3 May, 2016
by Amanda Gourlay
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Christopher Moran Holdings Ltd v Laura Carrara-Cagni [2016] UKUT 0152 (LC)

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

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 headlease

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 underleases

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 conservatories

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.

The appeal

“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 [1988] 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 [2015] 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 [2009] UKHL 38, [2009] 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.”

Further:

  • 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 [1911] 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.

Observations

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?

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19 April, 2016
by Amanda Gourlay
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(1) Philip Hemmise (2) Tina Hemmise v London Borough of Tower Hamlets [2016] UKUT 0109 (LC)

Fans of the heavyweights – this is one for you.

In this post I bring to you the House of Lords, the Supreme Court, Lord Keith, Sir Nicholas Browne-Wilkinson in his Vice-Chancellor days, Lord Sumption and an array of Lords Justice of Appeal.

Frankly, after a two month posting hiatus, I felt I must return to writing with something impressive, and the above list is, I think, up there with the best. The only names really missing are their Lordships Lords Denning and Neuberger.

Why the fanfare? Because this appeal begins with a straightforward enough question of contractual interpretation, but it then forays behind the curtain into the mysterious world of issue estoppel.

Our guide is HHJ Behrens. Appearing before him were the lessees in person, and my colleague Rebecca Cattermole for the London Borough of Tower Hamlets.

The issue

By a country mile, the main issue before HHJ Behrens was whether estate costs were recoverable from the lessees.

That was not a difficult question to answer as a matter of contractual interpretation. It was however complicated by an LVT decision made a decade earlier on the same issue.

The lease

The lease required the Hemmises to pay a service charge, being a proportion of the money spent by Tower Hamlets in fulfilling its obligations under the lease.

In exchange Tower Hamlets covenanted to:

“maintain and keep in good and substantial repair and condition … the Common Parts”.

The Common Parts were defined as follows:

“all main entrances passages landings staircases (internal and external) gardens gates access yards roads footpaths parking areas and garage spaces (if any) passenger lifts (if any) means of refuse disposal (if any) and other areas included in the Title above referred to or comprising part of [the Landlord’s] Housing Estate and of which the Building forms part provided by the [Respondent] for the common use of residents in the Building and their visitors and not subject to any lease or tenancy to which the [the Landlord is] entitled to the reversion.”

The LVT’s 2006 decision

In 2006, the LVT determined that the “estate costs” were not recoverable. It:

“… noted that in the terms of the Applicant’s lease [sic] that there is no reference to ‘Estate’ only to the “Demised Premises” and “Building” the latter comprising 173 to 193 Campbell Road”.

It recalculated the service charge accordingly. The recalculation resulted in a 50% reduction of the Hemmises’ service charge.

We will pass over the correctness of that determination for the time being. Tower Hamlets plainly gave it little houseroom: it continued to charge estate costs to the Hemmises as if the LVT decision had never happened.

Understandably buoyed by the LVT’s finding in their favour, the Hemmises challenged the estate costs for the years following 2006, along with several other items of expenditure, including the cost of television aerial maintenance.

Their challenge was heard in two parts: first in April and then July 2015.

The FTT’s April 2015 decision

This was a preliminary decision as to whether the 2006 LVT decision was binding.

Tower Hamlets put forward a different argument on the interpretation of the lease. The FTT concluded that not only was it not bound by the antecedent LVT decision, it was entitled to determine the matter in the opposite direction. In its view, the Estate costs were recoverable from the Hemmises.

“With all due respect to the decision of the previous Tribunal, this Tribunal is satisfied that the definition of “Common Parts” in … the lease extends to the whole of the Title or the Estate”, it wrote.

It expressly exonerated the Hemmises from any fault in the LVT’s reasoning:

“It is not [the Tenant’s] fault that the effect of [the relevant] clause … was previously overlooked and the Tribunal intends no criticism of their decision to challenge service charges since 2006 in reliance on the previous tribunal’s decision”.

The FTT’s July 2015 decision

In this second decision, the FTT:

  • Dismissed all of the Hemmises’ challenges – including the one to the television aerial costs – apart from those relating to the repair of a refuse chute door and the refuse area door, and
  • Declined to make a section 20C order, considering that the Hemmises had lost on most points. Tower Hamlets indicated that in any event it did not intend to put the costs through the service charge.

Permission to appeal

Martin Rodger QC granted permission to appeal to the Hemmises on these points:

  • The FTT’s decision that it was not bound by the previous LVT decision;
  • The dismissal of the television aerial challenge, and
  • The s.20C order.

Of the first of these, he said:

“It is arguable that [the FTT] is bound to follow the decision of a previous tribunal which had not been the subject of an appeal and which included a determination on the meaning and effect of the same lease in proceedings between the same parties”.

How binding is an FTT/LVT decision?

As a matter of general precedent

HHJ Behrens started from first principles. The LVT was not, and the FTT is not,  a court of record. Their decisions do not create a binding precedent.

He was supported in that view by West Midland Baptist (Trust) Association (Inc) v Birmingham Corp [1968] 2 QB 188. That was a compulsory purchase case, decided by a well-regarded surveyor in the then Lands Tribunal.

In reaching his decision, that surveyor appeared to have considered that he was bound by another Lands Tribunal decision, also made by a surveyor, from 1952.

West Midland was appealed to the Court of Appeal, where their Lordships deprecated the Lands Tribunal’s practice of treating its own decisions as binding.

HHJ Behrens quoted Salmon LJ on the subject:

“No doubt previous decisions of the tribunal on points of law should be treated with great respect and considered as persuasive authority, even when made by a layman. But they should never be treated as binding. It is important that such decisions should be most carefully scrutinised and if necessary rejected particularly in cases such as the present which raise points of law of outstanding importance with far reaching consequences.”

So far, so clear where the parties to the matter being decided were different to the parties in the case relied upon.

The same parties with the same lease

What then of cases where the same parties and the same lease were involved? The FTT/LVT’s powers in such cases depended on whether there was an estoppel between the parties.

Time for the heavy hitters: this is where the doctrine of estoppel came into play, and we step behind the curtain into the mystical world of equity.

Estoppel

Estoppel comes in different forms. In the Hemmises’ case, it was upon issue estoppel that the Tribunal’s energies were focused.

In that endeavour, it reflected the energy expenditure of the Supreme Court and “a strong Court of Appeal where the leading judgment was given by the Chancellor” in:

  • Arnold v National Westminster Bank plc [1991] 2 AC 93;
  • Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46, and
  • Price v Nunn [2013] EWCA Civ 1002.

Virgin Atlantic Airways Ltd

In Virgin Atlantic, Lord Sumption traced the evolution and differences between issue and cause of action estoppels. HHJ Behrens cited an extensive excerpt from it.

