Fluor Daniel Properties Ltd & Ors v Shortlands Investments Ltd [2001] EWHC 705 (Ch)

EWHC-Ch
Fluor Daniel Properties Ltd & Ors v Shortlands Investments Ltd
[2001] EWHC 705 (Ch) · 2001-01-12
[1]FC Foreman & Partners, one of the leading mechanical and electrical specialists in the country, were commissioned to carry out a strategic review of the existing M&E services within the building. Their report, which is attached herewith, highlights the works which need to be carried out immediately, together with those which should form part of a planned maintenance programme over the next ten years. Their report has highlighted the necessity to replace large elements of the air-conditioning system, in order to safeguard the continuing efficient use of the building.[2]Cameron Taylor Bedford, consulting engineers, were instructed to prepare a structural condition survey to determine both the structural integrity of the building and those aspects of repair which were required to be carried out immediately together with a planned maintenance programme for the next twenty years. A copy of their report is enclosed, where they have highlighted two aspects which require immediate attention, namely attention to elements of the glazed curtain wall and repairs to the podium jointing over the existing car park.[3]Osel Architects has been instructed to produce layout drawings for the refurbishment of the entrance hall, common parts and approaches to the lifts together with a schedule of external works. We are aware that the building is a prestigious headquarters building in a landmark position and, as such, it needs to maintain both first class services and facilities and, in that context, we believe that the proposed work which are to be undertaken are both necessary and reasonable to maintain the efficient running of the building for the benefit of the tenants." The cost of what were described in the enclosures to the letter as the "immediate works" was estimated at £2,181,000, inclusive of overheads, professional fees and a contingency. In addition the letter referred to the expenditure of maintenance costs estimated at £3,251,000 over the ensuing twenty years. The letter proposed covering the cost of the immediate works by means of a £500,000 withdrawal from the reserve fund and an increase of £1,681,000 in the service charge estimate for the year then current (1998/1999). The proposals evoked opposition from most of the tenants. They felt that the works were unnecessary given the relative newness of the building and, so far as the mechanical and electrical services were concerned, the apparent good condition of the service plant and the fact that it had not suffered any breakdown. A meeting of representatives of Shortlands, together with its advisers, on the one hand and representatives of the tenants and their advisers on the other, took place on 19 May to discuss Shortlands' proposals. A group of tenants then took further advice as to what works were needed. They instructed experts who later met Shortlands' experts in an attempt to agree what, if anything, needed to be done. It took the tenants a little while to take legal advice and instruct an expert to review the air-conditioning. Shortlands showed patience but seemed determined to undertake the various works which Baker Lorenz had identified in the letter of 30 April and Shortlands' representatives had explained in more detail at the 19 May meeting. On 22 September 1998, Mr Christopher Froshaug of Baker Lorenz (the author of the 30 April letter) sent to each tenant a demand for, inter alia, the service charge claimed to be due for the quarter beginning 29 September 1998, a copy of the auditor's certificate in respect of the service charge year which had ended on 30 April 1998 and a copy of the service charge budget for the service charge year then current, which had started on 1 May 1998. The letter, with its attached documents, referred to additional expenditure estimated at £2 million to cover what were referred to as air-conditioning and structural repairs, ie those items which had been broadly identified in Mr Froshaug's letter of 30 April and which had been discussed at the 19 May meeting. The letter went on to explain that the cost of those works was, in accordance with the service charge demand and statement of the recoverable service charge expenditure for the year ending 30 April 1999, to be recovered as follows:(1) an additional reserve fund contribution, included in the audited accounts for the service charge year which had ended on 30 April 1998, of £750,000 (the effect of which was to increase the overall reserve fund contribution for that year to £800,000 in that the contribution originally budgeted had been only £50,000);(2) a £750,000 provision in the estimate of the cost of repairs within the service charge budget for the service charge year then current; and(3) a contribution of £500,000 from the reserve fund (ie over and above the £750,000 to be added to it from (1) above). The service charge budget for the year then current also provided for a reserve fund contribution of £150,000. This would have had the effect, when paid, of reducing to £350,000, the net outflow of funds from the reserve fund used to finance the cost of the immediate works. The tenants challenged the recoverability of the additional £750,000 which had been retrospectively added to the service charge cost for the year which had already ended months earlier on 30 April 1998. They also challenged the recoverability of (1) the additional £750,000 (together with two other items totalling £55,500) included in the service charge budget for the year then current and (2) £100,000 of the £150,000 contribution towards the reserve fund also included in the service charge budget for that year. They paid the balance. Shortlands has since been persuaded to abandon its plan to carry out alterations to the reception area of the building (including the provision of a coffee shop). It has also given up a plan to "re-brand" the building using the name "Zinc". A number of the other works, not of a cosmetic nature, have also been abandoned. For their part, the tenants have accepted that certain works need to be done. As a result of communications between their respective experts and other advisers, the two sides have been able to agree a number of works. Differences remain. Those differences are helpfully identified in a Scott schedule which lists each item of work and each side's stance to it. In March 1999, the tenants discovered that Shortlands had withdrawn £342,430 from the reserve fund. They were eventually told that it had been paid to Halcrow following Allardice's acquisition of control of Shortlands and was in reimbursement of corporation tax in respect of payments to the reserve fund. The tenants challenged the payment and sought further information about it. The proceedings These proceedings were launched by the claimants in September 1999 with the fifth and sixth claimants being added in January 2000. The claimants seek declaratory relief concerning the various disputed items, their liability for contributions to the reserve fund and whether Shortlands was entitled to discharge corporation tax from it, and the recoverability of the £342,430. Since it was for Shortlands to establish its entitlement to the various sums in issue, and not for the claimants to justify having failed to pay them, it was agreed that, although the defendant, Shortlands would begin. Shortlands has been represented by Mr Brock QC and Mr Fancourt and the claimants by Mr Dowding QC and Mr Karas. The air-conditioning system The dispute, although much reduced in scope from what it was at the outset, is concerned principally with works proposed to the building's air-conditioning plant. So far as relevant, I will endeavour to explain how the plant operates and then describe what the works are which Shortlands wishes to carry out. The air-conditioning system works on the so-called variable air volume (or VAV) principle. Cooling is provided by the supply of treated air. The rate that it is delivered to each office space is adjusted to provide sufficient cooling to maintain a particular room temperature. Treated air is distributed by vertical ducts to each floor where VAV boxes, which control the rate of flow to each space, are located above the ceiling. The VAV boxes supply treated air in response to signals from thermostats. The roof plant consists of four air handling units each serving the wing of the building above which it is located. At the time they were constructed the units were the largest of their kind in the country. Fans (two for each of the units serving the north, south and west wings of the building and one in the unit serving the smaller east wing) - the so-called "extractor fans" - extract air from the building. Part of that air is discharged into the atmosphere to be replaced, through adjustable vents, by air drawn from outside. The air so obtained is then drawn through cleaning filters into a chamber containing cooling blocks. In each of the three larger units there are three such blocks. In the east unit there are only two. In each unit the cooling blocks are aligned in echelon, with each set back from the other. This means that the two ends of the middle block are exposed and also the inward-facing ends of the two outer blocks. They are positioned over a large watersump which is approximately twelve inches deep. Each cooling block consists of a series of copper coils which run transversely from one side of the block to the other. They pass through a series of water-like fins which are grouped closely together and run from the front to the back of each cooling block. Within the copper coils is chilled water supplied by means of a closed network of piping from two refrigeration plants, called chillers, situated in the basement of the building. The chilled water in the cooling coils chills the fins through which the coils pass. The filtered air is fan-driven through the cooling blocks and its temperature lowered as it passes across the cooling coils and the network of attached fins. Before passing through the cooling blocks the air is humidified. This is by means of water spraying devices called spray trees. Powered by a pump, the spray trees draw water from the sump which they then spray on to the cooling blocks. The air draws water from this source and is thereby humidified immediately before it passes through the cooling blocks. Surplus water from the spray trees falls back into the sump. Water in the sump is continuously replenished by fresh water, and a small quantity drained away, to ensure that the supply is constantly renewed. After passing through the cooling blocks, the chilled and humidified air is then drawn through "drift eliminators". These are a series of vertical strips made of polypropylene. The strips contain baffles the purpose of which is to catch any surplus droplets of water in the humidified air as the air is driven through them. The surplus water from the eliminators then falls into the sump below. The sumps are made of steel. They are roughly twenty or so feet square, reach from one side of the unit to the other and stretch from beneath the sprays trees to beneath the drift eliminators. By means of cross-bracing and rails, they also support the weight of the cooling blocks above. After having passed through the drift eliminators, the air is then drawn through heating batteries. These are lattice-like steel meshes heated according to need (rather like radiators) by means of hot water supplied by a boiler located in the basement of the building. The purpose of the heating batteries is to ensure that, before being pumped into the building, the treated air has attained the correct level of temperature and humidification. At the end of this process the treated air is then supplied through ducts into the building below by means of powerful fans (a further two for each of the four units), the so-called "supply fans". The ducts lead to the floors in the wing of the building served by that unit. Above each of the air handling units is a space through which the air from outside the building is drawn which is used to supplement the air from the building for treatment in that unit In the case of the north, south and west units, the space is surmounted by a steelclad structure consisting of louvred sides (through which the air from outside is drawn) and a flat roof. In the case of the north, south and west units, the structure containing the units together with the covered space above, stands proud above the main roof of the building. Each unit is connected on one side to - and is accessed from - a substantial plant room, itself situated on the main structure of the building. The east air handling unit is situated within the plant room. As I have mentioned, in the basement of the building are the two chillers, which provide chilled water to the copper coils contained in the cooling blocks. In order to remove heat from the chillers generated in producing the chilled water, a separate flow of water is passed through the two chillers. This water which becomes warm through in the process is then piped to two cooling towers on the roof. Having reached the cooling towers the water then passes down a crinkly-shaped series of vertical panels inside the tower. These vertical panels are open to the atmosphere. This cooling process is aided by fans which provide a draught of air on to the water. The cooled water is then recirculated through the chillers down in the basement. The two experts Before coming to the disputed items I should say a few words about the two experts who gave evidence. Their evidence is central to much of what I have to decide. Mr John Brew was called by Shortlands and Dr Arnold by the claimants. As a partner of Foremans at the time of the Foremans report in April 1998 (following the subsequent incorporation of the firm he became a director) Mr Brew was responsible for its contents although he had only a small part in its preparation. Until three or four weeks before the start of the trial, it had not been Shortlands' intention to call him as its expert on M&E matters. Initially this role was to be taken by Mr Burgess (formerly an employee of Foremans and principal author of the Foremans report) and, later, by a Mr Eggleshaw. Nor had he been able, prior to giving evidence, adequately to investigate aspects of the proposed works and their costings, although he could claim to have a particular knowledge of the air treatment plant in this building in that, as it emerged in the course of his evidence, it was he who had originally designed the system. On the other hand, his experience was mainly in the design and installation of M&E equipment rather than its maintenance and reoair and, as Mr Dowding pointed out, his opinions were heavily dependant on views provided by Woods of Colchester. He appeared to me to be very unfair minded. He was willing to modify his stance when it became evident to him that there might be a different and cheaper way of approaching a problem or when persuaded that Woods' views were open to legitimate objection. Dr Arnold was an extremely impressive witness. Highly qualified and a past president of CIBSE, chairman of the National Council of Specification, a Fellow of the Royal Academy of Engineering and director of the American Society of Heating, Refrigeration & Air Conditioning Engineers, he