Morris v Blackpool Borough Council & Anor [2014] EWCA Civ 1384

[2014] EWCA Civ 1384

Case No C3/2014/0226

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM

UPPER TRIBUNAL (LANDS CHAMBER)

HHJ Huskinson

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date Friday 24 th October 2014

Before

LORD JUSTICE JACKSON

LORD JUSTICE McCOMBE

LADY JUSTICE GLOSTER

Between

IAN MORRISAppellant

Respondents

(Transcript of the Handed Down Judgment of

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Peter Knox QC (instructed by Fylde Law) for Appellant

Sebastian Clegg (instructed by Blackpool Borough Council) for Respondents

Hearing Hearing date: 24 th June 2014

Judgment

As Approved by the Court

Introduction

[1]This is an appeal by the appellant, Ian Morris ("the appellant"), against the order of HHJ Huskinson ("the judge") sitting in the Upper Tribunal (Land Chamber) (“the UT”) dated 27 August 2013, allowing the appeal brought by Blackpool Borough Council ("the Council") and Blackpool Coastal Housing Ltd, an arms-length management organisation (“the ALMO”), a non-profit making organisation wholly owned by the Council, against the judgment of the Land Valuation Tribunal for the Northern Rent Assessment Panel (“the LVT”).

[2]The issue on the appeal before us was the proper construction of standard leases granted by the Council to its tenants, and, in particular whether it was entitled to charge certain management/administration charges as part of the service charge recoverable under those leases. When granting permission to the appellant to appeal, the UT made it clear that the appeal to this court was restricted to the issue as to the proper construction of the lease and that the appellant had not been granted any permission to appeal the quantification made by the judge of the management charges properly payable.

[3]By an order made on 1 May 2014 Jackson LJ ordered, pursuant to CPR rule 52.9A, that the recoverable costs of each party in respect of the appeal to the Court of Appeal should be limited to nil and that accordingly each party would bear its costs of the appeal whatever the outcome.

Background

[4]The Council as the local housing authority is the freeholder of almost 6,000 residential properties in the area. Approximately 5,500 of those properties are rented to secure tenants paying weekly or monthly rents. The remainder of those properties, amounting to approximately 401, are held upon long leases at low rent by lessees, who have been enfranchised pursuant to the right to buy legislation. Like the judge I shall refer to such people as "lessees".

[5]The second respondent to the proceedings before the LVT, and the second appellant before the UT, the ALMO, was responsible for the management of all the Council’s tenanted properties. The ALMO was funded through payment of a management fee, pursuant to a management agreement with the Council dated 15 January 2007. It did not appear nor was represented on the appeal before us. It was common ground that its participation in the structure did not affect the legal issues which we have had to decide.

[6]The appellant acquired a residential flat at 42 Molyneux Drive, Blackpool on Lennox Garden Estate ("the flat"), upon a long lease term of 125 years (“the lease”) on 16 December 2002, pursuant to the right to buy provisions contained in section 118 of and schedule 5 to the Housing Act 1985. Under clause 1 of the lease, the appellant is liable to the Council for:(i) a yearly rent of £10;

(ii) a contribution to the cost of insurance, by way of further rent; and

(iii) all monies due to the Council pursuant to clause 3 of the lease.

The relevant provisions of the lease

[7]The relevant provisions of the lease for present purposes are the following: i) the recitals to the lease and the First, Second and Third Schedules thereto which respectively defined: a) "the Estate" as “ALL THAT area of land situated in South Shore Blackpool in the County of Lancashire comprising land dwelling houses flats maisonettes garages gardens and premises known as The Lennox Gate Estate”; b) "the Property" as “ALL THAT plot or parcel of land being part of The Lennox Gate Estate TOGETHER WITH the two-storey building erected thereon or upon some part thereof and divided into eight self-contained Flats ALL which said land and building are for the purposes of identification only shown edged red on the plan numbered 1 annexed hereto”; the Property was in fact the building of which the appellant’s flat formed part; the Property was in fact the building of which the appellant’s flat formed part; c) "the Reserved Property" as (in summary)(a) the common parts of the Property;

(b) the main structural parts of the Property;

(d) all parts of the Estate other than the Property; and d) "the Premises" as, in effect, the flat; ii) clause 2 which provided:

