If a lessee has added a new structure – or in this case two new structures – to his/her flat, possibly in breach of covenant, are the remaining lessees liable to contribute to the maintenance of that/those structure(s) by way of service charge?
That was the question before Martin Rodger QC on this appeal. It related to the cost of repairs to two conservatories forming part of a penthouse flat.
The action unfolds on the King’s Road in London. It is a road which has played a significant role in my life: one university holiday, I took a short course in Russian in a building there which has since been converted into commercial units and now houses the William Yeoward glassware showroom; I bought my first sofa from the King’s Road Habitat; I pedalled along it weekly when teaching French at evening class before I came to the Bar, and several of the banner photographs on this very blog are the result of my bicycling perambulations on and around it.
The building in question, Daska House, stands opposite Chelsea Town Hall. It was constructed in the 1970s.
The ground and first two floors contain commercial premises, with a further seven floors of residential accommodation above, culminating in a penthouse. Each floor houses three flats save for the penthouse, which is (obviously) on the top floor.
The whole building is let under a 99 year lease.
At the time of the dispute giving rise to this appeal, the lessee was Charles Moran Holdings Ltd (“CMHL”).
Under the terms of the lease, CMHL covenanted with its landlord to keep the building in repair.
That covenant covered: “all buildings, structures or erections which now are or may at any time hereafter be erected thereon”.
CMHL also covenanted not to make “any structural alterations or additions to the demised premises”.
External alterations were only permitted if it obtained the prior written consent of the head landlord, that consent not to be unreasonably withheld.
The original lessee underlet each flat in the building, thereby creating 25 underleases. CMHL was the original lessee’s successor in title.
All of the underlessees covenanted to pay a service charge.
The demised premises under these underleases:
- Extended to “the interior faces only of such walls as bound the flat (for which purpose the interior faces shall include the plaster on such walls”, but
- Excluded “the main structural parts of the building … and external parts thereof (but not the glass of the windows which shall be included in the premises)”.
CMHL retained property which included:
- All those premises demised by and included in the [headlease] other than the 25 flats … and without prejudice to the foregoing specifically includes … the main walls structure and roof of the property including all walls not included in any flat or dividing any flat from another”.
CMHL also covenanted to keep the retained property “and all fixtures, fittings and furnishings therein and additions thereto in a good and tenantable state of repair”.
The penthouse underlease
There was rather a question mark hanging over the date of execution of the underlease for this flat. Happily, Martin Rodger QC decided that nothing turned on point and I do not therefore propose to dwell on it.
The underlessee of this flat, which was in fact also CMHL:
- Paid twice as much in service charges as the underlessees of the other flats in Daska House;
- Covenanted to comply with the covenants made by the headlessee in the headlease, and
- Covenanted not to erect any new or additional building on the demised premises nor to make any external addition.
The penthouse has two conservatories: one extends the kitchen and living area of the flat to the south, and the other a bedroom to the east. The FTT described them as “an integral part of the flat” in the sense that they form part of the living accommodation at the flat and are not self-contained.
The FTT concluded that the conservatories must have been constructed in about 1973. To Martin Rodger QC’s mind, in the light of the little information that was available on the point, that was a “reasonable hypothesis”.
There was no evidence as to whether the freeholder’s consent was obtained for the construction.
Christopher Moran Holdings Ltd
CMHL was the appellant in this appeal. It acquired both the headlease and the underlease of the penthouse way back in the bell-bottomed mists of June 1975. The conservatories already existed at the time.
Fast-forward some thirty-seven years to June 2012, when CMHL undertook major repair work at Daska House, at a total cost of nearly £1,380.000.
The works included the replacement of windows and patio doors for every flat in the building. The conservatories were demolished and rebuilt. The cost was £91,334.
Everyone agreed that the conservatories needed replacing, but Ms Carrara-Cagni – and many of her fellow under-lessees – took issue with demands to contribute towards the costs of doing so. They applied to the FTT for a section 27A determination.
The FTT’s decision
It was common ground between the parties that the conservatories were constructed after the grant of the underlease of the penthouse.
The FTT determined that the conservatories had been built in breach of the covenants in both the underlease and the headlease.
It agreed with Ms Carrara-Cagni, and held that the costs of replacing the conservatories were not recoverable from the lessees.
It considered that it could not have been the intention of the original parties to the leases that the under-lessees should be liable to contribute towards the costs of repair and replacement for structures put up in breach of covenant.
It therefore disallowed the costs of replacing the conservatories, but allowed a figure of £34,000, which would have been the cost of replacing the original windows and patio doors in the penthouse.
“This appeal turns entirely on the proper construction of the terms of the underleases”, announced Martin Rodger QC, turning his feet towards the well-trodden path of contractual interpretation, a path festooned with the lush, ever-verdant judgments of the senior courts of record.
Taking advantage of breach
As a preliminary point, he noted that this was not a case where one party was attempting to take advantage of its own breach of covenant “in order to obtain a benefit under a contract”, as illustrated in the line of cases including Alghussein Establishment v Eton College  1 WLR 587.
Rules of interpretation
The parties agreed on the principles of construction relevant to the interpretation of the underlease. There are no prizes for guessing that they had alighted upon Arnold v Britton  AC 1619.