had rather more experience of the maintenance and repair of air treatment systems than had Mr Brew. Unlike Mr Brew (or, for that matter, Mr Burgess) Dr Arnold had inspected maintenance records for the building relevant to the matters on which he was being asked to express an opinion. He also struck me as having a rather more practical approach to issues than Mr Brew possessed. He too suffered from a degree of under-investigation when it came to costings: for example in putting forward the repair of the sumps by a firm called Covac; it emerged that he was reliant on a quotation although the firm had not been able to carry out an inspection. Following inspection, Covac's quotation took a different and rather more expensive form. Nevertheless, I had more confidence in Dr Arnold's experience in these matters than I had in Mr Brew's. Except as otherwise indicated, where their views differ I have preferred the evidence of Dr Arnold to that of Mr Brew. The proposed works and the scope of the dispute The works which Shortlands now wishes to carry out, together with the estimated costs, where known, of doing so are as follows. I deal first with the works to the air handling units. Those works involve several separate items. (1) The humidifiers and sumps Shortlands proposes to remove the existing spray humidifiers and replace them with steam humidifiers. Steam humidifiers do not need sumps of the kind presently in place. It proposes, therefore, to remove the existing sumps and replace them with plastic (or fibreglass) condensate trays (to catchsteam which has condensed into water). The approximate cost of removing the sumps was not established in the evidence but the cost of replacing the existing spray humidifiers with steam humidifiers and condensate trays is thought to be, all told, some £80,000. The claimants, in reliance on Dr Arnold, say that there is no reason to replace the existing spray humidifiers which were replaced by Mr Purtle as recently as 1996/1997 and are, as Shortlands through Mr Brew accepts, in good working order. The claimants also contend, again in reliance on the evidence of Dr Arnold, that the sumps, although corroded and in need of repair, can be cleaned, the corrosion removed, any holes repaired with metal plates and the interior of each sump relined with a non-corrosive coating applied by brush, resulting effectively in a new one millimetre thick plastic sump within a sump. To do the job properly they accept that it would be sensible to treat the remainder of the internal surfaces of each air handling unit in this way. The claimants say that, if so treated, the life of each sump can be extended by at least ten years. The overall cost will be £60,000 odd if a company called Clearwater Technologies Limited is engaged or £90,000 odd if Covac is engaged. (2) The cooling blocks It is common ground between the parties that the cooling blocks require repair. There is a dispute, however, over the extent of the works required. It is agreed that, where exposed, the end plates of each block (ie the steel plate located at each end of the block which helps to hold the block together and through which the looped ends of the horizontally aligned copper cooling coils protrude) are badly corroded and need treatment. It is in issue whether the inside of each end plate is corroded to any extent requiring treatment and whether there is any corrosion or other damage to the interior of the block (ie between the fins which stretch from front to rear of each block and the cooper coils which, as I have mentioned, pass through them). Short of dismantling the block, it is very difficult to see what its condition is within. The claimants, in reliance on Dr Arnold's advice, say that internal repairs to the blocks are unnecessary in that there are no signs visible from the exterior of the blocks to indicate that the interiors are in any need of repair. They say, in further reliance on Dr Arnold, that if repair were needed, visible signs of disrepair would be evident, and that the removal of the corrosion on the exposed sides of the end plates can be quite adequately undertaken in situ. Shortlands, in reliance on Mr Brew's advice, say that, if they are to be adequately repaired, the blocks must be dismantled, lifted out of the air handling units, lowered to the ground and taken to a workshop and that, if this is done, it would be better to replace them with new ones since replacement can be achieved at no or no significantly greater cost then repairing them. Dr Arnold's estimate of the costs of his much more limited prescription is of the order of £5,000 to 36,000. Mr Brew's preferred method of treatment, effectively replacement of the blocks, is £28,000,to which must be added the very substantial cost of craneage to remove and lower the existing blocks and to lift up and put into place new (or the repaired) blocks and a hoist to accommodate ancillary works (the accessing of men and materials to the site). This latter cost could add as much as £125,000 to the overall cost estimate. Since the work envisaged by Mr Brew would involve the employment of contractors and professional supervision, a further 30% must be added to the overall cost to cover contractor's overheads, profit and preliminaries together with professional fees. (3) The chillers and cooling towers Principally because the chillers use a CFC refrigerant gas called R12 (the significance of which I will explain later) Shortlands wishes to replace them with air-cooled chillers to be located outside the building. The cost of so doing would be of the order of £253,000. Air cooled chillers would render redundant the water cooling system which serves the existing chillers, and in particular the two water cooling towers on the roof of the building. Shortlands wants to remove these as well. The estimated cost of so doing would be £7,500 odd, making an overall total of £260,500 or so for this item. To these costs there would have to be added a further 30% to cover contractor's overheads, profit and preliminaries together with professional fees. The claimants, in reliance on Dr Arnold's advice, take the view that no case has been made to replace the existing chillers which, they say, are in perfectly satisfactory working order. They therefore maintain that any expenditure on this item would be unjustified.(4) The fans This item concerns the replacement of the existing extractor and supply fans (seven of the former and eight of the latter) with new fans, each to be fitted with so-called inverter drives. Sometimes referred to as frequency inverters these are devices which enable the fans to be operated at lower speeds, thereby, so it is maintained by those who favour their installation, effecting a saving of electricity. Currently the flow of air through the existing fans is regulated by a mechanism (which can be operated either automatically or manually) which alters the angle of the fan blades. The total estimated cost of this work, if undertaken, is approximately £100,000. The claimants say that the existing fans are in perfectly satisfactory working order and, therefore, that their replacement is unjustified. They also contend that nothing is to be achieved by installing inverter drives.(5) Cladding panels and insulating material One of the problems encountered by the north, south and west units is that, as a result of their exposed position, rainwater is blown through the louvred sides into their respective covered spaces where it ponds. There is currently no way of preventing this. Nor are there any means within each covered space, other than by evaporation, of draining the pools of water which collect. The result is that in places the ponding water has rusted the floor of the covered space on which it has collected. These floors form the upper surface of the roof of the air handling unit below. In places the water is able to seep through into the units underneath. This was graphically illustrated on the second of my site visits which was undertaken after the trial had ended. It happened to be a wet and windy day. In one of the units water was dripping through the ceiling on to the floor below. Not surprisingly, the floor of the units showed signs of corrosion where this had occurred. The parties are in broad accord that a number of the cladding panels forming a part of the air handling units, mostly the north and south units, are corroded and the insulation within the panels (the walls, roof and floor of each unit consist of an inner and outer skin with an insulating material between) has become damaged through being saturated with water. It is agreed that where this has occurred the affected panel and insulation material should be replaced. The difficulty is as to the extent of the work required. This can only be ascertained with any certainty once work is underway. Shortlands' forecast of the amount of work needed is rather greater than the claimants'. Shortlands estimates that the overall cost is approximately £19,000. The claimants estimate that it will cost roughly £10,000. It is also common ground that remedial works are needed to eliminate rain water coming or being blown into the covered spaces above the air handling units and to drain away any water that does enter. The parties are in broad agreement as to the likely cost of these works, currently thought to be around £10,000 to £11,000.(6) The air handling unit roofs The parties are agreed that the roofs to the north, south and west air handling units are in need of repair. Dr Arnold for the claimants says that this can be achieved by applying to the surface of the existing roofs a proprietary membrane called Triflex, the cost of which is estimated at around £19,000. Mr Brew, on behalf of Shortlands, is of the view that a metal overclad roof is preferable. The cost of providing each of the three affected roofs with an overclad roof is estimated at around £25,000 together with the cost of either a scaffold or a tripod as means of obtaining access to do the work. The tripod method involves the use of harnesses, G-strap inertia reels and roof man anchors. It is the method to be used in the case of the Triflex application and is included within the overall figure of £19,000 odd.(7) Other items Finally there are a number of separate unconnected items. They are (1) modifications at an estimated cost of £28,500 to the three hot water boilers serving the building, (2) the upgrading of the electricity supply into the building at an estimated cost of £25,000 and (3) the £3,650 cost (already incurred) of removing two oil tanks. The claimants are opposed to each of these items. They say that the modifications to the boilers are wholly unnecessary. In the case of the upgrading of the electricity supply, they maintain that, although upgrading at the cost proposed would be appropriate in the future, no case for doing so at the present time, let alone two years ago, has been established. They say that the removal of the two oil tanks was likewise unnecessary. They say that the removal of the two oil tanks was likewise unnecessary. Not in dispute are (1) an item estimated to cost £1,000 concerned with an audit of the existing safety arrangements relating to the three boilers and (2) the proposed expenditure of £20,000 on emergency lighting and battery works. Concessions Over and above these works are a number of items additional to the two that I have just mentioned which are no longer in dispute either because Shortlands no longer presses them or because the claimants accept that they should be carried out. These items consist of assorted structural repairs the estimated cost of which, according to Shortlands, is £116,500. According to the claimants the cost is likely to be £106,500. I am not concerned to resolve that difference. On the M&E side, apart from the outstanding items referred to earlier, the claimants now concede that works costing £10,800 were necessary to comply with certain health and safety obligations. Those works have since been completed. Other works, which the claimants disputed, and which were estimated to cost £6,200, had, it turned out, already been carried out. Improvements to the entrance of the building, together with "re-branding" of the building, estimated to cost £291,500 (exclusive of a 30% add-on to cover contractor's overheads, profit and preliminaries together with professional fees) were abandoned in May 2000 when Shortlands conceded that the cost of these items could not be charged to the tenants. The legal position There were differences between counsel as to the extent to which the various sub-underleases allow Shortlands to carry out the disputed items. For Shortlands, Mr Brock made the following submissions. (1) The scheme of covenants set out in the sub-underleases is one whereby the landlord is obliged to carry out works and the tenants to pay for them and, as such, is a scheme for the mutual benefit of both landlord and tenant. Where therefore there is (or may be) more than one reasonable method of carrying out the obligation, it is for the landlord, as the party with the obligation, to choose the method. Provided the works are such as an owner who has to bear the costs himself might reasonably decide upon, the tenants are not entitled to insist that cheaper works are undertaken or to insist on a minimum standard of repair only. See Plough Investments v Manchester City Council [1989] 1 EGLR 244. That principle is not confined to works of repair properly so called but extends to the landlord's wider obligations under the leases, subject only to the effect on those obligations of clause 7(3). (2) In considering the meaning and extent of the concept of "repair" in a lease the court will take into account a number of factors. Many of them are identified in Holding & Management Limited v Property Holding & Management Trust plc [1990] 1 EGLR 65, where Nicholls LJ said this (at page 68G to J):
"... the exercise involves considering the context in which the word 'repair' appears in a particular lease and also the defect and remedial works proposed. Accordingly, the circumstances to be taken into account in a particular case under one or other of those heads will include some or all of the following: the nature of the building, the terms of the lease, the state of the building at the date of the lease, the nature and extent of the defect sought to be remedied, the nature, extent, and cost of the proposed remedial works, at whose expense the proposed remedial works are to be done, the value of the building and its expected lifespan, the effect of the works on such value and lifespan, current building practice, the likelihood of a recurrence if one remedy rather than another is adopted, the comparative cost of alternative remedial works and their impact on the use and enjoyment of the building by the occupants. The weight to be attached to these circumstances would vary from case to case. This is not a comprehensive list. In some cases there will be other matters properly to be taken into account. For example, as in the present case, where a design or construction fault has led to part of the building falling into a state of disrepair, and the proposed remedial works extent to other parts of the building, an important consideration will be the likelihood of similar disrepair arising in other parts of the building if remedial work is not undertaken there also, and how soon such further disrepair is likely to arise."