“The Lessee hereby covenants with the Council throughout the term hereby granted (A) to observe and perform the covenants contained in the Seventh Schedule hereto (B) to comply with and observe such regulations as the Council may make for the benefit of the occupiers of the Property…… ” iii) clause 3 which provided: “3. The Lessee hereby further covenants with the Council as follows:- (i) Subject to the provisions of Sections 18 to 30 of the Landlord and Tenant Act 1985 to pay a proportionate amount to the Council being the reasonable expenses and outgoings incurred or to be incurred by the Council (a) in respect of the repairing and maintaining renewing and cleansing as the case may be of any of the parts of the Reserved Property firstly and secondly described in the Third Schedule hereto (b) in respect of the provision by the Council of the services mentioned in the Eighth Schedule hereto (c) in respect of the rebuilding or reinstatement of the Property or in insuring against such rebuilding or reinstatement (d) in respect of the management costs involved in sub-paragraphs (a) (b) and (c) above and also in collection of the rent and the computation and collection of other monies due from the Lessee hereunder PROVIDED ALWAYS that the amount payable under this sub-clause shall be reviewed annually by the Council during the term hereby created by reference to its financial year and the amount or reasonably estimated amount shall become due in advance on the First day of April in any year (the first of such payments or a proportionate part thereof to be made on the date hereof) and shall be payable in manner aforesaid PROVIDED ALSO that if any adjustments to such amount or reasonable estimated amount as the case may be should become necessary upon annual review or otherwise the method of effecting such adjustments as become necessary shall be in the discretion of the council within the extent of Section 47(2) of the Act (ii) To pay such improvement contribution as defined in Section 187 of the Act as the Council may reasonably demand in respect of improvements carried out to the Property during the term hereby created”. iv) Paragraph 14 of the Seventh Schedule, entitled "Covenants on the part of the Lessee" provided: “The Lessee shall comply with and observe any reasonable regulations which the Council may consistent with the provisions of this Deed make to govern the use of the Flats and Reserved Property Such regulations may be restrictive of acts done on the Property detrimental to its character or amenities Any costs or expenses incurred by the Council preparing or supplying copies of such regulations or in doing works for the improvement of the Property providing services or employing gardeners porters or other employees shall be deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule hereto notwithstanding the absence of any specific covenant by the Council to incur them”

. I comment that although upper case letters were used at the start of what appear to be separate sentences in this paragraph, consistently with the rest of the lease, no full stops or commas were used anywhere in this paragraph. In this judgment I shall refer to the sentence beginning "Any costs or expenses incurred by the Council" as "the second part of paragraph 14". v) Paragraphs 3, 4 and 6 of the Eighth Schedule provided: “3. The Council shall keep the Reserved Property and all fixtures and fittings therein and additions thereto including drains gutters and external pipes serving the Property in a good and tenantable state of repair decoration and condition including the renewal and replacement of all worn or damaged parts PROVIDED that nothing herein contained shall prejudice the right of the Council to recover from the Lessee or any other person the amount or value of any loss or damage suffered by or caused to the Council or the Reserved Property by the negligence or other wrongful act or default of the Lessee or such other person 4. The Council shall provide the following additional services in respect of the Premises:- (1) The cutting and maintenance of the grassed area comprised in the Reserved Property (2) Rediffusion Service as detailed in the Agreements mentioned in the Tenth Schedule hereto so long as such Agreements remains operative 6. The Council shall employ and engage such servants agents and contractors as it considers necessary or desirable for the performance of its obligations under this Lease and shall pay their wages commissions fees and charges”. (1) The cutting and maintenance of the grassed area comprised in the Reserved Property (2) Rediffusion Service as detailed in the Agreements mentioned in the Tenth Schedule hereto so long as such Agreements remains operative

The charges for management costs

[8]The Council charged the lessees for the management costs of ‘leaseholder services’, which included costs relating to direct staff costs, including the charge of a significant proportion of the time worked by senior staff and a lesser proportion of the time worked by business support assistants, the finance team, the human resources team, the information technology team, the anti-social behaviour team, the customer involvement team and the repairs hotline. Service costs and desk costs of some of these teams were also included.

The increase in lessees' management charges

[9]In 2002, the appellant paid a management charge under clause 3 of £50.50. The management costs increased incrementally over the subsequent years and by 2010 the charge for management costs, which made up part of the service charge due to the Council, was £65.64.

[10]In 2010, the Council commissioned a survey by one of its officers, a Ms. Olley, to assess whether the amount being charged to lessees by way of management charge was appropriate. It was an important exercise because the amount charged to the overall number of tenants and lessees was ring-fenced, such that if the lessees were being charged too little for the services with which they were in fact provided, that would have to be made good by a surplus in respect of other fees. As a result of Ms. Olley’s findings, as set out in the survey, Ms Olley made various recommendations. The lessees were notified of the Council’s intention to raise the amount of the management charge.

[11]On 1 April 2011, the Council sent the appellant an invoice for £435, which consisted of:(1) Ground rent £10

(2) Insurance Buildings £79.97

(3) Management Charge £194.78

(4) Aerial Service £70.56

(5) Electrical maintenance £6.82

(6) Electrical supply £22,36

(7) Grounds maintenance £50.51 Total: £435 The appellant and a Mr. Allen Cargill, another long leaseholder of a property owned by the Council and the first appellant before the UT, challenged these invoices, principally because the management charge of £194.78 was about three times the amount in the previous year.

The relevant sections of the Landlord and Tenant Act 1985

[12]The relevant sections of the Landlord and Tenant Act 1985 ("the 1985 Act") for present purposes are sections 18 and 19. They provide as follows:

"Section 18 – Meaning of ‘service charge’ and ‘relevant costs’ (1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a dwelling as part of or in addition to the rent— (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvementsor insurance or the landlord’s costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs. (2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable. (3) For this purpose— (a) “costs” includes overheads, and (b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period. Section 19 – Limitation of services charges: reasonableness (1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period — (a) only to the extent that they are reasonably incurred, and (b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard; and the amount payable shall be limited accordingly. (2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise."