Martin Rodger QC repeated the principles summarised in Arnold by Lord Neuberger of Abbotsbury PSC:
“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38,  1 AC 1101, para 14. And it does so by focusing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of:
(i) The natural and ordinary meaning of the clause,
(ii) Any other relevant provisions of the lease,
(iii) The overall purpose of the clause and the lease,
(iv) The facts and circumstances known or assumed by the parties at the time that the document was executed, and
(v) Commercial common sense, but
(vi) Disregarding subjective evidence of any party’s intentions.”
- There are no special, restrictive rules of interpretation applicable to service charges, and
- “… in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention.”
Ado about additions
Martin Rodger QC also recorded the parties’ agreement that:
“in principle, a repairing covenant will apply to subsequent alterations and additions to a building, unless that result is excluded by the language used.
“That proposition was described as “elementary law” by Fletcher Moulton LJ in Rose v Spicer  234, 248:
““If a lessee whose lease contains such a [repairing] covenant erects a house on the land leased to him he is just as much bound to maintain it and keep it in repair as if it had been built before the lease was granted.””
Liability towards the head landlord
As headlessee, CMHL covenanted:
- With the head landlord to keep the building in repair, and
- With the underlessees, that it would comply with its covenants with the head landlord, unless those obligations had been passed on to the underlessees themselves.
Having already established that the conservatories fell within the ambit of property for which CMHL was responsible, Martin Rodger QC concluded that CMHL was liable to keep the conservatories in repair under the terms of its own lease with the head landlord.
Addition: before or after?
Unfortunately for the underlessees, the date of construction of the conservatories could not save them.
If they had been added to the penthouse after the underlease was granted, they were “additions” within the meaning of the underlease. CMHL was obliged to keep the property reserved to itself “and all additions thereto” in repair. It was also entitled to recover the costs of doing so from the underlessees.
If the conservatories had been added to the penthouse before the underlease was granted, they were part of the property reserved by the landlord because they were either:
- Part of the main structure, or
- “Part of the roof and walls not included in the penthouse flat”, because the flat itself was defined in such a way as to exclude all but the inner faces of exterior walls.
… “it is clear that the repair of the conservatories falls squarely within the natural meaning of the language of the appellant’s covenants,” said Martin Rodger QC. “[T]he outcome of the appeal therefore turns entirely on the effect of their (supposedly) having been constructed in breach of the covenants in either the Superior Lease or the penthouse underlease”.
Any permissible process…
“Respectfully”, he continued, “I cannot accept that the FTT’s conclusion is capable of being arrived at by any permissible process of contractual interpretation. It is open to a number of objections”.
He gave five reasons.
First, the under lease did not distinguish between lawful and unlawful additions.
Second, the FTT’s reading of the lease was “subversive of the overall purpose of the clause and of the general arrangements for allocating responsibility for repair”.
If the cost of repairing or replacing the conservatories was not recoverable through the service charge, the under lease was not at all clear as to who would bear the repairing, replacement and/or payment obligations.
The identity of that party would depend on whether the conservatories pre- or post-dated the under lease, a point of which future owners of interests in the building would in all likelihood be ignorant.
Third, it was “contrary to common sense”. Martin Rodger QC could give no weight to the suggestion that instead of the landlord suing for breach of covenant, it agreed with the transgressing under-lessee that the responsibility for maintenance and replacement of the conservatories should be borne by that under-lessee.
Fourth, it was improbable that the landlord had not been aware of the construction of two conservatories on its property.
Two planning applications had been made, and the conservatories were visible from ground level. Speculation as to the landlord’s state of knowledge was “futile, and underlines the importance of giving the words of the lease their natural and ordinary meaning”, he said.
Finally, the under lessees had no control over the decisions of the head landlord, within whose gift it was to grant or withhold consent to alterations.
In this case, there was “simply no reason for the historic lawfulness of the addition to the [building] to make any difference to the analysis of the continuing rights and obligations of different parties… It cannot be suggested that a lawful addition, erected with the consent of the freeholder and the Lessor of the penthouse underlease, would fall outside the Lessor’s repairing obligation or the liability of lessees to contribute… To interpret the head lessee’s repairing obligation as extending only to lawful additions would therefore provide only a very weak and ineffectual protection for the flat lessees against an increase in the burden of the service charge”.
Disposal of the appeal
The FTT had been “wrong to rewrite the clear and practical language of the underleases”.
So saying, Martin Rodger QC allowed the appeal.
It strikes me that it would be rather an understatement to say that the parties were hampered here by a lack of reliable evidence as to what happened in the early 1970s.
Even so, it goes against the grain that a lessee should contribute through the service charge towards the repair of an item which may have been added to a building in breach of covenant.
A covenant to keep in repair requires the party with the repairing obligation not only to keep in repair, but to put into repair if in disrepair.
What if the Upper Tribunal had been faced with a poorly constructed conservatory, which, from day one, needed repair? Could the landlord recover the cost of putting it into repair from the lessees?
My initial thought is that the covenant to obtain the landlord’s consent to alterations is designed to protect at least the landlord – and, where a service charge is payable, the lessees who pay – from a decrease in the value of the asset by reason of poorly carried out alterations.
It is however presumably also a provision which ensures that where alterations are carried out, they are carried out in such a way as not to oblige the service-charge paying lessees to bear the cost of effectively completing those works.
Is the answer therefore that the costs are not reasonably incurred as a service charge because the lessee who is carrying out the works has not completed them to a reasonable standard?
Click here for a printer-friendly version of this post.
Click here to read the decision in full on the Lands Tribunal website.