The citation is, as I say, extensive. You can read it in full here, but for present purposes the key conclusions that Lord Sumption drew from his examination of Arnold are these:

“(1) Cause of action estoppel is absolute in relation to all points which have to be and are decided in order to establish the existence or non-existence of a cause of action;

“(2) Cause of action estoppel also bars the raising in subsequent proceedings of points essential to the existence or non-existence of a cause of action which were not decided because they were not raised in the earlier proceedings, if they could with reasonable diligence and should in all the circumstances have been raised;

“(3) Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which:

“(i) Were not raised in the earlier proceedings or

“(ii) Were raised but unsuccessfully. If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised”.

Heavy stuff.

Returning to Tower Hamlets and the facts of the Hemmises’ case, HHJ Behrens decided that there was an issue estoppel to be dealt with.

“It follows in my view that unless there are special circumstances the doctrine applies so as to prevent the Landlord challenging the finding in subsequent proceedings”, he said.

Special circumstances

Arnold saw life in the High Court, the Court of Appeal and the House of Lords.

Arnold in the High Court

Sir Nicholas Browne-Wilkinson V-C, sitting in the High Court, set out the backdrop of principle against which facts can be tested for “special circumstances”.

In a nutshell, it was a question of doing justice for the parties.

“Turning again to the circumstances of the present case”, he said, “I have no doubt that justice does require the matter to be re-litigated. The following factors are in my judgment relevant.

“(1) There is a continuing contractual relationship of landlord and tenant under which (if there is an issue estoppel) the decision of Walton J will regulate four further rent reviews and thereby affect the rent payable until the end of the term.

“(2) Because of the peculiarities of the procedure applicable to appeals from arbitrators, unlike the ordinary case of a prior decision by a judge, the decision of Walton J was not subject to appeal. Therefore a matter of very great financial importance involving millions of pounds will, if an issue estoppel applies, be decided on a point of law which the lessees have never had the opportunity to test in the higher courts.

“(3) The decision whether or not to permit an appeal was the decision of Walton J himself and there was no right of appeal against his refusal to certify the matter fit for appeal. The lessees took every step to test the decision in the earlier case in the higher courts but without success.

“(4) Subsequent decisions, in particular that of the Court of Appeal in Equity and Law Life Assurance Society Ltd v Bodfield Ltd [1987] 1 EGLR 124, make it, at the lowest, strongly arguable that the decision of Walton J was wrong.

“These factors taken together satisfy me that this is a case in which justice requires that issue estoppel should not apply. I therefore hold that the plaintiffs are not estopped from raising the matter of construction pleaded in para 20 of the statement of claim and accordingly dismiss the application to strike out that paragraph”.

Arnold in the Court of Appeal

The Court of Appeal upheld the Vice-Chancellor’s determination that justice to the parties was the benchmark by which issue estoppel should be measured.

Dillon LJ observed that a party could not avoid an unhelpful finding of issue estoppel simply by saying that it was arguable that the previous decision was wrong. There needed to be more, and in the case before him there was more. He did not mince his words:

  • It was agreed that the previous judge’s was not in accordance with the guidelines since laid down and approved by the Court of Appeal;
  • There was nothing in the lease before him, properly construed, to constrain the previous judge to the extreme (and to Dillon LJ’s mind “ridiculous”) position that he seemed to have taken;
  • The previous judge’s decision was contrary to commercial sense and the underlying commercial purpose of a rent review clause.

Staughton LJ was rather gentler on the previous judge, noting that:

  • The law had moved on since he had reached his decision, and
  • Whatever decision was ultimately reached was going to be reached in the context of the parties being in a continuing contractual relationship.

It seems that for him the key point was the fact that the original decision was plainly wrong.

In one of those sentences which has negatives in places which tie the grey matter in knots, he said:

“I do not say that the result would have been different if there had been no further elucidation of the law. I have difficulty in seeing why the lessees would have failed if the original decision had merely been plainly wrong (as I think it was), but should succeed now that subsequent courts have shown that to be the case. That difficulty may have to be resolved on another occasion”.

Mann LJ, the third judge in the Court of Appeal, had the following to say:

“It therefore follows that nowadays ‘special circumstances’ or ‘exceptional circumstances’ can defeat an issue estoppel of whatever species. What is a special, or if one wishes it, exceptional circumstances cannot, and in my judgment should not, be defined. It is a matter for the judge in any case. I only say that a special or exceptional circumstance may relate to fact, law or even, apparently, practice: see The Mekhanik Evgrafov and the Ivan Derbenev (No 2) [1988] 1 Lloyd’s Rep 330.

“I would not disagree with Sir Nicolas Browne-Wilkinson V-C’s finding of special circumstances in this case… I regret to say that Walton J’s decision was in my view plainly wrong. If it were arguably wrong, I might have taken a different view as to whether there was a special circumstance”.

Arnold in the House of Lords

Matters did not stop there: the case was appealed from the Court of Appeal up to the House of Lords, where, mercifully, there was a lead judgment given by Lord Keith, who, equally mercifully, agreed with the courts below.

These points emerged from his judgment:

  • There had been no right of appeal against the decision of Walton J. because the case had been decided by arbitration, from which rights of appeal are tightly circumscribed;
  • If the question were not re-opened, the landlord would most unfairly be receiving a very much higher rent than he would be entitled to on a proper construction of the lease;
  • The public interest in seeing an end to litigation was of little weight in circumstances under which, failing agreement, there must in any event be arbitration at each successive review date;
  • Estoppel per rem judicatam, whether cause of action estoppel or issue estoppel, is essentially concerned with preventing abuse of process, and
  • In the present case he considered that abuse of process would be favoured rather than prevented by refusing the respondents permission to reopen the disputed issue.

Resolution of the Hemmises’ appeal

Armed with the guidance from Arnold – all three sets of it – HHJ Behrens turned to the Hemmises’ case.

Five points sprang to his mind:

  • The LVT’s decision was plainly wrong. The Estate was included in the definition of common parts, and the landlord was entitled to recover the costs of maintaining the Estate from the lessees;
  • The Hemmises and Tower Hamlets were in a continuing landlord and tenant relationship which still had about 100 years to run. The estoppel would benefit the Hemmises’ successors in title, resulting in a significant underpayment of service charge over the life of the lease;
  • The point was taken by the LVT in its decision without giving the landlord to make representations on it at the hearing or in writing afterwards;
  • It was reasonable for the landlord not to deal with the point before the LVT because the pleaded case related to the reasonableness of the charges, and
  • The landlord could – “and probably should” have appealed the decision, but on the current case, it was not wanting to overturn the LVT’s decision about the 2006 service charges, it wished to reargue the point in respect of later charges.

By contrast with Arnold, Tower Hamlets had enjoyed a right of appeal from the LVT’s decision, but HHJ Behrens felt that Lord Keith’s observations in Arnold were:

“as applicable to this case as to that. It is a case where justice is not served by perpetuating a wrong decision over the whole life of the lease. I accordingly think that special circumstances do exist and that accordingly the Landlord was not estopped from arguing whether it could recover the appropriate portion of the service charge in respect of maintenance of the Estate”.

That limb of the appeal therefore failed.