Section 19 – Limitation of services charges: reasonableness

The applications to and determinations by theLVT and the UT

[13]The appellant and Mr. Cargill applied to the LVT pursuant to section 27A of the Landlord and Tenant Act 1985 as amended (“the 1985 Act”), seeking a decision as to the amount properly recoverable under the service charge for management costs. The appellant applied for a determination of the service charge from 2002 onwards.

[14]It was held by the LVT, and accepted by the UT, that a two-stage analysis was involved in answering the question posed by the appellant: first, the court had to determine whether any expenditure which the Council was seeking to charge a lessee through the service charge, was expenditure which was properly recoverable from the lessee upon the true construction of the lease; second, if that primary question was answered in the affirmative, the expenditure had also to be properly recoverable having regard to the requirements of reasonableness set out in sections 18 to 30 of the 1985 Act.

[15]Before the LVT the Council contended that it was entitled to recover the relevant charges under paragraph 14 of the Seventh Schedule, as set out above.

[16]The LVT rejected the Council’s contentions. It held that the second part of paragraph 14 of the Seventh Schedule did not give the Council any wider power under which to incur and recharge expenditure than was already provided for in clauses 1 and 3 and the Eighth Schedule and that the provision was “inherently meaningless”: see paragraphs 24, 25 and 27 of the LVT’s decision. Thus, it held that paragraph 14 of the Seventh Schedule did not entitle the Council to charge for what the judge came to refer to as “the discretionary leasehold services” on the basis that there was no evidence that it had passed any regulations as provided for by paragraph 14. Accordingly itheld, thatas that paragraph did not apply, the Council could not charge for any discretionary services supposedly provided under it: see paragraphs 22 and 24 to 26. The LVT took the view that, in reality, the Council was seeking to charge for the cost of carrying out its functions as a local housing authority, rather than for the execution of its contractual obligations under the lease: see paragraphs 31 - 33 of its judgment.

[17]Accordingly it held that the management charge of £194.78 was unreasonable, and that the only management costs that the Council could charge a lessee under clause 3(i)(d) of the lease were those included in the sub-clauses 3(i)(a), (b) and (c) and in the collection of the rent and computation and collection of other monies due to the Council; it held that paragraph 14 of the Seventh Schedule was ‘inherently meaningless’ and did not entitle the Council to charge for the management costs of discretionary leasehold services, so termed because they were provided at the discretion of the Council and not pursuant to the lease.

[18]In answering the second stage of the analysis, the LVT went on to assess a reasonable charge by reference to the guidance set out in paragraph 2.3 of the RICS Code of Practice “Service Charge Residential Management Code” (second edition), and concluded, on the basis of its experience, that a fixed fee of £50 would be a reasonable management charge for the service charges owed pursuant to clause 3(i)(d) from 2002 onwards. Accordingly, the Council was liable to repay any monies received over and above that amount to each lessee concerned.

[19]The Council appealed that decision to the UT and its appeal was upheld. The UT disagreed with the LVT: see

[2013] UKUT 0377 (LC)

. In summary the UT held that: i) The Council was entitled to charge for its services under paragraph 14 of the Seventh Schedule. ii) The Council was permitted to charge lessees under clause 3(i)(d) of the lease for the management costs of discretionary services pursuant to paragraph 14 of schedule 7 to the lease, which provided that such costs and expenses were relevant by virtue of having been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule to the lease. iii) Further, the Council was entitled to a management charge for the provision of such services, by reason of the combined effect of clause 3(i)(b) and paragraph 14 of the Seventh Schedule. iv) In any event, even under clause 3(i)(b) and the Eighth Schedule, the Council was entitled to management charges for performing its obligation to keep the Reserved Property and all its fixtures and fittings in a good and tenantable state of repair etc. The fulfilment of the Council’s requirement to keep the Reserved Property could only properly be described as the provision of services to the lessee. The costs and expenses of fulfilling that requirement were properly chargeable under clause 3(i)(d).

[20]At paragraph 21 of the judgment, the UT rejected the appellant's argument that clause 3(i)(b) was limited to the provision of the two services under paragraph 3 of the Eighth Schedule (i.e. the cutting etc certain grassed areas and the provision of the re-diffusion service) for three reasons: i) If paragraph (b) had been intended to be so limited, it could have provided for that result. ii) The reference to ‘additional’ services at paragraph 3 of the Eighth Schedule carried the necessary inference that the other obligations contained in the Eighth Schedule were to be treated as provided by the Council. iii) Finally, if the appellant’s argument were correct, the second part of paragraph 14 of the Seventh Schedule would be rendered ineffective: it would be nonsense to deem that a cost had been properly incurred, but maintain that it was irrelevant for the purpose of calculating the service charge.

[21]At paragraphs 23 – 29 of the judgment, the judge, gave his reasons as follows:

“23. Paragraph 14 part 2 provides that certain costs and expenses incurred by the Council in doing certain things – “… shall be deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule hereto notwithstanding the absence of any specific covenant by any Council to incur them.”