Here, when considering the meaning to be ascribed to the various lease terms that are relied upon, the relevant factors include: the fact that the building is a high quality office block built to a high specification in or about 1980; the fact that the building is only 20 years old and has a considerable unexpired life span; the fact that the building attacks high quality tenants at substantial rents of between £20 and £26 per square foot; the fact that the proposed works will enhance the manner of the provision of services in the buildings; the fact that the works will extend the life of the plant; the fact that the works accord with current building practice and developments in technology since 1980; the fact that the works will prevent the likely recurrence of defects in the near future, are cost effective and will not have an adverse impact on the use and enjoyment of the buildings by its occupiers; and the fact that the tenants in the building have taken leases of between seven and twenty-five years, that all of them save one have the protection of Part II of the Landlord an Tenant Act 1954 and that all, at the date of service of the service charge demand, had several years unexpired. (3) Clause 6(1) is not confined to repairs strictly so called. Given the wording of the first proviso, which refers to the landlord's liability for "any defect or want of repair" , the words "amend" and "renew" which appear in the clause should not be given a meaning akin to repair. Having regard to the broad subject matter to which clause 6(1) applies and the complex nature of the building, the parties must have intended those words to have a wider meaning than just repair. In Credit Suisse v Beegas Nominees Limited [1994] 1 EGLR 76 Lindsay J held that in a lease covenant, almost identical in wording to clause 6(1) and subject to a proviso almost identical to the first proviso, the words "amend" and "renew" and also the words "otherwise keep in good and tenantable condition" had a meaning which went beyond repairs strictly so called (ie works of a kind which would fall within a covenant merely to repair). (4) If and to the extent that the proposed works are not within clause 6(1) (so as to be recoverable under clause 7(2)(a)), they are within the scope of the second proviso as constituting an extension, variation or alteration in the rendering of the services to the building - principally the supply of conditioned air - which, subject to the tenants paying the service charge, Shortlands is obliged under clause 6(2) to provide. Acting reasonably, Shortlands reasonably deems it desirable to carry out the works for the more convenient or efficient conduct and management of the building. (5) Further or alternatively, if and to the extent that the proposed works are not within clause 6(1) or the second proviso, they are within clause 7(2)(e) in that they are works which Shortlands reasonably considers desirable for the purpose of maintaining or improving services in the building, namely the supply of conditioned air. Illustrative of this is the Holding & Management Limited case, where there was a provision, similar to clause 7(2)(e), for such works to be carried out "as ... the Maintenance Trustee shall consider necessary to maintain the Building as a block of first-class residential flats". Nicholls LJ said (at page 69E) that the provision was:
"directed at works which are necessary to maintain the amenities and facilities which from time to time are appropriate for the building as a block of first-class residential flats." adding that: "
As living standards rise, so this or that feature can be expected to be changed or added to the building. Examples might be high-speed lifts or improved air-conditioning." (6) The first part of clause 7(3) - down to the words "obligations hereunder" - imposes on the landlord an obligation to use its best endeavours to provide an economical service to the tenants by ensuring that the methodology and cost of the works results in the lowest reasonable figure consistent with the due performance and observance of its covenants. The second part of the clause - beginning with the words "but the tenant ..." - ensures that, provided the landlord has complied with its obligations, the tenant cannot object to the cost of the materials used, work carried out or service provided merely because a lower cost could have been achieved. Shortlands will not be in breach of its obligations under this clause in respect of the proposed works. For the claimants Mr Dowding submitted as follows: (1) On its true construction, clause 6(1) does not cover items such as the replacement of the existing fans and chillers, none of which was or is in disrepair and all of which were and remain in proper working order, in satisfactory physical condition and, for all practical purposes, able to perform as efficiently as if new. Whatever the precise scope of words such as "amend" or "renew" and whether, as used in clause 6(1), they go beyond matters of mere repair, what is of importance to what is needed to trigger the obligation to amend or renew. The position in that regard is the same as with the obligation to repair: no work can be required unless and until the subject matter in question is out of repair (see Post Office v Aquarius Properties Limited [1987] 1 EGLR 40). (2) Plant is not in disrepair, nor is replacing it "repair", simply because it is at the end of its age range in the CIBSE tables. Plant which works satisfactorily and does so near to its maximum efficiency is in repair even though it may be close to the end of its working life. The obligation to "amend" adds nothing because it means no more than to "mend", thereby implying a state of disrepair. "Renew" presupposes that the physical condition of the plant or item in question (or of any part of parts of it) is such that renewal is reasonably necessary. The standard to apply is that laid down by Proudfoot v Hart (ie having regard to the age, character and locality of the building, is the condition of the subject matter of the dispute reasonably acceptable to a reasonably minded tenant of the kind likely to take a lease of the building?) The landlord is not entitled to replace plant, or any part of it, which is in proper working order, is in a satisfactory physical condition and is capable, to all intents and purposes, of performing as well as it did when new. The position is the same as regards the landlord's obligation "to keep in good and substantial condition" . While this may require the carrying out of works going beyond straight repair, the obligation is only triggered where, as a matter of fact and degree, the subject matter is not in good and substantial condition. Where it is triggered, the Proudfoot standard applies. The obligation does not require or entitle the landlord to carry out works which go beyond what is sensibly needed to remedy the defective condition in question. (3) The reference in clause 6(1) to the obligation to keep "in good working order and repair" is plainly directed to plant and is complimented by clause 7(2)(b) with its reference to the landlord recovering the cost of employing suitably qualified persons to "inspect repair and keep in running order the said apparatus equipment plant and machinery in the building...". It gives the flavour of what the parties must be taken to have intended in relation to plant. The emphasis is on repair and keeping in running order. It does not permit works to be done which go beyond that standard. (4) The second proviso is irrelevant in that it relates to the rendering - ie the delivery to the tenants - of the various services which the landlord has undertaken to provide and not to the means whereby the service is rendered, ie the plant: what it consists of and how it operates. The only relevant service in this dispute is the supply of conditioned air under clause 6(2)(b). The second proviso entitles the landlord to extend or vary etc the rendering of that service (for example as regards the number of hours per day that it is provided). It is not concerned with works to the plant which produces the conditioned air. That is a matter dealt with by clause 6(1). In any event the second proviso should be restrictively construed. It cannot operate to make the tenants liable for works of a kind that were never contemplated ie that are not within clause 6(1). Further, the landlord must act reasonably and must "reasonably deem" the alteration in the rendering of the service desirable for the more convenient conduct and management of the building. The landlord must therefore have proper regard to the interests of the tenants. (5) Clause 7(2)(e), although widely drawn, should be given a restricted construction. It is not intended to cover matters, such as works to the air conditioning plant, which are expressly and carefully dealt with in clause 6(1)(e) and are thereby covered by clause 7(2)(a). In the Holding & Management case Nicholls LJ said that he did not read the provision (referred to earlier) "as giving the plaintiff [ie the maintenance trustee] a free hand to require the residents to pay for all works, whatever they might be, which the plaintiff might consider necessary to maintain the buildings a block first-class residential flats". He made clear that, if the works in question did not fall within the ambit of the tenant's repairing obligation, the residents could not be required to pay for them under that provision. In Lloyds Bank plc v Bowker Orford [1992] 2 EGLR 44 Mr David Neuberger QC (sitting as a deputy judge of the Chancery Division) refused to construe a term whereby the service charge was to include the cost of "any other beneficial services which may properly be provided by the lessors" as extending to matters dealt with specifically in provisions elsewhere in the lease. If therefore the item in question is in the condition required by clause 6(1) or can be put in to it by work within the scope of that clause, clause 7(2)(e) is not to be construed as nevertheless allowing the landlord to carry out and charge for more extensive work. (6) Clause 7(2)(e) is only concerned with works to the extent that they maintain or improve services in the building, ie services which the landlord has covenanted under clause 6(2) to provide. Here, the relevant service is the supply of conditioned air. It follows, therefore, that the cost of the work is only recoverable if it is for the purpose of maintaining or improving the supply of conditioned air, for example by the installation of filters to combat declining air quality outside the building. Where, however, the condition of the plant is such that conditioned air is supplied in the quantities and to the standard required by clause 6(2)(b), there is nothing to which clause 7(2)(e) can apply. Over and above that, the landlord's opinion must be reasonable. The landlord must therefore have proper regard to the interests of the tenants in reaching a decision. (7) In any event there are limitations on the landlord's freedom of action. In the first place this is because the work in question is to be carried out at the tenant's expense. The normal rule as between covenantor and covenantee that, where a repairing covenant can be performed in more than one way, it is for the covenantor to choose the mode of performance provided he acts reasonably, should not apply where, as here, the covenantee tenant, and not the covenantor landlord, is to pay for the works. Where the rule has applied it is the covenantor who has paid. Plough Investments v Manchester City Council , properly understood, does not require that the rule should be so applied or, if it does, was wrongly decided. Second, in deciding upon the mode of performance, the length of the tenants' leases is relevant. In deciding therefore what works to carry out, a relevant factor must be what is reasonably necessary to perform the obligations until the expiry of the tenants' terms so that works which extend beyond what is reasonably necessary for this purpose are outside the service charge scheme. Third, the first part of clause 7(3) requires the landlord to use his best endeavours to select that method of performing his obligations which results in the lowest reasonable cost. This means that, if there are two ways of performing an obligation, both of them reasonable, the landlord must adopt the one which produces the lower figure. The following are my conclusions on the issues of law (1) While accepting (as did Lindsay J in Credit Suisse v Beegas Nominees in relation to the similarly worded provisions in that case) that clause 6(1) extends to the doing of works which go beyond repair strictly so called, I accept Mr Dowding's submission that the obligations contained in the clause presuppose that the item in question suffers from some defect (ie some physical damage or deterioration or, in the case of plant, some malfunctioning) such that repair, amendment or renewal is reasonably necessary. I further accept his submission that the condition of the item in question must be such as to be no longer reasonably acceptable, having regard to the age, character and locality of the premises, to a reasonably minded office tenant of the kind likely to take a lease of the building. Whether, once those conditions are established, the item must be repaired or renewed is a question of fact and degree having regard to the nature and extent of the defect and, not least, to the costs likely to be involved. (2) I also accept Mr Dowding's submission that the second proviso is confined to the rendering of the services which the landlord has covenanted by clause 6(2) to provide. It does not apply to the means whereby those services are rendered, ie the plant: what it consists of and how it operates. I therefore agree with Mr Dowding that the second proviso does not justify the recovery by the landlord of expenses incurred in renewing, much less improving, the plant (or some part of it) used for delivering the services, whether the service is the supply of treated air, electricity or hot water, if the plant in question is capable of rendering to tenants the particular service which the landlord has covenanted to provide. In short, repair or renewal of the plant is covered, if at all, by clause 6(1). (3) Although widely drawn, clause 7(2)(e) does not, in my view, entitle the landlord to incur expense which, through the service charge, the tenants are required to bear if the service in question is being rendered to the standard required by the landlord's obligations, the plant by which it is rendered is in proper working order (ie there is no disrepair or other defect requiring the landlord's attention under clause 6(1)) and the works proposed are not reasonably required to maintain the service and will not improve it. I can well see that, if, although supplied as required by the terms of the underleases at the time they were entered into, a service no longer conforms to the reasonable requirements of the tenants of the building, the landlord, provided it acts as required by this provision and subject to clause 7(3), will be entitled to the reasonable cost of works to improve the service. Short of that, however, I do not see the clause as having any bearing on the issues I have to decide. (4) I do not accept Mr Dowding's submission that, where the repairing or other obligation is cast upon the landlord as covenantor but it is the tenant covenantee who has to pay for the works, the normal rule as between covenantor and covenantee (ie that it is for the covenantor to choose the mode of performance provided he acts reasonably), does not apply or that, properly understood, Plough Investments v Manchester City Corporation does not so require or, if it does, that it was wrongly decided. Plough Investments concerned a landlord's covenant to keep the exterior of an office building in repair. The three tenants of the building were obliged to bear the costs incurred by the landlord of carrying out such works. At page 247M to 248B of his judgment Scott J said this:
"The landlord's fifth schedule repairing obligation is, although nominally an obligation, in a sense also a right. If it were simply an obligation then, presumably, the three tenants of the building could choose to release the landlord, in whole or in part, from that obligation. But the provision is not, in my view, simply, or even mainly, for the benefit of the tenants. It is also a provision for the benefit of the landlord. It enables the landlord to keep its building in repair at the tenant's expense. If the repairing obligation had been imposed on the tenant, the tenant would have been entitled to decide on the manor in which it will be discharged provided remedial works were sufficient to discharge the obligation, the landlord could not require a different type of repair to be effected. Under these leases, however, the relevant decisions regarding repairs to the exterior are to be taken by the landlord. If reasonable remedial works are proposed by the landlord in order to remedy a state of disrepair for the purpose of its fifth schedule obligation, the tenants are not, in my judgment, entitled to insist that cheaper remedial works be undertaken. Miss Williamson accepted that the landlord's decisions had to be reasonable ones. The tenants, after all, have to pay for the fifth schedule repairs. But I accept Miss Williamson's point that the tenants are not entitled to require the landlord to adopt simply a minimum standard of repair. Provided proposed works of repair are such as an owner who had the bear the cost himself might reasonably decide upon and provided the works constitute 'repairs' within the meaning of that word in the fifth schedule covenant, the tenant is not, in my judgment, entitled to insist upon more limited works or cheaper works being preferred. I agree with Miss Williamson that the landlord cannot be limited to a minimum standard of repair only."