The television aerials

HHJ Behrens disposed of this part of the appeal in just one – admittedly rather long – paragraph.

The issue has a perverse symmetry with the main ground of appeal.

Whereas the LVT had decided that the Hemmises’ service charge did not extend to paying for maintenance of the estate, the FTT decided that the Hemmises were liable to pay for the aerials serving the whole estate even though, as HHJ Behrens interpreted their lease, they were only liable to pay for maintenance of the aerials serving the building in which their flat was located.

He imagined that there was probably little difference between the amounts that Tower Hamlets had charged the Hemmises and the amounts that it should actually have charged – but the lease was the lease, and whatever the administrative inconvenience, Tower Hamlets was required to abide by its terms.

Costs

Tower Hamlets did not intend to put its legal costs through the service charge. Even so, HHJ Behrens made it clear that he would not make a section 20C order, since the Hemmises had lost the significant element of the appeal.

Observations

Every now and again the stately bows of the great ship Contract create ripples over the service charge sea across which we sail.

This is a case in point, and one I shall bookmark for future general reference on issue estoppel and special circumstances. The relationship of landlord and tenant is perhaps peculiarly suited to “special circumstances” arguments too because of the length of the term to which the parties bind themselves.

Many are the reasons why a party might not bring an appeal from a decision which is patently wrong: lack of resource and, sadly, lack of competence being but two that spring immediately to mind.

It strikes me as rather imprudent not to bother appealing a decision on the basis that a special circumstances argument can be run later.

“Doing justice for the parties” allows the Tribunal to plump for one of a range of outcomes. It is the archetype of flexibility at the expense of certainty, but it is however at least comforting to think that if a decision slips through the net, so to speak, all may not be lost.

Caddick and abuse of process

There is clear water between arguments advanced in this, the Hemmises’ case, and the those deployed by Mr & Mrs Caddick in Caddick v Whitsand Bay Holiday Park Ltd [2015] UKUT 0063 (LC).

In Caddick, HHJ Mole QC decided that a previous decision that a holiday chalet was not a “dwelling” meant that a challenge to the service charge by a successor in title – which required reconsideration of the “dwelling” question – was an abuse of process.

He reached that conclusion even though the first finding had been made in the context of an application for recognition of a tenants’ association, and the second was an application under section 27A of the 1985 Act.

There is not a breath about issue estoppel in his decision.

What would have been the result, I wonder, if it had been raised?

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12 February, 2016
by Amanda Gourlay
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Mansing Moorjani v Durban Estates Ltd [2015] EWCA Civ 1252

This Court of Appeal case, in which my colleague Ellodie Gibbons appeared, is not your typical service charge case. In fact, service charges appear nowhere in it and it has never been near the First-tier Tribunal.

It is all about damages for a landlord’s failure to comply with its repairing covenants.

It belongs to the family of cases that is headed up by Continental Property Ventures Inc v White [2006] 1 EGLR 85.

The Court of Appeal’s judgment was given by Briggs LJ, with whom LJJ Longmore and King agreed without further comment.

It is a judgment – and this is a post – which is quite heavy on citations from other cases.

The big issue

The immediate question which the Court of Appeal was asked to resolve was whether Mr Moorjani was entitled to damages for his landlord’s breach of its repairing covenant over a period of time when he was not living in his flat for reasons that had nothing to do with the condition of the flat.

That issue was underpinned by a significant question of principle.

Briggs LJ put it thus:

“whether the loss caused by … a breach [of a repairing covenant] (which, being temporary, causes no damage to the capital value of the lessee’s interest) lies in the impairment in the amenity value of the lessee’s proprietary interest in the flat, for which he has paid rent or a premium, or in the experience of discomfort, inconvenience and distress which the lessee actually suffers because of the disrepair”.

The lease

Mr Moorjani was the long lessee of a flat in Gloucester Place in Central London. The premium paid, way back when the lease was granted in 1977, was £16,000. A small ground rent was payable, and Mr Moorjani was liable to pay a service charge.

Under the lease, the landlord was obliged to:

  • To maintain and repair the common parts;
  • To insure the building, noting the interest of the lessee and any mortgagee on it if requested, and
  • To use any money received by way of insurance “with all convenient speed” in rebuilding, repairing or otherwise reinstating whatever had been damaged.

“It is well known, and common ground in this case, that [an insuring] covenant of that kind places an implied obligation on the lessor to pursue its rights under such a policy, so as to generate payment by the insurers for whatever works of rebuilding, repair and reinstatement are necessary because of the occurrence of an insured risk: see generally Vural Limited v Security Archives Limited (1989) P&CR 258”, said Briggs LJ.

The leaks

2005

In 2005, just as refurbishment work to it was completed, Mr Moorjani’s flat suffered a serious leak from the flat above.

The landlord’s managing agent told Mr Moorjani that the managing agency would deal with the repairs. The trial judge considered that in so saying, the agent meant to reassure Mr Moorjani that the managing agent would deal with the insurance claim and the problems that had been caused by the flood and were covered by the insurance.

Repair works were carried out later that year. Mr Moorjani was unhappy with them, but the trial judge held that the problems were mainly decorative, and that the flat was habitable. 

2006

Mr Moorjani’s complaints about the quality of the repair works were interrupted by a further, persistent, but less intrusive leak in 2006.

Drily, Briggs LJ observed that the 2006 leak had the effect of:

“muddying the waters as to the extent to which the disrepair later identified by the parties’ experts had been the result of the 2005 flood, the 2006 leak or a combination of the two”.

In the end, Mr Moorjani engaged his own workmen to finish the redecoration of his flat.

Mr Moorjani’s whereabouts

Mr Moorjani happened to be living with his sister when the 2005 flood happened. He returned to his flat in early 2008.

The claim

In 2011, he brought a claim against Durban Estates, claiming damages under four headings:

1) Loss of rental income from his flat;

2) Special damages for works not covered under the insurance policy following the 2005 flood, and that he had paid for from his own pocket;

3) General damages for breach of Durban Estates’ obligation to keep the common parts in repair between 2001 and 2011, and

4) General damages for breach of insuring and reinstatement obligations.

Loss of rent

The claim for loss of rent failed at trial. Permission to appeal was refused. That head of loss therefore fell away.

Special damages

The judge considered that Mr Moorjani had not proved his case on the second head of loss. Permission to appeal that issue was however granted.

Disrepair to the common parts

The judge held that:

  • There was insufficient evidence of disrepair before 2005. Permission to appeal that period was refused;
  • The claim for the period 2005 to 2008 should be dismissed because Mr Moorjani had not been living in the flat at the time. Permission to appeal that element was granted;
  • Damages of £1,500 were warranted for the period from January 2008 to March 2011 for the disrepair to the common parts. Permission to appeal that point was granted on the basis that the level of damages may have been too low.

Damages connected with insurance and reinstatement

On this point, the judge held that Mr Moorjani had suffered no loss, because he had not been living in the flat between the time of the flood in 2005 and the completion of the reinstatement work in 2007.