In my judgment the only possible purpose of this provision is to provide that such costs are costs which have a relevance by reason of being (through this deeming provision) properly incurred by the Council in pursuance of its obligations under the Eighth Schedule. It would make no sense for these costs to be deemed to be properly incurred by the Council in pursuance of its obligations under the Eighth Schedule if the result of such a deeming was merely that the lessee could say: under clause 3(i)(b) it is only the cost of the services specifically mentioned in the Eighth Schedule which can be included in the calculation of the service charge, namely the cost of the two “additional services” referred to in paragraph 3 of Eighth Schedule, such that it makes no difference to the calculation of the service charge whether or not the cost of these matters under paragraph 14 part 2 are to be deemed as properly incurred by the Council in pursuance of its obligations under the Eighth Schedule. 24. Reading paragraph (b) together with paragraph 14 part 2 and with the Eighth Schedule, in my judgment the only proper construction, if effect is to be given to both provisions, is that paragraph (b) is not intended to refer merely to the “additional services” mentioned in paragraph 3 of the Eighth Schedule regarding grass cutting etc and re- diffusion. Paragraph (b) is instead intended to refer to expenses and outgoings in respect of not only these specific “additional services” in paragraph 3 of the Eighth Schedule but also of the other services referred to in the Eighth Schedule together with such services as the Council provides under paragraph 14 part 2 being services the costs of which are deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule. 25. Quite apart from the foregoing argument based upon paragraph 14 part 2, there is a separate reason why in my judgment paragraph (b) of clause 3(i) extends to services substantially wider that merely the “additional services” referred to in paragraph 3 of the Eighth Schedule. I repeat subparagraphs (1) and (2) of paragraph 21 above. In addition to those considerations there is the following point. Paragraph 3 of the Eighth Schedule requires the Council to keep the Reserved Property and all fixtures and fittings etc in good and tenantable state of repair etc. This covenant by the Council extends to the whole of the Reserved Property (which is very extensive) – it is not limited to the firstly and secondly described parts of the Reserved Property. It is true that the lessee only has to contribute through paragraph (a) of clause 3(i) to the cost of repairing, maintaining, renewing and cleansing the firstly and secondly described parts of the Reserved Property. Thus the actual costs of repairing etc another building on the Estate or keeping the grounds of that other building in good condition does not form part of the calculation of a lessee's service charge – these costs are charged to the lessees of the building in question. However the obligation of the Council is to keep effectively the whole of the Estate in good repair and condition. This is a service specifically provided for in the Eighth Schedule. A substantial amount of management will be required from the Council in performing this obligation and thereby providing this service. 26. I accept that the construction of the lease is not without difficulty. I have however, with respect to the LVT, come to a conclusion different from that which it reached. I cannot accept the LVT analysis in paragraph 22 of its decision where it concluded, inter alia, that paragraph 14 part 2 was “inherently meaningless”. I conclude that it does have a meaning and effect as explained above. In my view the LVT erred in failing to give effect to paragraph 14 part 2 and in apparently concluding that the only services within clause 3(i)(b) which could be charged for (and the management costs of providing which could be included) were the services expressly referred to as additional services in paragraph 3 of the Eighth Schedule. As shown above, even leaving aside paragraph 14 part 2, the lease through the Eighth Schedule imposes substantial obligations on the Council the fulfilment of which can in my judgment properly be described as the provision of services to the lessee. Accordingly management costs involved in the provision of these services (and in particular management costs in ensuring that the whole of the Reserved Property is kept in good and tenantable repair and condition) can be included as part of the service charge calculation by reason of clause 3(i)(d). 27. I therefore conclude that the LVT's decision that £50 was an appropriate management charge cannot stand as it was based upon too restrictive an interpretation of the lease. Also this assessment of £50 cannot stand because the LVT assessed this merely by reference to its general experience of management charges for services of the nature which is understood were provided, rather than by applying the words of clause 3 and seeking to establish in accordance with that clause what was the proportionate amount which should be paid to the Council based upon reasonable expenses and outgoings to be incurred by the Council upon certain matters. 28. It would appear that a substantial part of the expenses and outgoings of providing the discretionary leasehold services are properly to be included within the calculation of the service charge by virtue of clause 3(i)(b) (which deals with the cost of services) rather than clause 3(i)(d) (which deals with management costs). However the recoverability of an ingredient which is properly to be included within the service charge calculation cannot in my view depend upon the label which has been put upon it. Thus the fact that the Council has chosen to describe the costs of the discretionary leasehold services as part of the management charge rather than as part of the cost of the services does not in my view mean that these costs cannot properly be included in the calculation of the service charge, especially as the nature of these services can properly be described as services in the nature of management.” “… shall be deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule hereto notwithstanding the absence of any specific covenant by any Council to incur them.”

[22]Given that it had come to a different conclusion from the LVT, the UT undertook a rehearing of the evidence as to the reasonableness of the management charges claimed by the Council. The judge analysed in detail the various elements which made up the relevant management costs. Based on its findings, the UT made reductions to the employment costs of the home ownership manager and the home ownership officer, the costs of the customer involvement team and a deduction for the cost of the tenant’s newsletter. As a result, each lessee was held to owe £155.53, calculated by dividing £62,368.47 by 401. The management charges from 2002 to 2010 were undisturbed.

[23]The appellant appealed against the construction of the lease in the UT’s judgment, and in particular the effect of paragraph 14 of the Seventh Schedule and its effect (if any) in relation to clause 3 and the Eighth Schedule.