Mr Dowding contrasted the position there with the position before me. The scheme of covenants in the leases before me is designed to provide services for the benefit of the tenants. That is why, he said, they are required to pay for them. I accept that the purpose of these covenants, at any rate insofar as they relate to air-conditioning and the like, is predominantly to benefit the tenants. It is true that in Plough Investments Scott J regarded the repairing obligation as not simply or even mainly for the tenant's benefit. But, as Mr Brock submitted and as Mr Dowding accepted, the scheme of provision in this case is also for the benefit of the landlord. The landlord has an interest, separate from that of the tenants, in ensuring that the building is properly serviced, thereby helping to maintain the reputation and attractiveness of the building to tenants and not least to justify the high rent per square foot which the building presently commands. Like the repairing obligations in Plough Investments , the landlord's obligations under the scheme of provision which I have to consider are also, in a sense, right: they could not, in my view, be released by the tenants. That being so, I see no reason why the principle identified by Scott J in Plough Investments should not apply. The obligations have been cast upon the landlord. It is for the landlord to decide how to discharge them. Provided it acts reasonably, it is for the landlord to decide how to go about the matter. The tenants cannot complain simply because the landlord could have adopted another and cheaper method of doing so. Where I agree with Mr Dowding is in his questioning of the standard of work which, acting reasonably, the landlord should be free to carry out at the tenants' expense. In the passage from his judgment referred to above, Scott J accepted as the appropriate standard "proposed works of repair ... such as an owner who had to bear the cost himself might reasonably decide upon". In Holding & Management Nicholls LJ, in rejecting a particular scheme of works as going beyond what was sensibly needed to cure certain physical defects in the leased premises in that case, said this (at page 69B):
"A prudent building owner bearing the costs himself might well have decided to adopt such a scheme, despite its expense. But what is in question is whether owners of 75-year leases in the building could fairly be expected to pay for such a scheme under an obligation to 'repair'."
In short the works - ie the standard to be adopted - must be such as the tenants, given the length of their leases, could fairly be expected to pay for. The landlord cannot, because he has an interest in the matter, overlook the limited interest of the tenants who are having to pay by carrying out works which are calculated to serve an interest extending beyond that of the tenants. If the landlord wished to carry out repairs which go beyond those for which the tenants, given their more limited interest, can be fairly expected to pay, then, subject always to the terms of the lease or leases, the landlord must bear the additional cost himself. (5) This brings me finally to clause 7(3). It was common ground between counsel that, under that clause, the landlord, if it is to recover the cost of doing so as part of the service charge, is required to use its best endeavours to select that method of performing its obligations which results in the lowest reasonable cost. The emphasis is on reasonableness. Provided it has used its best endeavours to act reasonably, the landlord is not to be criticised merely because it can be shown that the materials, works or services could have been provided or performed at a lower cost. Two preliminary matters Before coming to the evidence and my conclusions in relation to the various proposed works and other disputed items, it is convenient if I express my views on two particular topics that have arisen in the course of the evidence. (1) Industry lifespans The Foremans report of April 1998 gave much emphasis to what it referred to as "industry recognised lifespans" for M & E equipment. Section 2 of the report referred to a comparison between various codes, including one produced by CIBSE (the Chartered Institute of Building Structure Engineers). It then made the following statements:
"Plant lifespan can be enhanced by Planned Preventative Maintenance to reduce the incident [sic] of breakdowns by careful inspection, adjustment and service of the plant. Planned Maintenance will reduce the need for corrective maintenance which, once a plant reached a certain point in its anticipated life cycle, can increase considerable. The plant at Shortlands has now reached that point, as demonstrated by the industry recognised standards, and careful consideration must now be given to phased Plant/Equipment replacement"
There is no doubt that the considerations referred to in that passage loomed large in Foremans' recommendations which, in turn, formed the basis for the claims included in the disputed service charge demands. It was apparent, however, that, although Mr Burgess, the principal author of the Foremans report, had spoken to Mr Purtle, the fulltime building manager, he had not looked at the maintenance records for the M & E plant. Or had Mr Brew. Dr Arnold, on the other hand, had taken the trouble to consult them. Those records are of importance because, as Dr Arnold observed and as Mr Brew accepted, "the usual indicators that plant is coming to the end of its working/economic life are an increase in the frequency of breakdowns and a rise in the cost of maintenance". If Mr Brew (or Mr Burgess) had inspected the records, it would have been apparent that those indicators were not present in relation to the cooling blocks, spray trees, chillers and fans, all of which he recommended replacing, and that, whatever the lifespans set out in the CIBSE or other professionally prepared tables, it was evident that these items of plant had not reached the end of their working life. Indeed, one of the noteworthy features of the evidence concerning the chillers and the fans was that, despite their age, they had never broken down. Doubtless this was because of the careful way in which they had been maintained over the years. Dr Arnold described the tables as no more than "a starting point" when considering whether to replace plant. I accept Dr Arnold's evidence on the weight to be attached to them. I therefore reject the notion that merely because an item of plant has reached the end of its recommended lifespan as suggested by the CIBSE or some other guidelines, it was and is reasonable for Shortlands to want to replace it at the tenants' expense. (2) Legionella Mr Brock laid much emphasis on the risk of legionella infection in relation to the appropriate method of dealing with the sumps and the chillers. Thus, one of the reasons urged by him in support of doing away with the sumps altogether and replacing them and the existing spray humidifiers with a system of steam humidification and of doing away with existing chillers and water cooling towers and replacing them with air-cooled chillers which have no need of cooling towers, was that any risk of legionella infection from water in the sums or in the cooling towers would be eliminated. My attention was drawn to various passages in a publication produced by the Health & Safety Executive called "The control of legionellosis including legionnaires' disease' and to an approved code of practice produced by the Health & Safety Commission called 'The prevention or control of legionellosis (including legionnaires' disease)'. It is fair to say that, although legionnaires' disease was known in the construction industry at the time this building and its systems were constructed, it is only in more recent years that the significance of and methods of dealing with the disease have become widely understood. According to those publications, the bacteria which causes the disease proliferate, so as to cause a significant risk of infection, in water where the temperature is in the region of 20-45ºC. There is no doubt from that literature that water standing in ductwork and condensate trays and, particularly, in cooling towers may represent a potential source of infection where the water temperature is within the danger range. However, the publications do not advise against the use of water cooling towers and the like. Instead they advise on the precautions to be followed. Thus, in paragraph 90 of the Health & Safety Executive publication, the following appears:
"The risk of legionnaires' disease from cooling systems can be controlled by: (a) careful attention to the design and construction of the cooling tower and cooling system to ensure that the release of aerosol is minimised, the materials used in their construction do not harbour or provide nutrients for bacteria and they can readily be completely drained and cleaned; (b) positioning towers away from ventilation inlets and populated areas if possible; (c) maintaining the system in a clean and sound condition; (d) controlling water quality; (e) carefully monitoring precautions."
It is not suggested that the sumps and cooling towers in this building are not regularly maintained and the water quality controlled so as to reduce to a minimum any risk of infection. Indeed, one of the striking features of the evidence was the exemplary way in which Mr Purtle and his team carry out their duties, including the regular treatment and monitoring of the water in those very items of equipment to ensure that there is no risk of infection. There was no evidence to suggest that Mr Purtle was proposing to leave or that any replacement for him would not be capable of implementing the system of maintenance required under the approved code of practice. It is also significant, as Mr Dowding pointed out, that none of the experts who have attended the building, including, not least, Foremans, identify legionella as a reason for replacing the humidifiers or the chillers or suggest that there is any health risk from the existing air treatment plant. Thus, in a letter by Foremans (signed by Mr Burgess) to Shortlands dated 6 July 1998, in which the various proposed works were categorised under different headings, those under the heading 'Health & Safety' did not include either replacement of the humidifiers or removal of the cooling towers. Those items, insofar as they appeared at all, were under the heading 'repair and renewal'. The only reference to legionella in Foremans' report to is to identify elimination of possible legionella problems as a benefit of removing the cooling towers and spray humidifiers and not as a reason for removing them. Indeed, Foremans' legionella expert, a Mr Pavey, was never even asked to look at the building. For his part Dr Arnold was in no doubt that the existing systems in the building are more than adequate to eliminate any significant risk of infection. In these circumstances I am wholly unpersuaded that any risk of infection from this source provides a reason for undertaking any of the works proposed. The sumps, humidifiers and cooling blocks I deal with these three items together because the key to the appropriate means of dealing with them lies in how best to deal with the sumps. I have already summarised the opposing positions which each side adopts to these three items. Mr Brock submitted that, on the evidence, the cooling blocks required repair and the sumps renewal and therefore that both items were within clause 6(1). In particular he drew my attention to the evidence of Mr Purtle who said that the sumps require regular repair, that it takes three to four weekends to carry out the repairs, that this process has gone on over each winter period since 1981 and that, on occasion, it has been necessary to patch the sumps with metal plates. He drew my attention to the fact that, although the sump in the south air handling unit had been recently treated, rust was already coming through (as was evident from my own inspection of that unit) and that the crossbracing and rails supporting the cooling blocks were rusted in places. He drew my attention to the fact that Woods of Colchester had expressed the view, endorsed by Mr Brew, that the cooling blocks should be removed (ie lifted out of the building and taken away) for a decision whether they can be repaired or should be replaced and that, as the cost of replacing the cooling blocks in each unit is of the order of £7,000 to £8,000, it may be cheaper if they are to be removed from the building to replace them rather than simply repair them. Turning to Dr Arnold's prescription (ie the use of a firm such as Covac or Clearwater Technology to clean down the sumps, prepare surfaces by dry grit blasting, and line them with a non-corrosive material so as, in effect, to create a sump within a sump, at the same time treating the remainder of the internal surfaces of each unit in the same way) Mr Brock submitted that this method of treatment, even if possible, would be expensive. He pointed out that, to do the job properly, the contractor would need to have access to the particular air handling unit for a period of three or so weeks during which time the unit would be out of use and that wing of the building would be without treated air. In any event, he submitted, the sumps and cooling blocks are coming to the end of their useful life, judged by the CIBSE table of life factors. He further submitted that, bearing in mind that there is a risk of legionella infection from water in the sumps when the water temperature exceeds 20ºC (which, according to Mr Brew, it will or, according to Dr Arnold, it may reach during hot summer weekends when the air conditioning plant is not in use) and bearing in mind also that, though the existing spray humidifiers are relatively new and in good working order, in a modern design it is most likely these days that steam humidification would be used, the replacement of the spray humidifiers with steam humidifiers was reasonably desirable for the purpose of maintaining or improving services in the building or for the more convenient or efficient conduct and management of the building. He drew my attention to passages in the Health and Safety publications referred to earlier recommending avoidance of the risk of legionella by the provision of steam or evaporative humidifiers (rather than water or spray humidifiers). He drew my attention to Mr Brew's advice to Shortlands which is to remove the sumps altogether and replace them and the existing spray humidifiers with steam humidifiers. Steam humidifiers do not need sumps. Instead they have a non-corrosive condensate tray underneath to collect any surplus water which has condensed from the steam. He submitted that this combination of factors justified characterising the existing system of sumps, humidifiers and cooling blocks as together constituting a defect which justifies the installation of new cooling blocks and the replacement of the existing sumps and spray humidifiers with steam humidifiers together with non-corrosive condensate trays. Even if not within clause 6(1) these works would, he submitted, be within clause 7(2)(e), alternatively within the second provision. Mr Brew's opinion was that the removal of the existing sumps and cooling blocks and the installation of new blocks can be achieved in a given wing of the building over a three day period which could start on a Friday midday and be completed by noon the following Monday. All told the cost of these three items together would be around £250,000 (including £80,000 for the new humidifiers, £28,000 for the new cooling blocks and £125,000 for craneage etc) to which contractor's preliminaries, profit and other overheads, together with professional fees - a further £100,000 or so - must be added. Dr Arnold was of the view that works of this nature are wholly unnecessary. His view was that the existing sumps can be treated to removal all existing coatings with a view to preparing their surfaces for lining with a non-corrosive material, resulting effectively in a new non-corrosive