The Court of Appeal’s arrangement

Briggs LJ dealt with the issues in the following order:

  • The cost of works not recovered under the insurance policy;
  • Whether £1,500 was too low as an award of damages for shabby common parts between 2008 and 2011 whilst Mr Moorjani was in occupation of the flat;
  • The question of principle: whether there was an entitlement to damages for the period when Mr Moorjani was not living at the flat for reasons unconnected with its disrepair.

Works not recovered under the insurance policy

These expenses related to:

  • Warped doors, costing £1,650;
  • Repairs to the master bedroom costing £1,800;
  • Electrical repairs.

In principle all of these were covered by the insurance policy, and should have been pursued by the managing agent.

The trial judge determined that it was for Mr Moorjani to prove his case. She found that he had not done so.

Briggs LJ disagreed. Mr Moorjani had proved his case for the doors and bedroom repairs. He had shown:

  • The damage had been caused by the 2005 flood;
  • It fell within the scope of the insurance policy;
  • The landlord, through the managing agent, had agreed to pursue a claim for Mr Moorjani for damage caused by the 2005 flood, and
  • Mr Moorjani had raised the doors and bedroom damage with the managing agent in sufficient time for a claim to be pursued.

Conversely, the landlord had not produced any evidence to show that it had pursued the claim with the insurers.

“The ball was in the lessor’s court … and it was for Durban Estates to prove, if it could, that the fault lay with the insurers rather than them”, said Briggs LJ. “The evidence … persuades me that these items became in practice irrecoverable once the insurers’ deadline had passed, and the 2006 leak muddied the waters. It was, before that date, the failure of Gross Fine to pursue a claim in relation to those items, for which Durban Estates is liable, that led to Mr Moorjani having to deal with them at his own expense”.

The costs of repairs to the doors and master bedroom were therefore allowed. The electrical work was not allowed, Mr Moorjani not having been able to quantify that loss with evidence.

£1,500 for shabby common parts: was it enough?

“How does one put a value on three years of living in an apartment block where the common parts are shabby?” asked the trial judge.

This is how.

Quantifying the loss

Counsel at the trial put three cases before the judge by way of comparable:

  • Earle v Charalambous [2007] HLR 8;
  • Lewin v Brent London Borough Council (1995) CLY 1574, and
  • Sella House Ltd v Mears [1989] EGLR 65.

Two of those cases related to disrepair in the common parts, and carried awards of £450-£513, updated for inflation.

The market rental value of Mr Moorjani’s flat in 2008 was £550 per week.

The trial judge allowed for an increase of 5% per year, and considered that the loss of amenity amounted to 1-2% of that rental value. She awarded Mr Moorjani £1,500, being £500 per year.

Mr Moorjani’s appeal was based on that calculation being plainly too low.

The Court of Appeal’s judgment

Briggs LJ observed that:

“loss of amenity attributable to failure to repair common parts does not lend itself to scientific analysis. It is pre-eminently a matter for an experienced judge (sitting like this Judge) regularly in the local county court for the district which includes the property in question”.

So saying, he followed the lead of Carnwarth LJ in Earle v Charalambous, turned to Wallace v Manchester City Council (1998) 30 HLR 1111, and cited Morritt LJ:

“Thus the question to be answered is what sum is required to compensated the tenant for the distress and inconvenience experienced because of the landlord’s failure to perform his obligation to repair. Such sum may be ascertained in a number of different ways, including but not limited to a notional reduction in the rent. Some judges may prefer to use that method alone (McCoy v Clark), some may prefer a global award for discomfort and inconvenience (Calabar Properties Ltd v Stitcher and  Chiodi v De Marney) and others may prefer a mixture of the two…

“But in my judgment, they are not bound to assess damages separately under heads of both diminution in value and discomfort because in cases within the third proposition those heads are alternative ways of expressing the same concept…

“The question is the monetary value of the discomfort and inconvenience suffered by the tenants. That is a matter for the judge. As Kennedy LJ observed in the course of argument there is no market in out-of-repair council houses on which expert evidence could be either admissible or helpful. Secondly, a judge who seeks to assess the monetary compensation to be awarded for discomfort and inconvenience on a global basis would be well-advised to cross check his prospective award by reference to the rent payable for the period equivalent to the duration of the landlord’s breach of covenant. By this means the judge may avoid over- or under-assessments through failure to give proper consideration to the period of the landlord’s breach of obligation or the nature of the property”.

Turning to Mr Moorjani’s case, Briggs LJ noted that the trial judge had cross-checked her award against a notional reduction in rent.

That 1-2% reduction was very low: had Briggs LJ been conducting the trial, he might have reviewed it upwards. However in that time-honoured phrase adopted by many appeal judges, he observed that he had not “had the benefit of having heard the evidence”, nor did he have the trial judge’s “considerable experience in cases of this type in Central London”.

In those circumstances he did not consider that he could interfere with the assessment. That ground of appeal was therefore dismissed.

The big question: damages without occupation

Is a lessee entitled to damages for loss of amenity in relation to property which s/he does not occupy at the time of the relevant breach of covenant?

Briggs LJ began with a preview of the two alternatives.

Impairment of a property right

If this were the correct approach to assessing damages, it would not matter whether a lessee occupied the property full time, part time, not at all or sublet. Briggs LJ had two observations:

  • “This reflects a long-standing principle of the law of damages, which is that what the claimant chooses to do with property damaged by the defendant’s breach, otherwise than by way of mitigation, is res inter alios acta [roughly trans.: “is no one’s business but his own”]…;
  • “Furthermore, it is fully applicable, in the context of leases, to the quantification of damages for a tenant’s breach of repairing obligations, where it is irrelevant to the landlord’s loss that he has, before delivery-up, already re-let the premises at a rent which takes no account of the disrepair: see Joyner v Weeks [1891] 2 QB 31 and Haviland v Long [1952] 2 QB 80.”  

Personal inconvenience, discomfort and distress

The alternative approach was to measure loss on a more personal basis. In that event, it was crucial to be clear about what the lessee had or had not done with his property: if s/he only used it on high days and holidays, the damages would be considerably lower than if the flat was occupied full time by him.

The nature of the lessee would also be key, because Lewis v Daily Telegraph Ltd [1964] AC 234 and Electricity Supply Nominees v National Magazine Co [1999] 1 EGLR 130 were authority for the proposition that a corporate lessee cannot suffer distress or discomfort.

The authorities

Briggs LJ called in quite a cohort of Court of Appeal case law in his resolution of this aspect of the appeal:

  • Hewitt v Rowlands (1924) 93 LJKB 1080;
  • Calabar Properties v Stitcher [1984] 1 WLR 287;
  • Wallace v Manchester City Council (1998) 30 HLR 1111;
  • Earle v Charalambous [2007] HLR 8;
  • Shine v English Churches Housing Group [2004] HLR 42, and
  • McCoy v Clark (1982) 13 HLR 87.

