated for the purpose of administering the Estate and providing the services mentioned in this Deed in consideration of the rentcharges mentioned below.”
[14]By cl. 3 C&S transferred to Orchard the roadways, the service area and the new sewage works together with certain rights set out in Sch. 1 to the Deed but subject to and excepting and reserving the rights and matters set out in Sch. 2. Those rights and matters include the right of each unit owner to connect to and use the services in or beneath the service area and roadways, a right of way over the roadways, and the use of the sewage works for the drainage of water and soil from the unit. Sch. 2 also provides: “All the above easements rights and privileges to be subject to and conditional upon in relation to each Unit the payment of the Estate Rentcharges charged thereon and the performance and observance of the covenants on the part of the Freehold Owner thereof contained in Schedule 5 to this Deed”.[15]Cl. 4 is in this form: “4. Rentcharges In further consideration of the covenants by [Orchard] [C&S] hereby grants [Orchard] in fee simple:-4.1 The Nominal Rentcharge a perpetual yearly estate rentcharge of One Pound (£1.00) for ever after issuing and payable out of the Transferable Areas to be paid in advance without deduction on the 25th December in every year to be apportioned from time to time in accordance with the provisions of clause 9.2 hereof and4.2 The Variable Rentcharge a perpetual yearly rentcharge for ever after issuing and payable out of the Transferable Areas of an amount equal to the Service Expenditure from time to time incurred by the Company such rentcharge to be apportioned from time to time between the Units and paid in accordance with the provisions of Schedule 4”.[16]Cl. 5 deals with the enforcement of the rentcharges, and provides that the nominal and the variable rentcharges should issue out of the Transferable Areas together with the remedies conferred by s. 121 Law of Property Act 1925. Those remedies include distress and entering into possession of the land and taking the income until the monies due are recovered.[17]Para. 6 contains covenants by Orchard in this form, so far as material: “6. Company’s Covenants In consideration of (and subject to the payment of) the Estate Rentcharges [Orchard] hereby covenants with [C&S] at all times hereafter to perform and observe the following covenants:-6.1 Outgoings To pay all rates taxes charges duties burdens assessments dues outgoings and impositions whatsoever whether parliamentary parochial local or of any description whatsoever which are now or shall at any time be charged rated or assessed or imposed upon or in respect of the Roadways the Service Area and the Sewage Works or any parts thereof or on the owner or occupier in respect thereof6.2 Insurance ....6.3 Signs ....6.4 Maintenance Well and substantially to cleanse repair and maintain and when necessary renew and replace:-(i) the Common Service Media(ii) the Service Area(iii) the Sewage Works(iv) the Roadways6.5 Services To operate the Sewage Works and all pumps and other equipment relating thereto and to arrange for the collection and disposal of refuse from the refuse enclosure located in the Service Area6.6 Observance of Existing Coventants ....6.7 Service Expenditure Arrangements To comply with the provisions of Schedule 4 in relation to the Service Expenditure and the ascertainment and collection of the Variable Rentcharge hereinbefore reserved”.[18]Cl. 7 contains the covenants of C&S. It was to proceed with the new sewage works and until they were completed Orchard was to be permitted to operate the existing sewage works. Cl. 7.3 is a covenant by C&S so as to bind the Transferable Areas that the owner from time to time of every unit would at all times thereafter “(a) pay the Estate Rentcharges secured on the Units, at the times and in manner aforesaid”.[19]Cl. 10 relates to shares in Orchard. C&S was to take two A Ordinary shares whereas the unit owners were to take B shares. There is no evidence before the court as to what rights were conferred on holders of A or B shares.[20]Sch. 4 to the Deed contains provisions relating to the variable rentcharge, including its apportionment between units, its annual certification and payments on account. Sch. 5 contains positive and restrictive covenants affecting the units.[21]District Judge Roach on 23 November 2000 directed that the issues raised by paras. 3, 4 and 5 of the Defence be tried as preliminary issues. They came before the Judge. In his judgment he identified two issues as raised by those paragraphs:(1) does the Deed create an estate rentcharge within s. 2(4) of the 1977 Act;(2) if so, is it excluded by s. 2(5) because it does not represent a payment which is reasonable in relation to the covenant imposed?[22]On the first issue, the Judge rejected Johnson’s submission that the variable rentcharge in the Deed was not within the statutory definition of “estate rentcharge”. Four reasons for that submission were advanced by Johnson to the Judge, viz.(1) the provision of the Deed allowing Orchard to recover its management charges is outside s. 2(4)(b),(2) the covenant in cl. 6 of the Deed to pay rates is also outside s. 2(4)(b),(3) the provision in the definition of “Service Expenditure” enabling Orchard to recover the cost of the appointment and remuneration of managing agents and others is again outside s. 2(4)(b), and(4) the provision in Sch. 4 for payments on account is outside the spirit or meaning of s. 2(4). The Judge considered but rejected each of those reasons.[23]I need only refer to what the Judge said in relation to Johnson’s submission that because the payment of rates is not for the benefit of the land charged with the rentcharge, rates are outside s.