sump within a sump and that, to do the job properly, it would be sensible, as the firms contacted to carry out the task have suggested, to treat the remainder of the internal surfaces of each unit in the same way. This, in his view, will enable the existing spray humidifiers to continue in use. He was also of the view that the cooling blocks can be adequately repaired in situ and that, for reasons already explained, it is unlikely that any internal repairs to the blocks will be needed. He thought that repairs to the cooling blocks, if carried out in situ, will cost no more than £5000 to £6000. Mr Dowding submitted that Dr Arnold's evidence is to be preferred and that, although the sumps are in need of repair, the appropriate treatment is in the way recommended by him. He submitted that no case had been made out for replacing the existing spray humidifiers which, he reminded me, had been replaced as recently as 1996/1997 and, it was common ground, are in good condition. He submitted that there is no appreciable risk of legionella infection from the continued use of the spray humidifiers and that, in any event, as Mr Brew accepted, steam humidifiers use more energy and have a shorter life than spray humidifiers. Accepting that the endplates of the cooling blocks suffer from corrosion, he submitted that I should prefer Dr Arnold's opinion that the corrosion can be removed in situ and that there is no evidence to suggest that there is anything wrong inside the blocks. Removing them for inspection and, on the off-chance that they may be found to need it, for repair, alternatively for replacement by new blocks, will be exceedingly expensive, having regard to the cast of craneage and the like, and, in the circumstances, would go far beyond what is sensibly required to remedy the limited disrepair that has been identified. Because, at the end of counsel's submissions, there remained questions which the evidence at the trial had not explored and subsequent communications between the parties' experts had not been able to resolve, I called for a further hearing, which lasted a morning, to deal with these matters. The questions were (1) whether, while the in situ works advocated by Dr Arnold to the sumps in any given air handling unit (and to the remainder of the internal surfaces of that unit) are in progress, the parts of the building served by that unit would remain habitable and (2) the costs of the works. The evidence at the further hearing resolved the question of costs. As already mentioned, the treatment would cost around £60,000 if Clearwater Technology is engaged and around £90,000 if Covac is engaged. The evidence also established that, which ever firm were to be engaged, the works to each air handling unit would take approximately three weeks. The result is that one wing of each floor would be without a direct supply of fresh air for not less than three weeks assuming that the works are carried out over a part at least of the intervening weekends. It was not suggested that this method of valuation would not be adequate as a way of extending the life of the existing sumps for a further ten years. Nor was there any challenge to Dr Arnold's evidence that steps could be taken to ensure a method of operation which would enable the works to be carried out without risk of damage to any other part of the air handling system (for example as a result of the grit blasting process). That left only the question of the effect on occupants of the part of the building served by a given air handling unit while the works to the sumps and internal surfaces of that unit are in progress. As to that, the evidence established to my satisfaction that, provided, as is proposed by Dr Arnold, the works to the sumps and air handling units which he advocates are carried out over the winter months (i.e. between November and the end of March), which is when the variable air volume system for the supply of conditioned air to each floor is at its minimum setting for most of the time, the wing of the building served by the air handling unit in which, for the time being, the works are being carried out, will continue to enjoy sufficient ventilation to enable the areas in question to remain habitable. The factors which lead to this conclusion are (a) the fact that, on each floor, there is around the perimeter of the building a window (approximately 1.2m x 0.3m in size) at ceiling level designed, it is true, for smoke ventilation purposes but available nevertheless as a source of natural ventilation from the outside atmosphere; (b) the fact that, on each floor, the other air handling units will remain fully operational and supplying, therefore, conditioned air into the rooms and corridors served by those units; (c) the fact that the extractor fans will be available to extract air from all parts of each floor of the building and will therefore be able to draw in air, including air from the outside atmosphere, to replace the air extracted; and (d) the fact that, in any event, the need for a supply of conditioned (i.e. cooled) air in the winter months is at its lowest (on average one third of the amount supplied in the summer months). Relevant to factor (b) is that the four wings of the building are not sealed from each other. This means that, in the wing where the direct supply of conditioned air is not available by reason of the works, some mixing of the air in that wing will occur with conditioned air supplied to the other parts of that floor. It is true that internal parts of each floor which are not on the perimeter and do not therefore have access to ceiling-level windows will not enjoy the same degree of natural ventilation as the perimeter rooms. But I accept that the internal partitions and doors are not air tight and that, as Dr Arnold states, air from other parts of the building and beyond will filter into such areas especially given that those areas are no less served by the air extraction process (the effect of which, when in operation, is to draw in air from elsewhere) than are the perimeter rooms. Lastly, and by no means least, Mr Brew himself conceded that the overall situation would be "tolerable and manageable but not particularly conducive to the people in the building." An issue arose as to the impact on all of this of the building regulations and the terms of the sub-underleases. As to that, I am satisfied that, assuming that the works to each unit lasts no more than three or so weeks, there will be no breach of building regulations while the works are in progress. Dr Arnold said, and Mr Brew accepted, that the relevant building regulation, namely the requirement of adequate means of ventilation for people in the building as set out Part F 1 of Schedule 1 to the Building Regulations 1991, does not apply during the carrying out of what he described as temporary works. In any event, departmental guidance on the requirement suggests that it will be met if ventilation is provided which, under normal conditions, is capable, if used, of restricting the accumulation of moisture which could lead to mould growth and of pollutants originating within the building which would otherwise become a hazard to the health of the people in it. There was no evidence that, during the period of such works, if carried out in the winter months, either phenomenon would occur. I am also satisfied that, during the period of the interruption in the supply of conditioned air to that wing of the building, Shortlands would not be in breach of clause 6(2)(b) of the sub-underleases (which is the only relevant provision). The obligation to supply conditioned air by that clause is merely "to maintain a reasonable temperature in accordance with statutory requirements" but, in any event, it is subject to clause 4(5) which exempts the landlord from liability in respect of any interruption with any of the services "by reason of necessary repair or maintenance of any installations or apparatus ..." Works of the kind advocated by Dr Arnold would constitute necessary repair or maintenance. The result of this aspect of the additional evidence was that, provided the works to the sumps are carried out in the winter months, there is no objection to them on grounds of practicality or the effect that they would have on the occupants in the building. Nor can it be said that the works would not constitute a satisfactory means of repairing the sumps. The only question therefore is whether, in all the circumstances, Shortlands is entitled, at the tenants' expense, to replace the existing sumps and spray humidifiers with entirely new equipment and, at the same time, undertake the wholesale replacement of the existing cooling blocks or whether its rights under the sub-underleases entitle it, at the tenants' expense, to go no further than works of the kind advocated by Dr Arnold. The works which Shortlands wishes to carry out would plainly go beyond mere repair and renewal. To be justified, they would have to qualify under clause 7(2)(e). I do not consider that they can qualify under the second proviso although, at the end of the day, I doubt very much whether the second proviso would cover works not otherwise covered by clause 7(2)(e). I have come to the view that the works which Shortlands wishes to carry out would not be justified. Looked at on their own, no case has been made out for replacing the existing spray humidifiers; they are relatively new, are in good working condition, and are not in need of any repair other than routine maintenance. For reasons already explained, I am wholly unpersuaded that there is any appreciable legionella risk from their continued use. Removal of the sumps is only sensible if the spray humidifiers are replaced by steam (or some other form of) humidifiers which do not require their use. If the existing spray humidifiers are retained, the sumps can be adequately repaired in the manner advocated by Dr Arnold. Any inconvenience to occupants of the building during the time that the works of repair to the sumps are carried out, if done during the winter period, would be passing and not such as to involve Shortlands in any liability under the sub-underleases. The cost involved, if kept to the level quoted by Clearwater Technology, would be significantly less than the cost of cutting out and removing the existing sumps and replacing them and the existing humidifiers with a steam humidification system. It cannot be reasonable to incur the huge expense involved in lifting the cooling blocks out of the building and replacing them with new ones or to incur what may turn out to be the even greater expense of removing them from the building for inspection and later return when any repairs found necessary have been carried out, and replacing them in the meantime with temporary cooling blocks, merely on the off-chance that, although not presently evident, it may turn out that internal repairs to them are needed. It is not suggested that the corrosion evident on the cooling block endplates cannot be adequately dealt within situ. I am therefore of the view that the claimant's objections to these items succeed. The chillers and cooling towers Shortlands' proposal, based on recommendations by Foremans, involves the replacement of the existing chillers by completely new air-cooled equipment to be located outside the building in a position yet to be identified but likely to be in the car park. The new plant, if installed, would render the two cooling towers redundant. This is because, being air-cooled in contrast to the existing chillers which are water-cooled, the new chillers would have no need for the water-cooling function. As I have mentioned, the estimated cost of installing the new system, including the housing around the plant needed to safeguard it and to reduce the noise which the equipment generates when in operation, is £213,00 to which, according to the Scott schedule, is to be added a further £40,000. This additional sum is to cover the cost of new or amended pipework and associated electrical works and controls which will be necessary given the new location of the intended plant. The cost of removing the cooling towers, made redundant by the air-cooled water chilling system, is, according to the Scott schedule, a further £7,500. To these costs must be added a further 30% to cover contractor's overheads, profits and preliminaries, together with professional fees. The principal reason advanced for replacing the chillers is because they use CFC R12 refrigerant. Mr Brew appeared to accept in cross-examination that, but for the banned refrigerant, there is no case for replacing the two chillers by reference to their existing condition. At the time of the Foremans report in April 1998, no ban had been enacted on the use of CFC R12 gas, at any rate as a top-up, and it was therefore open to owners of equipment using that refrigerant to obtain supplies for top-up purposes. The current position, is that, under EU legislation, with effect from 1 January 2001, use of that gas for topping-up is prohibited. However, as Mr Brew accepted and, in any event, as I find, an alternative refrigerant, which attracts no prohibition, is available as a replacement or drop-in for the banned gas should the need arise. This alternative is called Isceon 39TC. This gas already existed in 1998 but it was at that time not fully tested and its capacity to act as an efficient replacement was not sufficiently established. Dr Arnold's evidence, which I accept, is that its capacity to act as an efficient replacement is now established. Mr Brew accepted that the performance of this alternative refrigerant is comparable to R12 and can be used in existing R12 equipment such as the two chillers. To install Isceon 39TC as a replacement gas would involve a cost of around £17,000 per machine or £34,000 in all. This includes the cost of an oil change (necessary, according to Dr Arnold, if there is to be no loss of performance as against the use of R12) and removal of the R12. A further matter raised by Mr Brew, but not in such a way as to suggest that there is any appreciable risk, is the risk of legionella infection from the water in the two cooling towers. I have already dealt with this topic as a reason for replacing items of equipment in current use in the building. The evidence was that the towers are "dosed" daily with bromine by an automatic dosing device and also, if needed, manually with a biocide by Mr Purtle or one of his staff. I am satisfied, and accept Dr Arnold's view, that, given this method of treatment, any risk of legionella infection from this source is altogether minimal. Nor is there any other good reason for wanting to dispense with the cooling towers. Together with their louvre supports, they require no more than rust treatment and painting from time to time. They are deep cleaned every year under health and safety legislation. Baltairco, the company that installed the towers, expressed the view, following an inspection in April 1998, that "the towers appear in good condition with only minor cosmetic work required". Mr Burgess said that, if the existing chillers were retained, the towers could easily be upgraded by means of what he called a "once-over". This would involve stripping them down, removing the water, re-painting the steelwork and replacing any worn parts. He said that, having done so, the towers could be run for another ten years. Mr Brew agreed. Mr Brew was of the view that these works would cost around £6,000. Dr Arnold had put the cost of the works at between £5,000 and £10,000. Looking at the matter as a whole, in my judgment it would be quite unreasonable for Shortlands to replace the two chillers and remove the cooling towers and seek to recover the very considerable cost of doing so from the tenants. I am unpersuaded by Mr Brock that any justification exists under either the second proviso or clause 7(2)(e) to do so. The existing equipment works, has been excellently maintained, regularly serviced and shows no sign, despite its age, of any breakdown. There is nothing in the maintenance records that anyone has seen (insofar