None of the cases expressly plumped for a solution to the particular dilemma before the court. Briggs LJ therefore perambulated their facts and reasoning.

Hewitt v Rowlands

The tenant of a cottage which suffered from terrible damp remained in occupation of it. Bankes LJ made the following statement of principle:

“Prima facie, the measure of damage for breach of obligation to repair is the difference in value to the tenant during that period between the house in the condition in which it now is and the house in the condition in which it would be if the landlord on receipt of the notice had fulfilled his obligation to repair”.

Calabar Properties v Stitcher

Here a top floor flat was damaged as a result of the landlord’s failure to comply with its repairing covenants. The tenant and her husband remained in occupation, suffering discomfort, distress and ill-health until they could bear it no more and left for good.

The tenant succeeded in her claim against the landlord for:

  • The cost of repairs and redecoration, and
  • A global sum for their discomfort, distress and ill-health.

She failed in her claim for damages for loss of amenity based on the rental value of the flat.

Her claim for the cost of alternative accommodation also failed, but only because it was not pleaded.

In the Court of Appeal, Griffiths LJ held that, as a matter of principle, a claim for the cost of alternative accommodation may be recoverable if property became uninhabitable as a result of a landlord’s breach of a repairing covenant.

He continued:

“The object of awarding damages against a landlord for breach of his covenant to repair is not to punish the landlord but, so far as money can, to restore the tenant to the position he would have been in had there been no breach. This object will not be achieved by applying one set of rules to all cases regardless of the particular circumstances of the case. The facts of each case must be looked at carefully to see what damage the tenant has suffered, and how he may fairly be compensated by a monetary award”.

Referring to Bankes LJ in Hewitt v Rowlands, Griffiths LJ then observed that each case depended on its individual circumstances, and it was not necessary in every case to obtain valuation evidence:

  • A tenant of a Rent Act statutory tenancy could not claim damages equivalent to the market rental value of the flat because he could not stop occupying it and rent it out without losing his tenancy. The tenancy therefore had no market value;
  • A tenant who remained in occupation of premises in disrepair was entitled to compensation for the discomfort and inconvenience caused by his landlord’s breach of covenant;
  • A tenant who had rented a property in order to let it out may however be entitled to damages equivalent to the market rental value of the flat if the flat could not be let out as a result of the landlord’s breach of covenant;
  • A tenant who is driven out and forced to sell a property may be entitled to measure his loss by reference to the difference between the actual sale price and the price s/he would have obtained, had the landlord complied with the repairing covenant.

Wallace v Manchester City Council

The tenant and her two children stayed put in their council property under a secure tenancy, even though the landlord was in breach of its repairing covenant and the property was in an appalling state.

Morritt LJ identified the following propositions:

  • The aim of an award of damages for breach of a repairing covenant is, so far as money can, to put the tenant into the position s/he would have been in, had the repairing covenant been complied with;
  • It follows that the court will need to compare the property in its actual condition with the condition that it should have been in, had the repairing covenant been complied with;
  • If a tenant remains in occupation, the tenant’s loss is the loss of comfort and convenience which results from living in a property which is not in the covenanted state of repair;
  • If the tenant does not remain in occupation but is compelled to sell or sublet, his loss is the diminution in price or rent caused by the landlord’s breach. If the property is sold, a tenant cannot claim for discomfort and inconvenience after that sale.

“The question to be answered”, he said, “is what sum is required to compensate the tenant for the distress and inconvenience experienced because of the landlord’s failure to perform his obligation to repair. Such sum may be ascertained in a number of different ways, including but not limited to a notional reduction in rent. Some judges may prefer to use that method alone…, some may prefer a global award for discomfort and inconvenience … and others may prefer a mixture of the two… but in my judgment, they are not bound to assess damages separately under heads of both diminution in value and discomfort because in cases within the third proposition those heads are alternative ways of expressing the same concept”.

Earle v Charalambous

The claimant was the long lessee of a top floor flat that was damaged as a result of a leaking roof, for which the landlord was responsible.

In the end, he moved out of the flat to live with his parents until the roof was repaired, whereupon he resumed occupation.

He was awarded damages in two tranches:

  • For the period whilst he was in occupation, and
  • For the time he spent living at his parents’.

In the Court of Appeal, Carnwath LJ, with whom Morritt C and Moses LJ agreed, gave the lead judgment. He compared Mr Earle’s position with Wallace, Calabar and Hewitt.

  • Wallace was a case of a secure weekly tenancy, where the weekly rent was not the ideal guide to the true value of the tenancy to the tenant;
  • Calabar had been criticised by HHJ Hicks QC in Electricity Supply Nominees Ltd v National Magazine [1999] 1 EGLR 130. In Carnwath LJ’s view, it was not authority for departure from Bankes LJ’s statement of principle in Hewitt.

For Briggs LJ there was one standout phrase in the judgment:

“Distress and inconvenience caused by disrepair and not free-standing heads of claim, but are symptomatic of interference with the lessee’s enjoyment of that asset”.

That phrase was not, in Briggs LJ’s view, confined to long leases. It was equally applicable to periodic, secure and even statutory tenancies because:

“In each case, the lessee or tenant enjoys a recognisable species of property right, in return for payment, either in the form of a premium, a rack rent or a fair rent. If in any of those cases the amenity or value of that bundle of rights to the lessee or tenant is impaired by the lessor’s or landlord’s breach of covenant, then that is a loss of which discomfort, inconvenience or distress (or the breakdown in health of a loved one) are all symptoms”.

Shine v English Churches Housing Group [2004] HLR 42

The tenant in this case refused to leave his flat despite the landlord’s offers to accommodate him elsewhere whilst it carried out repairs. That refusal amounted to an unreasonable refusal to mitigate his losses.

The trial judge awarded damages in excess of the rent payable by the lessee, and the Court of Appeal reduced the award on the basis that it could not be justified.

For Briggs LJ, the key phrase to emerge from the judgment was that, in a contractual claim such as an action for breach of the terms of a lease:

“the award of damages for stress and inconvenience should be related to the fact that the tenant is not getting proper value for the rent”.

Shine was however a case where the tenant was not the tenant under a long lease for which a premium had been paid.

Briggs LJ noted that where the lease in question was a long lease, two different considerations applied, although he did not explore them in detail, and emphasised that they did not detract from the overarching principle that breach of covenant caused impairment in a lessee’s property rights.

First, an award of damages was intended to compensate the lessee for the loss of value of the premium paid for the lease, as opposed to the weekly rent.

Second, whilst the obligation lay on the landlord to carry out repairs and maintenance, the money to pay for repairs and maintenance came from the lessees through the service charge. It was a matter of speculation as to whether, by failing to demand the money at the time when the repairs were needed, the landlord had ameliorated or, when the service charge was finally demanded, aggravated the lessees’ financial positions.

McCoy v Clark (1982) 13 HLR 87

The tenant here effectively used his flat as a dormitory – he neither decorated, furnished nor tidied it. The trial judge therefore awarded a very low amount by way of damages. The tenant appealed.