(b) The judge said:

“In my judgment, also the payment of ordinary rates in respect of the common parts would be for the benefit of the individual owners. If such rates are payable, then it is beneficial to each owner of the estate to have that liability discharged out of a fund to which all the individual owners contribute, so that there is no interruption to the common services.”
[24]The Judge then turned to the second issue which he had identified and an argument based on s. 2(5), that the terms of the Deed enabled the rent owner to recover more than is reasonable in relation to the covenant. The Judge said:
“I have difficulty in understanding this submission on the face of it, because the purpose of the deed is to meet in full the expenditure and, given that no more than 100 per cent of the expenditure is recoverable, then the payment must in my judgment be reasonable in relation to that covenant. The mischief attacked by subsection 5 is I think the circumstance where a fixed sum is provided for in the rent charge which bears no proportion to the actual expenditure, and that is not the present case. Counsel for Johnson again relies on the provisions for payment in advance and the provision for recovery of surveyors’ and other professional charges, and submits that these are opportunities for Orchard to recover sums which are not reasonable in relation to that covenant. Again, I disagree. These payments are all part of the scheme of the rent charge, which is to cover, and cover entirely so far as the draftsman could, the expenditure, including the running expenditure to Orchard, but no more. They do not, in my judgment, provide for a payment for the performance by the rent owner of the covenant of sums which are not reasonable in relation to Orchard’s obligations.”
[25]In Johnson’s skeleton argument for this appeal, on the first issue three of the four points argued before the Judge were repeated and a fourth item added as also being outside s. 2(4)(b). However, when Mr. Radevsky, appearing with Mr. Harpum (neither of whom appeared below) for Johnson, addressed us, only the argument relating to rates was pursued. What was said was that the payment of rates, which are an imposition on the owner or occupier of land, is not a payment made for the benefit of the land. The consequence, according to Mr. Radevsky, is that the variable rentcharge is not an estate rentcharge within s. 2(4) and by virtue of s. 2(2) is wholly void. The absence of merit in this submission is highlighted by the fact that it is not suggested that any rates are in fact payable in respect of the roadways, the service area or the sewage works. An item of expenditure called “water rates” used to appear in the accounts, but they are now called “water charges” and it is not argued that they fall outside s. 2(4)(b).[26]I am not able to accept Mr. Radevsky’s submission. It is apparent from the scheme set up by the Deed that the reason why the roadways, the service area and the sewage works were transferred to Orchard was to enable Orchard to perform its obligations for the benefit of the units. Those areas serve to provide amenities for the units. Were rates to be charged, they would be part of the costs of Orchard in holding the roadways, the service area and the sewage works for that purpose. That is why the parties to the Deed agreed that Orchard should have the obligation to pay the rates and why that cost was recoverable from the unit owners. In my judgment the payment of the rates would be for the benefit of the units and so within s. 2(4)(b). I therefore respectfully agree with the Judge’s view on this point.[27]That conclusion makes it unnecessary for me to deal with the further issue addressed by both sides as to whether, if the payment of rates was outside s. 2(4)(b) it would be severable. For Johnson it was argued that the entire variable rentcharge would be invalid. For Orchard it was argued, primarily on the basis of the inclusion in s. 2(2) of the words “to the extent that”, that it would be severable. That is an important point which is best left to be decided in a case where it is not a hypothetical issue.[28]The only other ground on which the Judge’s decision is challenged relates to the question of reasonableness. It is submitted by Mr. Radevsky that the way the Deed is drafted, there is no limitation of reasonableness as to the level of “Service Expenditure” which may be incurred by Orchard and charged to the unit owners. He says that the unlimited charges which are capable of being levied and which have been claimed from the unit owners show that the payments purportedly recoverable are not reasonable in relation to the covenant to pay as required by s. 2(5). He contends that the Judge was wrong to hold that s. 2(5) was necessarily satisfied if no more than 100% of the total expenditure was recoverable; that, he says, is not sufficient for compliance with s. 2(5). He submits that it is necessary that the items for which expenditure may be charged and the level of expenditure on those items are limited by a requirement of reasonableness, and that is missing from the Deed, with the result that the variable rentcharge is invalid.[29]Again I am not able to agree. It is important to bear in mind that on this appeal we are concerned not with whether any item charged was reasonable in amount but with the validity of the rentcharge. As Mummery L.J. pointed out in the course of the argument, s. 2(5) is an anti-avoidance provision, designed to prevent a requirement by the rent owner that the owner of the land charged should make a payment unrelated or disproportionate to the performance of covenants within s. 2(4)(b). If, for example, a fixed sum was required which was far in excess of what would be reasonable for the performance of the covenant, that rentcharge would be invalidated. As Mr. Morgan Q.C., appearing with Mr. Cousins for Orchard, rightly put it, one measures the price of the rentcharge against the promise of the performance of the covenants. A rentcharge of a fixed sum may satisfy s. 2(5) as being reasonable even if it is on the high side for a particular year. But in the present case we are concerned with a variable rentcharge which is measured and limited by the expenditure by Orchard in the performance of its covenants. Like the Judge I cannot see how that can be said to be unreasonable in relation to the covenants. In particular I cannot accept that the absence of an express limitation of reasonableness in the Deed renders the rentcharge void.[30]It may be that in any event a term of reasonableness is to be implied, as Johnson itself contends in para. 6 of the Defence. That does not fall for decision in the present case.[31]For these reasons, therefore, on the only points live on this appeal I respectfully agree with the Judge’s conclusions and reasoning. It is unnecessary to consider Orchard’s argument, which it advances in its Respondent’s Notice, that even if the rentcharge were invalid Johnson was contractually bound to pay the sums demanded by reason of the covenants in the Transfers dated 10 August 1988 and 9 January 1999 and cl. 7.3(a) of the Deed. I would dismiss this appeal. Mummery L.J.[32]I agree.

Order

Appeal dismissed. Appellant to pay the Respondent’s costs on the standard basis subject to detailed assessment if not agreed. Appellant to make an interim payment in respect of costs in the sum of £25,000. (Order does not form part of the approved judgment)

Cited in 1 later judgment