as any steps have been taken to inspect them: Shortlands' advisers have not done so) to suggest that any breakdown is likely. The machines have continued to run satisfactorily since Foremans produced their report in April 1998 recommending replacement. They have only required minor repairs from time to time. They continue to operate almost as if new. If a breakdown does occur, the machines can be replaced. They have experienced no significant escape of refrigerant. (Mr Purtle mentioned in his oral evidence a recent very minor leak but one which did not necessitate any topping-up of the refrigerant). If a serious leak occurs, but the machines remain otherwise serviceable, the refrigerant can be replaced with Isceon 39TC. It is not suggested that any difficulty in obtaining spares (of which there was a faint suggestion in the evidence) would, of itself, justify replacing the machines. Their replacement by an air-cooled plant would consume more electricity than the existing plant and would therefore attract additional running costs. Under the regime currently in force, there is no appreciable risk of legionella from the cooling towers. The claimants therefore succeed in their objections to these items. The fans The recommendations contained in Foremans' April 1998 report, based upon suggestions made by Woods of Colchester, were that there should be new impellers and motors supplied to each fan (effectively that there should be fifteen new fans) and that, in addition, the so-called "frequency inverters" or "inverter drives" should be fitted. I have already explained the purpose of these devices and how, by altering the angle of the fan blades, the flow of air through the existing fans is varied. I have also mentioned that Woods have estimated the overall cost of supplying the new motors, impellers and the frequency inverters at approximately £100,000. In April 1998, Woods reported that the existing fans had been "maintained regularly" and that they were "generally in good condition". There is no evidence that they have ever broken down. Calculations produced by Woods in April 1998, which Mr Burgess incorporated into the Foremans report, indicated that annual power savings of £60,000 could be achieved if inverter drives were installed. A cursory examination of Woods' calculations, however, showed (as Mr Burgess readily accepted in cross-examination) that, in computing present day running costs (the costs of operating the fans as they presently exist), Woods assumed that the fans were, as Mr Burgess put it, "running full-pelt simultaneously" for fifteen hours, six days a week and 52 weeks in the year. He accepted that this is a gross overstatement of their current usage. He thought that Woods' figures were 50% too high. Mr Brew accepted that the Woods calculation was "obviously wrong". Neither he nor Mr Burgess has done any investigation into what energy savings, if any, would be achieved if their recommendations were carried into effect but Mr Brew's feeling, although he could not say precisely why, was that energy savings would be achieved if inverter drives were to be installed. He accepted that, if I were to conclude that no case had been made for installing them, he would be content to leave the existing fans in place and allow them to be "run to destruction" before replacing them. He said that replacement fans are on short delivery. Although there was some suggestion that spare parts may become increasingly difficult to obtain, he did not urge this as a reason for replacing them. Dr Arnold's firmly held view is that there is no case for replacing the motors and that there is no saving in energy costs gained from converting to an inverter drive. Suffice it to say that I have seen nothing in the evidence to indicate what savings, if any, would be achieved. In my view, even if the second proviso and clause 7(2)(e) are given the wide construction for which Mr Brock contends, Foremans' recommendations, if carried into effect, would constitute a wholly unreasonable expenditure. The only point that could be urged in favour of the proposal was that the fans are at the end of their projected life according to the CIBSE lifespan tables. I have already discussed the weight to be attached to such tables. Given the trouble-free manner in which the fans have so far operated and the favourable reports on their condition I am not persuaded by this consideration. In the result, Shortlands fails to establish a case for their replacement at the tenants' expense. Roofs of the three external air handling units. It was common ground between Mr Brew and Dr Arnold that repairs are necessary to the roofs of the three external air handling units (the fourth is not externally located and is therefore unaffected) to prevent rain water leakages and to put them in good order. Leaking water causes corrosion to the panelling above the air handling units located below and damage to the insulation material sandwiched between the inner and outer skirts of the panelling. In their April 1998 report Foremans, adopting the suggestion of Woods of Colchester, recommended new metal roofs to each of the three units in question at a cost of round £24,000 to £25,000. Dr Arnold's remedy is slightly cheaper. It consists of covering the existing roofs with a waterproof membrane using a material called "Triflex". It carries a fifteen year guarantee. It could be installed at an inclusive cost of £18,777. What is involved is repair or renewal within clause 6(1). There is very little to choose between the two. An uncertain element of Foremans' recommendation - and an element not provided for in the cost estimate of £24,000 to £25,000 - is whether a scaffold would be needed to construct the new roofing and, if so, whether it must be from ground level up or from simply around the roof area in question, or where, as with the Triflex solution, the works can be undertaken using a so-called "tripod" (involving safety harnesses and G strip inertia reels). On current estimate, Shortlands' preferred solution will cost slightly more than the Triflex alternative. In the context of an annual service cost of around £1 million (ignoring reserve fund contributions) this difference is minimal. Provided the equipment needed to carry out the work will not add significantly to the cost so that the overall difference in price between the two solutions is no more than a few thousand pounds, I do not see why Shortlands should not be free to follow its preferred solution. It is not suggested that Shortlands is acting unreasonably in preferring its method of dealing with the problem. I do not consider that clause 7(3) compels Shortlands to adopt the Triflex method merely because it happens to be slightly cheaper. The claimant's objection therefore fails. The cladding panels and insulating material There is no issue here. The panels need repairing (and, if necessary, damaged panels replaced) and the damaged insulating material made good. The precise cost will only emerge when the extent of the damage is established. Boilers According to the Foremans report "the boiler plant works satisfactorily but requires some immediate attention in terms of operating sequencing". The purpose of sequencing would be to even out the present uneven usage of the three boilers. The background to this goes back many years. In 1981 Mr Purtle installed two valves between the number one and number two boilers. This was done to avoid the number one boiler which operates the constant temperature circuit (ie the supply of hot water for use in hand basins and the like, and also for use in the heating battery in the air handling units) from interfering with the operation of the other two boilers which operate the variable temperature circuit, ie the supply of hot water to the radiator central heating system in the building. It is possible, when the two central heating boilers are not required, manually to switch one or other or both of those boilers for use as a substitute for the number one boiler and thus to provide hot water and, should it be needed, heated water to the heating batteries in the air handling units. Apparently, this facility does not exist when the two central heating boilers are in use during the winter months. Mr Brew estimated that the cost of modifying the boilers to eliminate this lack of flexibility is £25,000 which, as he accepted, was not a precise calculation but simply an "order of cost". He accepted that there is still quite a lot of life in the three boilers and that they could be left as they are. In his witness statement, Mr Burgess stated that the boilers were "in good condition and well maintained". Dr Arnold was of the view that the boilers had another seven to ten years of life in them and that expenditure on them to provide for sequencing was unjustified. Another item of proposed expenditure is £3,500 to change the existing motorised pneumatic control valve on the boilers to an electrical valve. The purpose of so doing would be to enable the boilers to be operated by remote and automatic controls compatible with a building maintenance system if and when such a system is introduced into the building. Mr Brock submitted that these works are within the scope of the second proviso, alternatively clause 7(2)(e). I do not agree. It is not suggested that, as presently configured (with their lack of sequencing), the boilers do not perform as required. It is not suggested that they do not supply whatever hot water is needed as and when needed or that there is any lack of efficiency in the system. The works are not therefore within the second proviso. Nor for the same reason are they items which Shortlands might reasonably consider desirable for the purpose of maintaining or improving services to the building. They will have no impact on them. They are not therefore within clause 7(2)(e). The same is true of the proposal to change the control valves. The claimants succeed therefore in their objections to these items. Electricity supply The problem here is succinctly described in Mr Purtle's witness statement when he said that:
"8 electrical incoming 3 phase mains serve the building. Service number 4 supplies all of the small power and lighting to the floors. (The other supplies serve, amongst other things, the building lifts, fans, chillers and common areas and are not a problem.) When the building is fully occupied, I have known this 800 amp supply to peak at 750 amps, and it has run quite warm. I am concerned that, in the event of the building being fully occupied again, this supply may be insufficient to meet the tenants' power demands and could present a significant danger, with either the system failing or it becoming a dangerous fire risk."
In his oral evidence, Mr Purtle referred to an occasion in the late 1980s when one of the servers nearly caught fire and an isolator had to be changed. He said that the last time that the supply peaked at 750 amps was in the early 1990s. Since then, incoming tenants had been encouraged to bring in their own supplementary electricity supply, a position which Mr Brew described as "messy". He and Mr Burgess advised that the supply be upgraded. His order of cost for so doing is £25,000. Mr Brew accepted that he had not yet carried out any detailed investigation into the matter (for example whether the risers within the building can accommodate a new supply) but said that his recommendation was based on what he described as a "visual survey". He was unable to state whether the present day electricity demand by tenants was greater than it was twenty years ago when the building was first let. In some areas, he thought, demand had reduced whereas in others it had increased. His belief was that, overall, it had increased. Dr Arnold, having reviewed the electricity supplies, agreed that some cost should be included for upgrading or reinforcing supplies in due course. He thought that the estimate of £25,000 was reasonable. However, he could see no reason why this work would be carried out at this time as he could see no pressure for increased supplies at present. His view was that it would be reasonable for Shortlands to make provision for expenditure for this item but that this was a matter to be undertaken in five to ten years time rather than at the present. In my view Shortlands is entitled to take the view that carrying out this item of work now is reasonably desirable for the purpose of maintaining or improving services. The reasonable cost of carrying it out is a recoverable item of service charge expenditure. Oil tanks In 1984 or 1985 the building's heating system was switched from oil to gas. Two oil tanks located in a purpose-built concrete bunker outside the main building then became redundant. The tanks remained partly filled with oil. No one seems to have thought any more about them until Mr Burgess appeared in 1998. He took the view that they constituted a health and safety risk and advised that they be removed. His advice was followed, the remaining oil was removed and the tanks dismantled and taken away. That left an empty bunker. This occurred in late 1999. The overall cost of doing so was £6,795. Mr Brock submitted that the cost of removing the two tanks (£3,650 - part of the overall cost of £6,795) was within the scope of the second proviso, alternatively clause 7(2)(e). I visited the bunker on my first site visit. It is only accessible through a narrow opening (secured by a locked hatch) and entry into it requires some agility of movement. Mr Burgess expressed the view in his witness statement that, if a leak had occurred in the tank within its enclosure and a member of staff had gone into the area, he or she could have inadvertently been overcome with fumes. He also raised as a possibility that, if smoking a cigarette, such a person might have ignited a fire. This seemed to me to be rather far fetched. Mr Burgess accepted that an alternative could have been simply to remove the remaining oil and clean the tanks. The evidence suggests that this would have cost £3,150. Removing the tanks, according to Mr Burgess, was no more than "good housekeeping". Mr Brew had a slightly different slant on the matter. In his report he considered that the original oil tanks constituted a health and safety risk "via vermin etc". He thought that rats might find their way into cavities between the tanks and the surrounding walls of the boiler. His view was that removing the tanks was "sensible". Dr Arnold was of the view that it was reasonable to have the oil removed and the tanks cleaned but could see no good reason for having the tanks themselves removed. On the contrary he considered that there was a good argument for keeping the tanks in case, one day, it should be thought desirable to switch back from gas to oil. The tanks, in his view, would remain re-useable. I am quite unpersuaded that the £3,650 cost of cutting and removing the tanks is an expense, small though it is, which should be borne by the tenants. It is not suggested that it is covered by clause 6(1). It is quite unrelated to the rendering to the tenants of any of the services which the landlord is obliged to provide and so is outside the scope of the second proviso. Nor do I consider that it is work which Shortlands might reasonably consider desirable for the purpose of maintaining or improving services in the building. It is irrelevant to the maintenance of those services. It is therefore outside the scope of clause 7(2)(e). In my view it is irrecoverable. Other matters (1) Other reports Mr Brock sought to draw some support for Mr Brew's recommendations, either in methodology or in cost, from two other reports, one by John Brady Associates and the other by Woods of Colchester. Woods' initial report recommended, as one option, the wholesale replacement of each of the air handling units at an overall cost of £590,000, exclusive of craneage, off-loading or re-assembly of the various unit sections. By the time of the hearing before me, that option had been rejected as going beyond what was sensibly needed. Except, in relation to certain aspects of Woods' (more