Sir David Cairns, who allowed the appeal but did not refer to any authority or principle, said:

“On that basis, was the compensation that was awarded to the defendant for it adequate? In my view, it was not. It is all very well to say that the defendant was not spending a great deal of the day in the flat and that he was using it mainly as a sleeping place. If he had the flat as a sleeping place and was willing to pay £9 per week for the flat for that purpose, then he is entitled to a flat which is comfortable for that purpose, and if it is substantially reduced in the degree of comfort, than I think that what he ought to recover is something proportional to that reduction”.

The threads, drawn together

That lengthy perambulation around the authorities allowed Briggs LJ to reach a number of “tentative” conclusions.

The root of the loss

Both Calabar and Wallace refer to discomfort, inconvenience and distress as if they were themselves the losses suffered. Briggs LJ however opined that:

“the better view is that the loss consists in the impairment to the rights of amenity afforded to the lessee by the lease of which discomfort, inconvenience and distress (even the deterioration of the health of a loved one) are only symptoms”.

That was so if liability for the performance of the repairs and reinstatement lay on the landlord, irrespective of whether the lessee was liable to pay for those repairs and reinstatement by way of service charge. In Briggs LJ’s words:

“The quality of [a lessee’s] enjoyment is underpinned by the lessor’s promise to carry out [its] obligations diligently and in due time, rather than to neglect or delay in their performance”.

Use and non-use

If Briggs LJ’s first tentative conclusion was correct, the use that would have been made of the property, had it not been in disrepair, was not relevant to the assessment of damages.

Mitigation

In what I am tempted to interpret as a rather uncomfortable reconciliation of Earle with his conclusions, Briggs LJ rowed back from entirely disregarding the lessee’s use – or non-use – of his/her property rights during the period of disrepair.

In Earle, the tenant had suffered a 100% loss of amenity, because he had been unable to live in his flat at all. The Court of Appeal limited his damages to 50% of the market value of the flat however because he mitigated his loss by living with his parents.

In the light of that limitation, Briggs LJ’s view was that use/non-use of the property in disrepair was potentially relevant to the question of mitigation, adding however that where property was not useable, the cost of renting alternative accommodation may be the better measure of a lessee’s loss.

A form of mitigation?

In a rather curious continuation of his mitigation theme, Briggs LJ then observed that “it would be strange if mitigation were the only principle by reference to which the limited use or non-use of leasehold premises during the period of disrepair was relevant”.

The trial judge had held that Mr Moorjani’s absence from his flat was unconnected with the flood and his landlord’s subsequent breaches of covenant.

If however Mr Moorjani had left his flat as a result of the breaches, Briggs LJ considered that it would have been wrong to award him 100% of the rental value of his flat.

That was because Mr Earle had only recovered 50% of the rental value when he left his flat in order to mitigate his loss, even though he suffered an equivalent impairment of his rights.

In order to reconcile the two positions, Briggs LJ was obliged to adopt a rather unattractive conclusion, that being that:

“It may be that non-use for reasons unconnected with the disrepair should be regarded as a form of mitigation of loss, even if there is no intention to mitigate, but it will not wholly cancel out the loss constituted by the impairment of the amenity, for which the tenant has paid rent, and the lessee a premium, even if he lives elsewhere rent-free”.

Effectively therefore, and despite Briggs LJ’s opening observation in this section, it would appear that mitigation is the only context in which use of the property falls to be considered.

Adequacy

Finally, Briggs LJ considered the situation where the rental value may be insufficient to adequately compensate a lessee’s loss.

“The court is entitled, and, I would say, obliged to temper the rigour of those rules which seek to implement the compensatory principle which lies at the heart of the law of damages, where particular circumstances make it just to do so, see generally County Personnel (Employment Agency) Ltd v Alan Pulver & Co [1987] 1 WLR 916.

The point had already been adverted to by the Court of Appeal in Shine – damages may exceed the market rental value in given situations where there are aggravating factors, just as they may be reduced in others, and not only where the relevant conduct is effectively by way of mitigation.

The conclusion

It will be no surprise to learn that Briggs LJ determined that Mr Moorjani was entitled to damages for disrepair to the common parts for the period during which he was out of occupation for reasons unconnected to the disrepair.

This is how he approached the assessment of Mr Moorjani’s damages:

  • The market rental value of the flat was the starting point for assessing the damages to which he was entitled;
  • That value should be significantly reduced because neither the flat nor the common parts was in more than cosmetic disrepair;
  • It should be further reduced to take account of the fact that Mr Moorjani was not in occupation of the flat at the relevant time, and therefore sustained a lesser loss than a lessee in occupation.

So as to save the parties having to return to the county court for the exact sum to be determined, Briggs LJ carried out the assessment himself, applying, entirely without irony bearing in mind the complaint that the disrepair was decorative, a “broad brush” approach.

The assessment

The notional weekly rental value of the flat in 2008 was £550.00.

Between 2005 and 2006, Mr Moorjani complained only of disrepair to the common parts.

  • Briggs LJ reduced the rental value by 5% a year in order to calculate the rental value for 2005 and 2006;
  • Had Mr Moorjani been in occupation of the flat, he would have awarded 5% of that rental value;
  • As Mr Moorjani had not been in occupation, Briggs LJ reduced that 5% to 2.5%.

From 2006 until the first quarter of 2007, both the flat and the common parts were in a state of disrepair.

  • Briggs LJ again applied a 5% reduction per year from the 2008 figure;
  • Had Mr Moorjani been in occupation, Briggs LJ would have awarded him 20% of the rental value;
  • Again however, as he had not been in occupation, that 20% was reduced to 10%.

From the second quarter of 2007 until early 2008 when Mr Moorjani returned to the flat, only the common parts were in disrepair. Briggs LJ applied the same methodology as for the 2005-6 period.

Both King and Longmore LJJ agreed with Briggs LJ.

My observations will follow in a separate post. This one is quite long enough, and there is plenty to say about Briggs LJ’s conclusions.

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25 January, 2016
by Amanda Gourlay
1 Comment

Geyfords Ltd v O’Sullivan, Grinter, Shaw, Morgan, Bonsor [2015] UKUT 0683 (LC)

Reading this decision, in my mind’s eye I saw Martin Rodger QC with his head in his hands, lit by the trembling light of a single candle, weeping silently over dog-eared papers and piles of pink tape.

That vision may have come to me because I had just read Sir Henry Brooke’s fourth post in his series of Dickens and the law – it reviews the unremitting grind of old Chancery – but I think it is apposite.

Ladies and gentlemen, this is another appeal on the recoverability of legal costs –  £54,000 worth – under the terms of a lease.

There is a certain désespoir in the opening two paragraphs of the decision, in which our Deputy President says this:

“Because of the variety of expression used to define service charges, and the diversity of the leases in which they appear, the resolution of these problems is often difficult, despite the frequency with which they arise. Leases are rarely identical in their language and in the circumstances of their creation, but while it is not possible to lay down strict rules of universal application, the proper approach to the interpretation of service charge provisions is the same in every case and is no different from the proper approach to the interpretation of other contractual terms. Consistency in the application of that approach provides the best hope of predictable outcomes”.

