Landlord and tenant – Service charge – Legal costs – Respondent landlord incurring legal costs in dispute with third party – First-tier tribunal deciding respondent entitled to recover costs from appellant lessees through service charge – Appellants appealing – Whether landlord’s costs of litigation against, and objection to planning application by, third party recoverable as service charge – Appeal allowed
The respondent was the freeholder of 89 Holland Park in London, a detached Victorian Villa at the end of a line of similar properties. It was divided into five flats, and the leaseholders, including the appellants, each held a share in the respondent.
In 1965, the then freeholder sold a small plot of land to the south of the building, measuring around 23 feet by 140 feet (the garden plot). The purchaser entered into a deed of covenant by which she agreed not to apply for planning permission in respect of the plot without first having the plans approved by the freeholder, nor to start to develop the land until drawings and specifications had been so approved.
H bought the garden plot in 2012. Her plan for an underground dwelling with a glass structure above ground was opposed by the respondent and the leaseholders. They were concerned about the threat to the structure of their building and to the appearance and amenity of the surroundings and claimed to have the benefit of the covenant.
Litigation ensued and substantial costs were incurred by the respondent, including the costs of opposing H’s application for planning permission, which it sought to recover from the leaseholders by way of service charges. The appellants challenged the payability and reasonableness of service charges of £430,411.50, said to be the appellants’ share of those costs.
The First-tier Tribunal (FTT) decided the respondent was entitled to recover the charges under two covenants in the appellants’ lease. The appellants appealed.
Held: The appeal was allowed.
(1) When interpreting a written contract, the court was concerned to identify the intention of the parties by reference to what a reasonable person, having all the background knowledge available to the parties, would have understood the language in the contract to mean. It did so by focusing on the meaning of the relevant words in their documentary, factual and commercial context. That meaning had to be assessed in the light of the natural and ordinary meaning of the clause, any other relevant provisions of the lease, the overall purpose of the clause and the lease, the facts and circumstances known or assumed by the parties at the time that the document was executed and commercial common sense, but disregarding subjective evidence of any party’s intentions: Arnold v Britton [2015] EGLR 53 applied.
Service charge clauses were not subject to any special rule of interpretation. The fact that a landlord might have simpler remedies than a tenant to enforce service charge provisions was not relevant to the issue of how one interpreted the contractual machinery for assessing the tenant’s contribution. The court should not bring within the general words of a service charge clause anything which did not clearly belong there. If the parties to a lease intended that the lessor should be entitled to receive payment from the tenant in addition to the rent, that obligation and its extent would be clearly spelled out in the lease: Sella House Ltd v Mears [1989] 1 EGLR 65, Gilje v Charlgrove Securities Ltd [2003] 3 EGLR 9, Liverpool Quays Management Ltd v Moscardini [2012] UKUT 244 (LC); [2012] PLSCS 197, Phillips v Francis [2015] EGLR 8, Assethold Ltd v Watts [2014] UKUT 537 (LC); [2014] PLSCS 359, Fairbairn v Etal Court Maintenance Ltd [2016] EGLR 16, Bretby Hall Management Co Ltd [2017] UKUT 70 (LC); [2017] PLSCS 54 and Kensquare v Boakye [2021] EWCA 1825; [2021] PLSCS 199 considered.
(2) A decision had to be made as to what specific obligations fell within an obligation in general terms. Clause 4(4)(g)(ii) of the lease entitled the landlord, and obliged it if it considered it necessary or advisable, to employ professionals for the proper maintenance (etc) of the building. That included taking specialist advice. Even though the specific work was not spelled out explicitly, it was clear from the context, following as it did the landlord’s obligation to maintain and repair the structure of the building. The employment of professionals was clearly within the general words of the service charge.
The question was whether those general words, and clause 4(4)(l), included instructing legal professionals and expert witnesses in litigation against a third party, or in connection with an objection to a third party’s planning application. Clause 4(4)(l) in particular was a sweeper clause and should not be regarded as extending the range of what the landlord could do, or construed to bring into the service charge expenses that could not otherwise have been included.
(3) The respondent, and the lessees, were legitimately motivated by concern for the structural integrity and safety of the building and concern about amenity. But that motivation did not assist in determining whether those were the sort of costs that fell within the general words of the relevant clauses. The natural and ordinary meaning of the words used did not naturally suggest the inclusion of litigation against third parties, nor of objecting to a planning application.
The focus of clause 4(4) was on managing and maintaining the building, not on actions to be taken against neighbours or in relation to neighbouring land; the clause was about management and there was no hint of litigation. Moreover, the lease made specific mention elsewhere of litigation that the respondent had to undertake and the lessees had to pay for.
(4) The FTT had given insufficient regard to the context in which the clauses appeared, to the focus of clause 4(4) on the practical management and upkeep of the building, and to the presence elsewhere in the lease of express provisions relating to legal costs.
The purpose of the clause was to fund the landlord’s obligations as landlord. It was not to support its wider interests as freeholder. To read that as covering the cost of litigation with a third party or of objecting to planning permission was too great a stretch.
It was implausible that the landlord and the leaseholders would have intended such an extraordinary commitment to potentially ruinous costs of more than £2.7m. Accordingly, the appellants were not required to pay as service charges the relevant legal costs and the cost of objecting to the planning application.
Mark Loveday and Mattie Green (instructed by Howard Kennedy LLP) appeared for the appellants; Shomik Datta (instructed by KDL Law of Heathfield) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Dell and another v 89 Holland Park (Management) Ltd