The law

[24]The principles applicable to the interpretation of the terms of a lease are the same as those applicable to any other contractual document, save where terms of art apply. They do not in the present case. The principles of interpretation are well known and were not in dispute between the parties on the appeal. I cite only a few passages from the well-known authorities which are particularly relevant to the interpretation exercise which the court has to carry out in the present case.

[25]In the well-known case of ICS v West Bromwich Building Society

[1998] 1 All ER 98

, Lord Hoffmann stated at paragraph 114 that:

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

[26]Individual clauses in a contract must not be considered in isolation but must be considered in the context of the whole document. As Lord Hope stated in Multi-Link Leisure Developments Ltd v Lanarkshire Council [2011] 1 All E.R. 175:

“11 The court's task is to ascertain the intention of the parties by examining the words they used and giving them their ordinary meaning in their contractual context. It must start with what it is given by the parties themselves when it is conducting this exercise. Effect is to be given to every word, so far as possible, in the order in which they appear in the clause in question. Words should not be added which are not there, and words which are there should not be changed, taken out or moved from the place in the clause where they have been put by the parties. It may be necessary to do some of these things at a later stage to make sense of the language. But this should not be done until it has become clear that the language the parties actually used creates an ambiguity which cannot be solved otherwise.”

[27]Thus, generally speaking, every part of a written instrument should be given effect. As Lord Romilly MR stated in Re Strand Music Hall Co Ltd (1865) 35 Beav 153: “The proper mode of construing any written instrument is, to give effect to every part of it, if this be possible, and not to strike out or nullify one clause in a deed, unless it be impossible to reconcile it with another and more express clause in the same deed”.

[28]However, as Mr Sebastian Clegg, counsel appearing on behalf of the Council submitted, often superfluous words do appear in contracts, particularly leases where the draftsman may express essentially the same point in a number of ways in an attempt to be sure that he has covered the position. Thus, as Hoffmann LJ (as he then was) stated at the end of his judgment in Arbuthnott v Fagan [1995] CLC 1396 in the context of a Lloyds’ standard agency agreement:

“In a document like this, however, little weight should be given to an argument based on redundancy. It is a common consequence of a determination to make sure that one has obliterated the conceptual target. The draftsman wanted to leave no loophole for counter-attack by the recipient or intended recipient of a call. It is no justification for construing the language so as to apply to a situation which, on a fair reading of the general purpose of the clause was not within the target area.”

To similar effect was Lord Hoffmann's statement in Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd

[1999] 1 AC 266

, 274B:

“I think, my Lords, that the argument from redundancy is seldom an entirely secure one. The fact is that even in legal documents (or, some might say, especially in legal documents) people often use superfluous words. Sometimes the draftsmanship is clumsy; more often the cause is a lawyer's desire to be certain that every conceivable point has been covered. One has only to read the covenants in a traditional lease to realise that draftsmen lack inhibition about using too many words.”

The parties’ submissions The appellant's submissions

The parties’ submissions

[29]Before us, Mr. Peter Knox QC, leading counsel for the appellant, argued that the UT had erred in relation to three issues. He articulated the issues arising on the appeal as follows: i) What was the correct construction of the lease, and in particular of paragraph 14 of the Seventh Schedule? ii) If the LVT’s construction was correct (as the appellant submitted), should its finding that £50 was a reasonable management charge for the year 1 April 2011 to 31 March 2012 be upheld? If not, what should be put in its place? iii) If the judge’s construction was correct, was he right in concluding that the Council was entitled to add a management charge for all the items he found it could?

[30]In relation to the first issue, Mr Knox submitted that the judge was wrong to reject the LVT's construction of paragraph 14 of the Seventh Schedule. The sentence beginning “Any costs or expenses incurred by the Council” etc had no application, as it was premised on the passing of regulations in accordance with the first two sentences. Once such regulations were passed, then the Council could charge for supplying a copy of them to the long leaseholders and for carrying out the works they authorise, in which case these costs were to be deemed as properly incurred under the Eighth Schedule. But unless and until such regulations were passed, the Council has no power to pass on the costs to lessees. This indeed appeared to be what the LVT had held (albeit that it had not spelled out the point out expressly). The fallacy in the UT’s reasoning was treating the second sentence in paragraph 14 as entirely detached from the first two sentences, and relating it to work done and services provided voluntarily and without passing any regulations at all. That construction was wrong given: the structure of the sentence; the width of powers it would give to the Council on its contended interpretation; and the purpose of the Seventh Schedule. The purpose of the Seventh Schedule was not to give the Council wide powers to do what it liked, but rather to oblige the lessee to perform its obligations, and on occasions to make specific payment in lieu (see clause 2, and, in particular, paragraphs 1, 2, 3, 7, 8, 9, 10, 11(ii) of the Seventh Schedule). One would expect a clause giving the Council a wide general power to provide whatever services it liked (and therefore to subject the lessee to considerable financial uncertainty) to be clearly stated in the body of the lease. If the Council were right, nothing save the 1985 Act would limit the improvements which the Council could carry out.