It is not altogether cheering stuff, but Martin Rodger QC used the opportunity to lead by example.

In that he was assisted by Counsel who can properly be described as drawn from the ranks of les grands frappeurs (trans. “the big hitters”): Mark Warwick QC and Howard Lederman.

Woodcote Court

The development, Woodcote Court, was a mixed use one, constructed in the 1930s.

On the ground floor there was a car showroom, garage and workshop where the landlord freeholder, Geyfords, carried out business.

On the first and second floors there were twelve flats:

  • Seven were let on short term tenancies;
  • The remaining five were let on long leases. Geyfords was the landlord under these leases, and had been since the leases were granted.

The disputed clause

Each residential long lessee was required to pay, by way of service charge, one twelfth of various “costs expenses outgoings and matters”, including:

“All other expenses (if any) incurred by the Lessors or their managing agents in and about the maintenance and proper and convenient management and running of the Development”.

The parties were in dispute as to whether legal costs were recoverable by way of service charge under that clause.

Two rounds of litigation

The £54,000 bill in search of a home had been incurred by the landlord in two sets of proceedings: one county court and one in the LVT.

The county court proceedings

In September 2010, the landlord sued three long lessees for non-payment of an interim service charge demand of £12,000 odd in connection with major works.

The claim was ultimately settled by a consent order in January 2012 on these terms:

  • Each lessee would pay £8,000 within 28 days, and the balance when the landlord delivered the final tender for the works;
  • The landlord would pay £8,000 for each of the seven flats it let on short term tenancies;
  • Each side would bear its own costs of the proceedings.

The LVT proceedings

In March 2012, all five long lessees made a section 27A application to the LVT. They sought a determination for the years 2005-2013.

The lessees represented themselves, but the landlord engaged solicitors and Counsel.

The LVT’s determination was four-pronged:

  • The landlord was entitled to recover most of the costs that it had claimed;
  • It had no jurisdiction to determine the application made by the three lessees who had been involved in the county court claim;
  • The interim demand that had been the subject of the county court claim was reasonable in respect of the remaining two long lessees who had not been parties to the claim, and
  • It declined to make a section 20C order. It made no determination as to whether the costs were actually recoverable under the lease.

The landlord sought to recover its legal fees through the service charge.

Perhaps unsurprisingly, a dispute arose as to the lessees’ liability to pay those costs. In the end, in November 2014, the landlord made a section 27A application for a determination of that liability.

The FTT’s decision

The FTT decided that the word “running” added nothing to the meaning of “management”.

It concluded that “management” was not wide enough to encompass the recovery of legal costs incurred in a dispute with the very lessees from whom it was seeking to recovery those costs through the service charge.

It decided that the legal costs claimed were not recoverable under the lease, but granted permission to appeal, not having found the question an easy one.

The Upper Tribunal’s decision

Arnold v Britton [2015] UKSC 37

Martin Rodger QC began by reciting Lord Neuberger’s overview of contractual interpretation in Arnold:

“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 Limited v Persimmon Homes Limited [2009] AC 1101, para. 14.

It does so by focussing on the meaning of the relevant words … 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 commonsense, but

(vi) Disregarding subjective evidence of any party’s intentions.”

He then turned to three of the seven factors identified by Lord Neuberger in Arnold, setting out in full those which he considered to be relevant to the case before him:

“17. First, the reliance placed in some cases on commercial commonsense and surrounding circumstances (e.g. in Chartbrook) [2009] AC 1101 paras. 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed.  The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision.  Unlike commercial commonsense and the surrounding circumstances, the parties have control over the language they use in a contract and, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

“18. Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning.  That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it.  However that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning.  If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve….

“23. Seventhly, reference was made in argument to service charge clauses being construed “restrictively”.  I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation.  …. The origin of the adverb was in the judgment of Rix LJ in McHale  v Earl Cadogan [2010] HLR 412, para. 17. What he was saying, quite correctly, was that the court should not “bring within the general words of a service charge clause anything which does not clearly belong there”.”

“Running and management”

“The starting point of the interpretative process is the language used, in its immediate context, and the technique of stripping away synonyms in order to isolate what the reader considers to be the critical expression risks diluting the cumulative impact of the words the draftsman and the parties have chosen to employ. That is particularly the case where, as here, the language used is relatively economical”.

With that observation, Martin Rodger QC began his review of the FTT’s decision.

Neither “running” nor “management” clearly included nor excluded the recovery of legal costs:

  • “Running” was more suggestive of day to day hands-on actions;
  • “Management” was more long term or strategic;
  • Together, the words were more applicable to dealings with the condition of the building and its surrounds, rather than litigation about the rights and obligations of the lessees.

The phrase “proper and convenient” also suggested that the recoverable costs were intended to be the costs of routine, rather than exceptional, expenditure.

Case law

Reston v Hudson [1990] 2 EGLR 51

This case led Martin Rodger QC to the conclusion that “management” may sometimes include litigation and obtaining professional, including legal, advice.

In Reston, the landlord issued proceedings to determine whether he was responsible for the cost of repairing the windows in the building.

The lease allowed him to recover “the costs of management of the estate”.

The High Court judge held that the legal costs of the landlord’s claim did fall within the meaning of management.

That decision was justified, in Martin Rodger QC’s judgment, because the leases were unclear, and the proceedings were of concern to all of the lessees and the landlord.

Sella House Ltd v Mears [1989] 1 EGLR 65

Conversely, this well-known case caused Martin Rodger QC to row back from applying Reston to a case where the landlord claimed payment from an individual lessee.

In Sella House, the crucial clauses allowed the landlord to recover the costs of:

  • A managing agent “or other person who may be managing the Building”, and
  • “Other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building”.

The Court of Appeal held that the clause did not allow the recovery of the landlord’s legal costs.

In Taylor LJ’s judgment, legal costs should be recoverable in cases where a lease contained “a clause in clear and unambiguous terms”.

That was not, noted Martin Rodger QC, a statement of principle, even though it had frequently been relied upon for that purpose. It was simply an uncontroversial observation that “clear and unambiguous terms” are required in a lease to impose what Taylor LJ “obviously regarded as an onerous and unusual payment obligation”.

He continued:

“I refer to Sella House not for how the language of that lease struck the Court of Appeal, but because it illustrates the improbability that parties to a lease would regard general words as sufficient to express an intention that any shortfall in the landlord’s cost of litigation between them should be a charge on the whole body of leaseholders”.