limited) refurbishment option, I do not consider that much is to be gained by looking at Woods' initial report. Nor do I consider that much is to be gained by comparing Foremans' recommendations with those of John Brady Associates. Although expressing the view that the two chillers were currently working "quite well" John Brady were in favour of replacing the chillers but not, as Foremans suggested, with air-cooled chillers but with what they described as "multiple smaller modern units". They also advised replacing the existing cooling towers with what they described as "modern glass-fibre units at an overall price of £250,000 rather than, as Foremans recommended, doing away with them altogether. They too recommended installing a modern building management system at a cost of £300,000 and the refurbishment of the air handling units at a cost of £400,000. Included within this recommendation was the replacement of the cooling blocks and the replacement of the existing Bray humidifiers with an alternative humidification system. It was not clear what conclusions I should draw from all of this. Mr Brock also submitted that even Halcrow, the previous owner of the building, thought that £825,000 needed to be spent on it. This appears from a short costing report, produced four days after control of Shortlands passed from Halcrow to Allardice in late December 1997, as a follow-up to a condition survey which Halcrow Gilbert Associates, a firm of consulting engineers connected with Halcrow, had produced sometime earlier that month. I cannot attach any weight to HGA's costings. The figure of £825,000 is misleading. Their recommendations, based on a survey conducted within the space of a single day, were for total replacement of sixteen fans (in fact there are only fifteen) at a cost of £128,000 and the installation of inverters at a further cost of £140,000 making a total of £268,000 for the fans alone. They also recommended the replacement of the two chillers at an overall cost of £190,000 and the installation of a building management system, to replace the existing control system, at a cost of £330,000. The only work they recommended to the air handling units was the relining of the sumps (not their replacement let alone doing away with them altogether) at an overall cost of only £28,000. (2) Year 2000 compliance Included in the recommendations set out in Foremans' April report was a provision of £10,000 to cover the cost of year 2000 compliance, ie steps to be taken to avoid the consequences of a shutdown of computer systems as a result of the so-called millennium bug. The provision formed a part of the overall figure of £2.18 million referred to in Mr Froshaug's letter to tenants dated 30 April 1998 and in the sums demanded of tenants in September 1998. In the event, only £280 was spent on this item. It is not obvious whether the fact that £10,000 was Shortlands' original estimate for this item remains of any materiality. Insofar as it does I am of the view that the provision was wholly excessive. This is not a conclusion given with the benefit of hindsight. Rather it is because, as Dr Arnold pointed out (without contradiction) when he was cross-examined about the matter and I accept, since the building's M & E systems are largely without computer equipment, there was nothing, or virtually nothing, to go wrong on the drawing of the new year. The paragraph 17 items There remains the miscellany of small items which were mostly included in the 1997/1998 final service charge account and are challenged in paragraph 17 of the particulars of claim. The claimants have since conceded that items 3, 4 and 5 were properly included and Shortlands that item 8 should not have been included. Item 9 relates to the contribution of £150,000 to the reserve fund sought from tenants as part of the service charge demand for the year 1998/1999. I will deal with that item separately when dealing with issues concerned with the reserve fund. Item 1 concedes a payment to Baker Lorenz of £3893 (plus VAT) for advice given to Shortlands. The advice related in part to the handover of management of the building from Kemp & Hawley to themselves in early 1997 and in part to the service charge implications of closing the Shortlands Club (a sports club located on the ground floor) and letting the space to Holmes Place. Mr Dowding accepted that the payment, in so far as it related to the first head of claim, was properly included in the service charge account but submitted that it was wrongly included insofar as it related to the second head of advice. The amount at stake is only small, at most seven hours of advice charged at £175 per hour or £1225 in all. The invoice for the payment and an accompanying time schedule do not clearly distinguish between the two. I accept Mr Fancourt's submission that the second head of advice related to the effect on the service charge regime of an open market letting of the space previously used as the sports club and that the fruit of the advice was reflected in the form of the estimated service charge for 1998/1999 submitted to the tenants under cover of Baker Lorenz's letter of 22 September 1998. In that letter Holmes Place is shown as contributing, by way of service charge, to those items of cost from which it benefits, thereby benefiting the other tenants who would otherwise have had to share between themselves all of the service charge costs. The cost of Baker Lorenz's advice in this regard seems to me to be recoverable under clause 7(2)(f). Item 2 concerns contributions to a pension scheme set up for the benefit of Mr Purtle and his two assistants after control of Shortlands passed from Halcrows to Allardice and they ceased to be members of Halcrow's company pension scheme. In order to retain their services, it was considered necessary to set up a separate pension scheme to compensate them for their loss of membership of the Halcrow scheme. According to Mr Froshaug's unchallenged evidence on this point, the contributions were larger than they had been before the change of control (when the three had participated in the Halcrow scheme) and their salaries, from which the contributions were deducted, were therefore increased to ensure that their take home pay remained the same. In my view these pension contributions, being a part of the salaries of the three employees, are recoverable, like the remainder of their salaries, under clause 7(2)(a) (as being within clause 6(2)(f)), alternatively under clause 7(2)(b). Item 6 concerns a payment of £1784 (plus VAT) to Cameron Taylor Bedford, consulting engineers, for producing a detailed structural survey report, together with a repairs cost schedule, for presentation to the tenants. The claimants challenge the recoverability of this sum on the ground that the report includes items, liability for the costs of which has been successfully challenged by the claimants (for example the replacement of various spandrel panels and a reduction from £150,000 to £40,000, owing to an error by Camerons, in the cost of carrying out repairs to eliminate various basement water leaks). Mr Dowding submitted that the invoice should be apportioned to reflect the split between recoverable and on-recoverable items dealt with in the report. Mr Fancourt submitted that whether or not the report covers items which were or turned out to be irrecoverable from tenants under the service charge provisions, the report was properly commissioned. It revealed items of work most of which required doing and the estimated cost of which (between £106,000 and £116,000) is recoverable from the tenants. As such, he submitted, the costs are fairly within the scope of clause 7(2)(a) (as being incidental to the performance by Shortlands of its obligation to repair etc under clause 6(1)(a)); alternatively are reasonable and proper fees payable in connection with the maintenance of the building and thus within clause 7(2)(f). I accept Mr Fancourt's submission. In my judgment the whole of Cameron's bill is recoverable. Item 7 concerns a bill for £1,450 plus VT charged by Shortlands' former solicitors for work carried out in March and April 1998. Mr Dowding submitted that the solicitors' services related in part to matters which are in dispute and the costs of which are not properly recoverable. He submitted that the bill should be apportioned. The bill is headed "3 Shortlands M&E works". Mr Froshaug's evidence on this point, which was not challenged, is that the bill covered legal advice relating to what items could be recovered under the terms of the tenants' various leases. On that footing, in my judgment, the sum in question is recoverable, as Mr Fancourt submitted, under clause 7(2)(f). The fact that, on investigation, some of the items of work have turned out not be recoverable seems to me to be neither here nor there. The reserve fund Until day 4 of the trial, there was an issue concerning the circumstances in which Shortlands had withdrawn a sum of £342,430 from the reserve fund and whether that withdrawal had been properly made. The tenants, who had been pressing Shortlands' solicitors since July 1998 for details of the fund, first discovered in March 1999 that this payment had been made. They were initially given to understand that the payment was "corporation tax in respect of fund accretion" and that it had been paid in the year to 30 April 1998. They were not told precisely when the payment had been made. They were also told that the fund was being held in Shortlands' name on fixed deposit terms at Standard Chartered Bank. Despite being challenged to justify the use of the reserve fund to discharge a corporation tax liability and despite pressing for further information about the liability, it took Shortlands and those advising it many months to respond with details of the payment and the basis for its justification. Shortlands now accepts that the reserve fund should be treated as if that sum had never been removed from it. That involves, as Shortlands accept, that the fund must be credited with the interest that it would have earned if the payment had never been made. In making these concessions Mr Brock emphasised that, in withdrawing the money, Shortlands had acted on advice from its former solicitors and from its accountant. Three issues remain. First, since the reserve fund is to be taken as £342,430 (larger in amount than it was thought to be in September 1998 when the excess (1997/1998) and advance (1998/1999) service charge demands were made and since, on any view, the scope and therefore the cost of the works are much reduced from what they were at the time of those demands, the extent to which it is proper for Shortlands to seek, by means of service charge demand rather than by recourse to the reserve fund, to defray the costs of the works is thrown into much sharper focus. Should Shortlands be looking at all to the service charge to meet the costs of the works? Second, and following on from the first issue, was Shortlands justified in including £150,000 as the contribution to the reserve fund included in the 1998/1999 service charge budget presented to tenants in September 1998? Third, what is the appropriate treatment for tax purposes of the receipts by Shortlands of reserve fund contributions and, more fundamentally, what is the nature of those receipts? For reasons which I need not explain, it was agreed that this issue can be put to one side for the time being. It may be necessary to revisit it a later date. I come then to the first of those two issues: the impact of the additional £342,430 on the amount (if any) to be included in the service charge to cover the costs of the repairs.

(b) Those provisions are as follows:

"7(4)(a) ... the Landlords may make such reasonable provisions for a reserve for anticipated further expenditure incurred in performance of the covenants on the part of the Landlords contained in Clause 6 hereof as the Landlords may reasonably deem appropriate and the amounts so provided shall form part of the Annual Service Cost but so that any net interest earned by the deposit on such reserve shall accrue thereto and under no circumstances shall any part of such Reserve be repaid to the Tenant and in particular not at the end or sooner determination of the term hereby granted or on the assignment of this sub-Underlease by the Tenant. 7(4)(b) ... (for the avoidance of doubt) the sums payable by way of Service Charge shall be deemed to be merely sums paid in reimbursement of disbursements made by the Landlords out of a common fund administered by them on behalf of the Tenant and other occupiers of the Building and not as consideration for a supply of services and to this end the amount of any such reserve as aforesaid and any sums expended from such Reserve shall be balanced over such periods not exceeding five years as the Landlords may in their discretion select."
As clause 7(4)(a) provides the purpose of the reserve fund is to provide a reserve for anticipated future expenditure incurred by the landlord in the performance of his obligations under clause 6 of the lease. The amount of the reserve fund and any sums expended from it are, according to clause 7(4)(b), to be "balanced over such periods not exceeding 5 years as the landlords may in their discretion select". I take this to mean that payment into the fund must be matched by expenditure out of it over a period which is not to exceed five years. This is a protection for the contribution tenants to ensure that they are not required to contribute sums which are simply allowed to build up and in respect of which, as clause 7(4)(a) makes clear, they have no right of recovery. Mr Froshaug's view of the reserve fund, expressed in paragraph 10 of his witness statement and with which I do not disagree, is that the purpose of the fund is "to try and 'smooth out' the fluctuations in yearly expenditure as a result of periodic costs occurring in any one service charge year...." . In contrast to that are what he referred to as "normal day to day running costs of the building which are less prone to large fluctuations". Elsewhere in this witness statement, at paragraph 31, he expressed the view that the fund was "there to help meet periodic and large one off costs that will inevitably occur during the life span of the building." Given Shortlands' proposal announced to tenants at the end of April 1998 to spend £2.1 million on works to upgrade the existing M&E services in the building and to refurbish the entrance hall, common parts and approaches to the lift, together with some external works, all of which Mr Froshaug categorised as "one-off expenditure", it was only to be expected that Shortlands should feel it appropriate to draw on the reserve fund to cover some of the cost. The amount it proposed to withdraw was £500,000. Mr Froshaug's letter of 30 April to the tenants put the matters as follows:
"in the reserve fund we expect to have available £850,000 by the end of the 1998/99 service charge year and the intention would be to utilise £500,000 of that fund as an off-set against the anticipated expenditures of £2.181 million. The balance of the reserve fund would be retained against future expenditures"
. The balance of the anticipated expenditure was, as the letter went on to point out, to be raised from tenants through the 1998/99 service charge. Mr Froshaug's figures assumed - as he confirmed in his oral evidence - that the reserve fund had been reduced by the withdrawal of the £342,430 and that the reserve fund contributions to be made by tenants that year was to total £50,000. Shortlands' thinking was expressed in Mr Froshaug's witness statement as follows (at paragraph 31):
"[Shortlands] decided that it would not be prudent to release all of the sinking fund monies to meet the anticipated £2 million costs of the proposed works to the building. It was necessary to retain a reasonable sum of money within the sinking fund to meet any unforeseen major costs that might occur over the next 12 - 24 months, or at least until such time as the sinking fund could be built up again to a reasonable sum."