[31]Although before the UT Mr Morris, who represented himself in person in the tribunal, had submitted that the services referred to in sub-clause 3(i)(b) were limited to the services referred to in paragraph 3 of the Eighth Schedule, before us Mr Knox accepted that the Eighth Schedule covered more than those two "additional" services referred to in paragraph 3; however he submitted that the services mentioned in the Eighth Schedule were nonetheless restricted to the services expressly mentioned in that schedule and in sub-clauses 3(i)(a), (b) and (c) as well as those for which the Council had passed an (undefined) regulation.

[32]He further submitted that, even if there were any doubt, paragraph 14 should be construed as suggested above contra proferentem, because(a) the Council drew up the lease, and

(b) the Council’s construction effectively derogated from its grant to the lessee by subjecting him to an unexpected and unusual financial uncertainty.

[33]Mr Knox submitted that there was a second reason why the UT was wrong. Even if the Council were entitled to charge the cost of providing voluntary services to the appellant without prior regulations under paragraph 14, the judge was wrong to hold in paragraph 26 that the Council could charge to the appellant, under clause 3(i)(d), any “management costs” in relation to the provision of them. That was because: i) The only obligation to pay “management costs” was in respect of those things set out in clause 3(i)(d) – i.e. “in respect of the management costs involved in subparagraphs (a) (b) and (c) above and also in collection of the rent and the computation and collection of other monies due from the Lessee hereunder”. ii) On any footing, costs incurred voluntarily by the Council under paragraph 14 of the Seventh Schedule were not costs incurred by virtue of any of the obligations in clause 3(i) (a) (b) or (c). iii) Paragraph 14 itself set out what charges the Council could charge for such services, and this did not include “management costs”; although it said that such costs were to be deemed to have been properly incurred under the Eighth Schedule, it did not go on to say that any management costs could be recovered for this service. Management costs were not included under paragraph 14 and it did not say that services were deemed to be supplied under the Eighth Schedule.

[34]In relation to the second issue, Mr Knox submitted that, if, as the appellant submitted, the LVT’s construction were correct, the LVT was perfectly entitled to assess the relevant management charge, as it did in paragraphs 35 to 36 of its judgment, at £50 for the year:(a) because there was no satisfactory breakdown of what the management costs were (on this construction), and

(b) the LVT was entitled as it did to rely on its own experience of management charges.

[35]In relation to the third issue, Mr Knox submitted that, even on the judge’s construction, it was difficult to see how items (1) to (3), (17), (19) and (27) (in relation to ASB services) could fairly be said to be services for which the Council is entitled to charge the appellant.

The Council's submissions

[36]Mr. Clegg relied on the reasoning of the judge in the UT and sought to uphold his judgment. He submitted that LVT's determination that the words in the phrase at the end of paragraph 14 of the Seventh Schedule were ‘inherently meaningless’, and its failure to give them a meaning rubbed against the canon of construction put forward in Re Strand Music Hall Co Ltd.

[37]Mr Clegg submitted that the reason why the second part of paragraph 14 appeared in the Seventh Schedule was because it was intended to give the Council the power to provide services without subjecting it to a corresponding obligation to provide such services, as it would have done, if that part of paragraph 14 appeared in the Eighth Schedule. To include the second part of paragraph 14 of the Seventh Schedule in the Eighth Schedule would be to include it in a covenant on the part of the Council. The reference to the provision of such services as being deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule, notwithstanding the absence of any specific covenant therein, brought the provision of such services within the remit of clause 3(i)(b) of the lease and allowed the Council to charge for such services provided that the expense was “reasonable”. Upon this view of the second part of the Seventh Schedule, it was not “inherently meaningless” as the LVT held and therefore there was no offence to the said canon of construction. When taken in conjunction with sub-clause 3(i)(b) (which expressly recognised the application of sections 18 to 30 of the 1985 Act), the second part of paragraph 14 of the Seventh Schedule did not give the Council free rein to impose whatever charges it wished; they had to be reasonable.

[38]The words in the second part of paragraph 14 of the Seventh Schedule from “Any costs or expenses incurred by the Council preparing or supplying copies of such regulations or in doing works for the improvement of the Property providing services or employing gardeners porters or other employees shall be deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule hereto notwithstanding the absence of any specific covenant by the Council to incur them” had to be referring to something more than “any reasonable regulation”, or the phrase “any reasonable regulation” had to have a very wide meaning, because, included within the matters contemplated by paragraph 14, were such things as doing improvement works and employing gardeners, porters or other employees.

[39]So far as the second reason advanced by Mr Knox was concerned in support of his submission that the UT's construction was wrong, Mr Clegg submitted that the judge’s justification for his decision that the discretionary leasehold services and associated management costs were chargeable under clause 3 of the lease was not confined to paragraph 26 of his judgment but was also set out in paragraphs 16 to 25 of his judgment. Whilst paragraph 14 of the Seventh Schedule to the lease did not itself expressly refer to the charging of “management costs” for the material services, it nonetheless referred to “Any costs or expenses incurred by the Council…” which would include “management costs”. In any event, paragraph 14 of the Seventh Schedule brought those services under the Eighth Schedule and they were therefore covered by sub-clause 3(i)(b) and hence sub-clause 3(i)(d) of the lease.

[40]Mr. Clegg submitted that in the present case there was no room for the application of the contra proferentem rule; that was an option of last resort only to be deployed where a contractual term remained ambiguous when the court found itself unable on the material before it to reach a sure conclusion on the construction of a particular contractual term: see per Sir John Pennycuick in St Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No 2)

[1975] 1 WLR 468

at 477. In the present case there was no ambiguity.

[41]In relation to the second issue identified by Mr Knox, Mr Clegg submitted that, if, as the appellant submitted, the LVT’s construction were correct, then the matter would require to be remitted to the LVT for reconsideration of what was and what was not recoverable by way of service charges under the terms of the lease in accordance with the Court of Appeal's construction. Those questions were evidential questions not relating to the construction of the lease and were not before the Court of Appeal pursuant to the restrictions contained in the judge's grant of permission to appeal.

[42]Mr Clegg submitted that the third issue identified by Mr Knox was not open for argument on this appeal. The grounds of appeal in relation to which the appellant had obtained permission to appeal were only as to the construction of the lease and not as to the judge's application of his construction of the lease to the facts. Discussion and determination

[43]I prefer the submissions of Mr Clegg. I agree that the judgment of the UT should be upheld largely for the reasons given by the judge. In those circumstances I can set out my reasons for reaching this conclusion briefly.

[44]Under clause 3(i) of the lease the appellant covenanted to pay the Council a proportionate amount of the reasonable expenses and outgoings incurred or to be incurred by the Council in respect of the matters identified in sub-clauses 3(i)(a), (b), (c) and (d). As quoted above, sub-clause 3(i)(a) referred to “the repairing and maintaining renewing and cleansing as the case may be of any of the parts of the Reserved Property”; sub-clause 3(i)(b) referred to “the provision by the Council of the services mentioned in the Eighth Schedule hereto”; sub-clause 3(i)(c) referred to “the rebuilding or reinstatement of the Property or in insuring against such rebuilding or reinstatement"; and sub-clause 3(i)(d) referred to “the management costs involved in sub-paragraphs (a), (b) and (c) above and also in collection of the rent and the computation and collection of other monies due from the Lessee hereunder".

[45]The Council's covenants in the Eighth Schedule included: under paragraph 3, to keep the Reserved Property in good and tenantable repair, decoration and condition; under paragraph 4, to provide the following additional services in respect of the Premises, namely the cutting and maintenance of the grassed areas comprised in the Reserved Property and Rediffusion services; and, under paragraph 6, to employ such servants, agents and contractors as it considered necessary to fulfil its obligations under the lease.

[46]The critical issue of construction is the effect of paragraph 14 of the Seventh Schedule. That schedule sets out the lessee's covenants. Under the second part of paragraph 14: "Any costs or expenses incurred by the Council preparing or supplying copies of such regulations or in doing works for the improvement of the Property providing services or employing gardeners porters or other employees shall be deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule hereto notwithstanding the absence of any specific covenant by the Council to incur them”. Accordingly, the question is whether the management costs of what have been described in the LVT and the UT as ‘discretionary services’ (i.e. services which the Council was not obliged to provide but did nonetheless provide for lessees) come within the remit of the Eighth Schedule and were chargeable to the lessee pursuant to clause 3(i)(d).

[47]The exercise of contractual interpretation in the present case is a good example of the importance of the application of commercial sense and the consideration of the document as a whole.

[48]I reject Mr Knox's submission that the costs or expenses incurred by the Council under the second part of paragraph 14 of the Seventh Schedule, in order to be recoverable, were reliant on the passing of ‘any reasonable regulations’. Such a construction fails to give effect to the structure of paragraph 14 as a whole. It fails to reflect the fact that the second part of paragraph 14 is not simply addressing work done by the Council in connection with, or pursuant to, such regulations. It fails to give effect to the use of the word ‘or’ before the words "in doing works for the improvement of the Property providing services or employing gardeners porters or other employees" and to separate the items to which costs or expenses may apply. In other words such suggested construction does not take into account the wide application of the second part of paragraph 14, which makes reference to "providing services" and "employing gardeners porters or other employees". Perhaps most importantly, it fails to give effect to the clear intention in the last part of the paragraph that the lessee will be under an obligation to pay for the costs or expenses incurred by the Council in providing such services, as though it were carrying out its obligations under the Eighth Schedule, notwithstanding "the absence of any specific covenant by the Council to incur them.”

[49]I accept Mr Clegg's argument that the most likely explanation for why the disputed provision is located in the Seventh Schedule (which deals with the lessee's covenants) was a desire on the part of the draughtsman to confer upon the Council the power to provide services, and to charge for them, without the corresponding obligation that would have arisen had the provision been contained in the Eighth Schedule. Although I have little doubt that a provision conferring a discretionary power on the Council to provide services could have been more elegantly placed in a separate provision in the main body of the lease, or indeed in the Eighth Schedule itself, coupled with appropriate wording preventing the giving rise to any obligation to provide such services, nonetheless, despite its somewhat unusual location, the sense of the provision is clear.