On the figures mentioned in Mr Froshaug's letter to the tenants, the sum to be left within the reserve fund, after the completion of the £2.1 million of works, would, as he confirmed in cross-examination, have been £350,000. In fact, as Shortlands now concedes, the reserve fund was larger in amount by £342,430 together with the interest that the sum should have been earning. Mr Froshaug was unwilling to contemplate, however, that, if it had understood that the reserve fund was larger by that amount, Shortlands would have drawn any more than £500,000 as a contribution to the anticipated costs of the proposed works. He could advance no good reason why not. No director of Shortlands or of Allardice at the time of the April 1998 letter or subsequently was called so I was without any assistance from them as to what their thinking was or might have been. Mr Lynch, who also gave evidence, turned out to be a director and shareholder of Shortlands' parent company following the acquisition of control from Allardice earlier this year and had been a director of Shortlands for a few weeks in early 1998 but he appeared very vague about these matters. It was also clear from Mr Froshaug's evidence that no thought had been given by him (or I infer by others on behalf of Shortlands) to the requirement of clause 7(4)(b) of the leases to balance payments into the reserve fund against expenditure from it over a period not exceeding five years. Since the reserve fund stood at £693,000 as at 30 April 1993 and £785,000 as at 30 April 1994 and since expenditure met by the fund after the latter date had been exceeded by the amount of interest earned (see bundle M page 2045) and by December 1997 (before withdrawal of the £342,430) the fund had attained roughly £1 million it is difficult to see how Shortlands could properly have thought anything less than £750,000 should have been utilised. In defence of his stance, Mr Froshaug insisted that there was a need to build up the reserve fund to cover anticipated expenditure over the following twenty years but that approach was to ignore the five yearly balancing requirement set out in clause 7(4)(b). In fact what appears to have happened is that, ignoring altogether the clearly expressed unwillingness on the part of any of the tenants other than Halcrow and Holmes Place, which did not in any event use the main entrance and is not required to contribute to any part of the service charge concerned with air-conditioning costs and the like, to have the entrance area improved and re-branded and the air-conditioning works carried out, Shortlands then proceeded to adopt a threatening posture. In his letter of 12 June 1998 to tenants, Mr Froshaug said this:
"Our clients [ie Shortlands] also wish to point out that the proposed works - with tenants' acceptance and co-operation - were going to utilise some two-thirds of the existing reserve fund and if the tenants are prepared to co-operate and run with the proposals which our clients have made then our clients will stand by that decision. If the tenants are really trying to move in a different direction to the proposals of the landlords, then our clients will review this in the light of their right to a fully funded reserve fund (which will be a very considerable sum indeed)."
Give the intention to utilise £500,000, two-thirds of the existing reserve fund assumes that the fund stood at £750,000 only. In the meantime, however, Shortlands ran into a difficulty. Intending, for whatever reason, to incur the £2.1 million of expenditure and complete the works in question during the 1998 calendar year (see paragraph 22 of Mr Froshaug's witness statement) it had failed before September 1998 to take any steps to raise any part of the £1.5 million odd that it was looking to recover from tenants through their 1998/99 service charge. September 1998 was some four months into the service charge year. Under clause 7(4)(e) of the leases not less than 14 days' notice in writing of an intention to increase the amount of the quarterly service charge demand was required. However, as no notice of any increase in the service charge demand (to cover any part of the £1.5 million to be raised) had been served by 15 September 1998, no increase in the service charge demand could take effect before the December 1998 quarter day. Shortlands appears to have attempted to retrieve the position and be put in funds for most of the £1.5 million it was looking to the tenants to obtain in advance of the works being completed in the following manner: first, by requiring tenants, by Mr Froshaug's letter to them of 22 September 1998, to pay an increased service charge instalment as from the ensuring quarter day which was only seven days later and, second, by seeking to increase the amount of the previous year's service charge expenditure (ie expenditure for year ended 30 April 1998) by retrospectively increasing the amount of the tenants; reserve fund contribution for that year by £750,000 from £50,000 to £800,000. The first aim ignored the terms of clause 7(4)(e). To achieve the second aim, Mr Froshaug wrote to Mr David Garcia of Gerald Edelman (the firm of accountants undertaking the audit of the service charge expenditure) requesting that he increase the reserve fund provision in the previous year's account by £750,000. He also requested that the auditors' certificate be backdated by a week or so. Gerald Edelman felt able to fall in with both requests. As a result, tenants found themselves faced with a demand, set out in Mr Froshaug's letter to them of 22 September 1998, to discharge the balance, as it then appeared, of the previous year's service charge as certified by Gerald Edelman, including, as a result of Mr Froshaug's communication to Mr Garcia a few days earlier, the additional of £750,000. Under the terms of their leases, tenants were required to discharge, within seven days of demand, the amount of any excess of service charge expenditure. This was no more than a ploy to recover in advance of any expenditure being incurred, as much as possible of the anticipated costs of the works without going through the correct machinery for increases in service charge demands as provided by the lease and without having recourse to the reserve fund for more than £500,000. It is no wonder that the tenants protested. To make matters worse, Shortlands indicated in the service charge budget for 1998/1999 (enclosed with Mr Froshaug's letter of 22 September 1998) not only that it included an additional £750,000 (to cover the balance of the cost of the works over and above what was to be recovered, within seven days, as a result of the retrospective £750,000 increase in reserve fund contribution for the previous year) but also that the reserve fund contribution for that year would be increase to £150,000. Over the years, reserve fund contributions had risen gradually from £66,000 odd to £750,000 and, for the previous year (ie 1997/98), had stood at only £50,000 until retrospectively increased to £800,000 in the way that I have described. That background justifies the following conclusions concerning the propriety of the demands made of tenants in September 1998 to finance the proposed works: (1) Shortlands was not entitled retrospectively to increase the contribution to the reserve fund by £750,000 for the previous service charge year and (2) Shortlands ought to have looked to the reserve fund to cover the first £750,000 of the costs of the M&E and other works identified in the Scott Schedule which fall to be undertaken at the tenants' expense. That leaves only the propriety of the inclusion of £150,000 as the contribution to the reserve fund in the 1998/1999 service charge budget presented to tenants in September 1998. As is apparent from figures mentioned earlier, that sum represented a threefold increase in the reserve fund contribution originally included in the service charge budget for the previous year and a doubling of the contribution included in the service charge for the year before that. Assuming that £750,000 was withdrawn from the reserve fund towards the cost of works to be undertaken in the year 1998/1999 and ignoring any contribution to the fund that year, a figure somewhere between £250,000 and £300,000 would have remained in the reserve fund to cover future expenditure. In his letter to tenants dated 30 April 1998, Mr Froshaug had said that the balance of the reserve fund at the end of the 1998/199 service charge year would have been enough to meet future expenditure. According to paragraph 31 of his witness statement, the future expenditure he had in mind referred to unforeseen major costs that might occur over the next twelve to twenty-four months. In paragraph 41 of his witness statement Mr Froshaug sought to justify the £150,000 contribution on the basis that "this increased figure would be much more in line with what would actually be required in the long term to undertake repairs and renewals and in the hope that when such works were undertaken it would not be necessary to go to the tenants for additional funding...". According to paragraph 40 of his witness statement it is evident that he was taking into account "the likely major repairs and renewals over the subsequent 15/25 year period". That was a period which greatly exceeded even the longest of the tenants' sub-underleases and was very much in excess of the five year balancing requirement set out in paragraph 7(4)(b) of the sub-underlease. In a summary of estimated costs enclosed with Mr Froshaug's letter to tenants dated 30 April 1998 there was reference to "maintenance over next 20 years" costing (inclusive of contractors' overheads, profit and preliminaries) £3,251,000. These were over and above the projected expenditure of £2,181,000 on "immediate works" (a figure which, over the months, had been much reduced as discussions between representatives of Shortlands and the tenants have proceeded). In the course of events the £3,251,000 figure was modified to £2 million exclusive of contractors' overheads etc and professional fees. Against this background, I am of the view that the £150,000 contribution to the reserve fund included in the budget for the 1998/1999 service charge year was excessive. I am not asked to say what it should have been, much less to indicate a ceiling above which reserve fund contributions should not go. In any event I would not feel able to do so. It is sufficient if I say, first, that, even taking account of the modified level of expenditure envisaged by Shortlands over the following 20 years I cannot see how the service charge contribution for 1998/199 could properly have exceeded £100,000 and second, that there is much in favour of the view that the contribution should not have exceeded £75,000 which was the figure for the 1996/1997 service charge year. In conclusion I will leave it to counsel to draft an order setting out in declaratory form the relief which is needed to reflect the contents of this judgment. Floor Tenant Position as at September 1998 Position as at November 2000 1st (part) Office Angels Passing rent : £150,000 Area: 6,703 sq ft Date of Lease : 25.04.96 Length of term: 13 years from 29.09.93 Expiry date: 29.09.06 T break: 29.09.01 Rent Review: 29.09.96 and 29.09.01 Anticipate break clause being operated. Negotiations with prospective tenant. 1st (part) Office Angels Passing rent: £214,400 Area: 9,695 sq ft Date of Lease : 02.03.93 Length of term: 10 years from 29.09.91 Expiry date: 29.09.01 Rent Review: 29.09.06 Section 25 notice served. T said will take a new lease but known to have advertised its lease and negotiating for premises elsewhere. Negotiations with prospective tenant. 2 Eisai Passing rent: £365,000 Area: 16,345 sq ft Date of Lease : 30.10.92 Length of term: 25 years from 29.09.01 Expiry date: 29.09.16 T break: 29.09.01 M break: 29.09.06 T break: 29.09.11 Rent Review: 29.09.96, 01, 06 and 11 T staying not operating 2001 break. Negotiations for a longer term with proposals to drop the mutual break in 2006. 3 (part) Liposome Passing rent: £93,240 Area: 4,799 sq ft Date of Lease : 12.01.96 Length of term: 10 years from 30.09.96 Expiry date: 28.09.06 T break: 28.09.01 Rent Review: 29.09.01 Moving out and negotiating to surrender before break date. Under offer with rest of 3rd floor. 3 (part) Sir William Halcrow & Partners Passing rent: 113,120 Area: 4,778 sq ft Date of Lease : 11.02.98 Length of term: 10 years from 29.09.96 Expiry date: 29.09.06 with rolling 9 month T break Rent Review: 29.09.01 T operated break effective on 09.11.00 but now staying to 31.03.01. Under offer with rest of 3rd floor. 3 (part) Japan Tobacco Passing rent: £111,316 Area: 6,543 sq ft Date of Lease : 12.01.96 Length of term: 7 years 8 months from 30.09.96 Expiry date: 06.05.04 T break: 05.05.99 Rent Review:29.09.01 T did not operate break but has now moved out and negotiations for surrender. Under offer with rest of 3rd floor.[4]General Electric Information Services Passing rent: £385,000 Area: 16,323 sq ft Date of Lease : 23.06.83 Length of term: 24 years from 29.09.82 Expiry date: 29.09.06 Rent Review: 29.09.01 Lease in process of being assigned to NBC who have agreed taken a reversionary lease 29.09.06 to 28.09.14 and have spent £7 million on fitting out.[5]Waste Management International Passing rent: £385,000 Area: 16,280 sq ft Date of Lease : 30.10.92 Length of term: 25 years from 29.09.91 Expiry date: 29.06.16 T break: 29.09.01 M break: 29.09.06 T break: 29.09.11 Rent Review: 29.09.01, 06 and 11 In occupation of part with other part sublet to Cinram. Negotiating prospective leave with tenant for 15 years to expire September 2016.[6]Waste Management International Passing rent: £407,000 Area: 16,280 sq ft Date of Lease : 30.10.92 Length of term: 25 years from 29.09.91 Expiry date: 29.09.16 T break: 29.09.01 M break: 29.09.06 T break: 29.09.11 Rent Review: 29.09.01, 06 and 11 Surrender and re-let to Copyright Promotions Group plc. Lease expiring September 2011. 7 (part) Berg UK Limited Passing rent: £217,035 Area: 9,640 sq ft Date of Lease : 04.11.96 Length of term: 15 years from 30.09.96 Expiry date: 29.09.01 M break: 29.09.06 Rent Review: 24.06.01 and 24.06.06 In the process of being assigned to Viasystems Group Limited with break clause removed. 7 (part) Fluor Daniel Property Limited Passing rent: £147,690 Area: 6,564 sq ft Date of Lease : 29.07.96 Length of term: 10 years from 24.06.96 Expiry date: 24.06.06 Rent Review: 24.06.01 Known to have marketed their lease earlier this year. Believed not now on the market.[8]Wimpey Passing rent: £351,095 Area: 16,323 sq ft Date of Lease : 11.12.96 Length of term: 10 years (less 33 days) from 01.11.96 Expiry date: 29.09.06 Rent Review: 29.09.01[9]GE International Passing rent: £426,000 Area: 15,975 sq ft Date of Lease : 05.02.97 Length of term: 10 years from 29.09.96 Expiry date: 29.09.06 T break: 29.09.01 Rent Review: 29.09.01 Will exercise break and move out 09.01. Negotiating an earlier surrender. Offer from prospective tenant. Bold = Claimant; T Break = tenant's break clause; M break = mutual break clause