[50]The relevant wording in the second part of paragraph 14 is plain; read in the context of the other provisions of the lease, it would objectively convey to a reasonable person, having all the knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, that, despite the absence of any obligation on the Council to provide the particular service in question, a discretionary service in fact provided to a lessee would be deemed to have been properly incurred in pursuance of the Council's obligations under the Eighth Schedule, and that such lessee would accordingly be obliged to pay any management costs involved in their provision, pursuant to sub-clauses 3(i)(b) and (d) of the lease. The fact that sub-clause 3(i)(b) refers to "the services mentioned in the Eighth Schedule hereto" cannot sensibly be construed as excluding services which, by virtue of paragraph 14 of the Seventh Schedule, are "deemed to have been properly incurred by the Council under the Eighth Schedule".

[51]Mr Knox's submissions deprive the wording in paragraph 14, viz. that certain services: "shall be deemed to have been properly incurred by the Council in pursuance of its obligations under the Eighth Schedule hereto notwithstanding the absence of any specific covenant by the Council to incur them”, of any utility or function. His submissions, in other words, fail to give effect to the clear intention that some services provided to lessees by the Council may not be the express subject of a covenant. But that conclusion undermines the commercial reality that the evolving challenges faced by a landlord may well require some room for adaptation as to what services best meet its lessees' requirements; and that is particularly so in the case of a local authority landlord which is the freehold owner of 401 properties.

[52]In the alternative to his primary submission on interpretation, Mr. Knox sought to draw a dividing line between the discretionary services and the management costs. However that argument ignored the interconnection between the various contractual clauses: services under the Eighth Schedule (including those under paragraph 14 of the Seventh Schedule, as concluded above) are chargeable under sub-clause 3(i)(b), and the management costs of those services are chargeable under sub-clause 3(i)(d).

[53]I also reject Mr Knox's submission that this was an appropriate case for recourse to the contra proferentem rule - namely the maxim "omnia praesumuntur contra proferentem” (literally: "everything is to be presumed against the party proffering the document"). As Sir John Pennycuick said in St Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No 2) supra at 477, the presumption can only come into play if the court finds itself unable on the material before it to reach a sure conclusion on the construction of a reservation or other contractual term. The presumption itself is not a factor to be taken into account by the court in reaching its conclusion on construction. In my judgment the wording of the lease is not so vague or ambiguous that the court in the present case is unable to reach a sure conclusion on the material before it, applying the established principles of contractual interpretation. Accordingly the presumption never comes into play. The case relied upon by Mr Knox in this context, namely Gilje v Charlgrove Securities Ltd [2002] L& TR 33, is distinguishable on its facts. In that case the Court of Appeal applied that presumption to the question of whether a tenant was liable to contribute by way of service charge to the notional costs of the landlord of fulfilling an obligation in the lease to provide a resident caretaker. The cost involved was said to be the notional rent forgone by the landlord in relation to the caretaker's flat. Laws LJ stated that the lease fell to be construed contra proferentem, although without any discussion of the circumstances in which the presumption arises. But it was clear in that case, as stated by Laws LJ at page 546, paragraph 28, that there was no provision in the relevant lease for the calculation or revision of notional rent, and that a reasonable tenant, reading the lease, would not have perceived that the relevant service charge provision relating to a caretaker required him to contribute to the notional cost of the landlord of providing the caretaker's flat. In contrast, the lease in the present case does provide that the lessee will be liable for reasonable management costs under clause 3(i)(d) in providing services under clause 3(i)(b), which covers services in the Eighth Schedule, and, by express cross-reference, for the costs of those discretionary services referred to in paragraph 14 of the Seventh Schedule which are deemed to have been incurred in pursuance of its obligations under the Eighth Schedule. Accordingly I derive no assistance from the fact that the presumption was applied in Gilje v Charlgrove Securities Ltd.

[54]Nor do I accept Mr Knox's submission that the interpretation put forward by the Council would give the Council free rein to provide voluntary services as it saw fit and pass on the charges to lessees. Clause 3 of the lease is not only expressly stated to be subject to the provisions of sections 18 to 30 of the 1985 Act but it also limits the obligation to pay to "the reasonable expenses and outgoings" in incurred by the Council. As set out in sections 18 and 19 of the 1985 Act as quoted above, the recovery of a service charge depends on the extent to which "relevant costs" have been "reasonably incurred".

[55]In the circumstances, it is not necessary for me to deal in any greater detail with the various arguments which were raised by the appellant and the Council respectively in relation to the first issue, both before us and in the court below. I conclude that, for the reasons given above, services performed at the Council’s discretion may be deemed properly incurred under paragraph 14 of the Seventh Schedule despite the absence of a specific covenant in the Eighth Schedule, and therefore the management costs of performing those services was recoverable under sub-clause 3(i)(d) of the lease as a service charge.

[56]In the light of my conclusion in relation to the first issue, the second issue identified by Mr Knox does not arise for consideration. So far as the third issue is concerned, I agree with Mr. Clegg’s submission that it is not open to the appellant to raise the third issue on this appeal in the light of the judge's restrictions on the grant of permission to appeal.

Disposition

[57]Accordingly I would dismiss this appeal.

Lord Justice McCombe:

[58]I agree.

[59]I also agree.

Cited in 1 later judgment

DAVID FREDERICK CUCKOW v AXA INSURANCE UK PLC 2023