Francis v Phillips [2014] EWCA Civ 1395

Martin Rodger QC’s next stop was our old bugbear, Francis v Phillips, in which Sir Terence Etherton, the Chancellor, identified a “broad principle” in service charge cases:

“ … it is reasonable to expect that, if the parties to a lease intend that the lessor shall be entitled to receive payment from the tenant in addition to the rent, that obligation and its extent will be clearly spelled out in the lease: see, for example, Gilje v Charlgrove Securities Ltd [2002] 1 EGLR 41 at [31] (Mummery LJ). It is to be expected that the tenant will wish to be fully aware of any such additional obligation on which his or her continuing right to possess the land and to occupy it may depend.

“It is to be expected that the lessor will wish to make such a continuing additional obligation clear because it arises under a lease which will subsist through successive ownerships of the reversion and the tenancy and because the lessor will not wish to be out of pocket in respect of services provided for the benefit of the tenant…”

Of this observation, Martin Rodger QC said: “an absence of clarity can therefore be treated as an orthodox aid to identifying the boundaries of payment obligations generally, including service charge obligations”.

The meaning of the clause

Martin Rodger QC came straight to the point: in his view, the £54,000 could not be applied to the service charge under the disputed clause.

There were two reasons within the clause itself which drew him to the conclusion that the clause was intended to cover only routine and unexceptional expenditure:

  • The words “proper and convenient” suggested that directly, and
  • The fact that the landlord relied upon a sweeping up clause covering residual expenditure. The parties could not have intended that the landlord should recover its legal costs through a residual category of expenditure.

Other provisions of the lease

The lease contained other provisions which supported Martin Rodger QC’s interpretation.

Lessee-lessee covenants

First, there were covenants between lessees which were mutually enforceable by the following mechanism:

  • The lessees covenanted with each other and with the landlord to that effect, and
  • The obligations which the lessees were entitled to enforce were set out in the form of regulations in a schedule to the lease, and covered matters such as use, noise and nuisance.

For flats where leases had not been granted at the date of the lease in question, the landlord covenanted to include those regulations in the leases when it granted them.

The mutual obligations did not involve the landlord at all, and the landlord could not be compelled to take any action under them.

If it did decide to take action, there was no reason to believe that it was entitled to claim an indemnity for its legal costs.

Equally, individual leaseholders could take their own steps to enforce compliance with the regulations, but could not look to the landlord to do so on their behalf.

Lessee-lessee-landlord covenants

Next, there were covenants made by the lessee with both landlord and fellow lessees, under which the landlord agreed:

“That (if so required by the Lessee) the Lessors will enforce the covenants … entered into by the lessees of the other flats … on the lessee indemnifying the Lessors against all costs and expenses in respect of such enforcement and provided such security in respect of costs and expenses as the Lessors may reasonably require is provided by the Lessee.”

In those cases, a lessee could oblige the landlord to take action, but was required, on the wording of the covenant, to indemnify the landlord against any costs it incurred.

Enforcement action by the landlord against the lessee

Third, the landlord might decide to take its own action to enforce covenants made with the lessee alone. Those covenants included the lessee’s obligation to pay the service charge.

“It does not seem to me to be likely that the parties intended that leaseholders should be required to contribute towards costs incurred in litigation to enforce … obligations which the Lessors have undertaken on their own initiative”, observed Martin Rodger QC. 

Forfeiture/non-compliance with statute

Fourth, and finally, the lease contained covenants by the lessee:

  • To pay “all costs, charges and expenses (including solicitors’ costs and surveyors’ fees)” incurred by the landlord incidental to the preparation and service of a notice under section 146 of the Law of Property Act 1925, or,
  • If the lessee failed to comply with an Act of Parliament or other legislation, “at all times [to] keep the Lessors indemnified from and against all actions proceedings costs expenses claims and demands in respect thereof.”

In this case, Martin Rodger QC considered that the obligation to pay the “costs, charges and expenses (including solicitors’ costs and surveyors’ fees)” was “an example of clarity” when compared to the language of the disputed clause.

The overall purpose

Martin Rodger QC then stood back to take stock of the lease overall.

He noted that:

  • Each long lessee was required to pay one twelfth of the costs of maintaining, repairing and decorating the building;
  • The landlord, who occupied the ground floor for the purposes of its own car dealing business, was not required to meet any of that expenditure in its capacity as occupier of that ground floor, even though it benefited from the repairs, maintenance and redecoration.

“That arrangement”, he observed, “might be regarded as rather inequitable, but it makes it less likely that the parties can have intended that payment obligations which are, to a significant degree, for the [landlord’s] own benefit should be enforced entirely at the expense and risk of the leaseholders”.

Life at the date of the lease

Moving away from study of the lease itself, Martin Rodger QC focused on the law as it was at the date when the leases were granted in 1978:

  • Landlords generally enforced payment of service charges by forfeiture action;
  • A lessee generally only avoided forfeiture by paying – or arranging for his/her mortgage lender to pay – the outstanding service charge and the legal costs of the forfeiture action;
  • Section 81 of the Housing Act 1996 was nearly twenty years away. Forfeiture was unfettered by the need to obtain a determination of the amount of service charge.

The consequence was that:

  • “In 1978, the parties would not have contemplated that the [landlord] might be required to incur expenditure in establishing the quantum of the service charge before a statutory tribunal operating in a largely costs-free jurisdiction;
  • “Service charge disputes were determined in the County Court, where the successful party would recoup its costs from the unsuccessful party;
  • “The joint expectation would therefore have been that (barring any change to those ground rules) the [landlord] would not find itself out of pocket if it proved necessary to collect service charge contributions by legal action, and so would have no need to recoup its legal expenses through the service charge”.

Plainly there might be an exception if the landlord’s claim for payment was dismissed, or the parties settled the claim without provision for the landlord to recover all of its costs.

If that was the case, it struck Martin Rodger QC as even less likely that the lease should allow for the unrecovered costs to go through the service charge as part of the “proper and convenient management and running of the Development”. 

A (very short) history lesson

The forerunner to section 19 of the Landlord and Tenant Act 1985 was section 91A of the Housing Finance Act 1972.

Although in many ways similar to section 19, section 91A did not include the landlord’s costs of management within the definition of “service charge”.

In 1978 therefore, there was no statutory provision for challenging a landlord’s management costs, if those costs were put through the service charge.

A pre-1985-Act court might have implied a term limiting recoverable service charges to those which were reasonable, but Martin Rodger QC took the view that the absence of statutory provision limiting the costs of management to those which were reasonable was “a further reason for construing the language as insufficiently clear to extend to the cost of litigation between the parties themselves”.

Commercial common sense

“Commercial common sense would lead one to expect the employment of clear language to impose onerous and unpredictable burdens”, observed Martin Rodger QC, pithily, giving two reasons for rejecting the landlord’s arguments under this heading.

First, the landlord was the more commercial party and carried on a business from one third of the building.

The landlord would not expect the occupiers of a different part of the building to pay the costs of recovering the money owed to it for the upkeep of its third of the building.

Second, the landlord was entitled to continue its short term lets of the flats retained by it. If the disputed phrase had the broad scope for which the landlord argued, the landlord would be able to recover through the service charge the costs of running and managing the short term tenancies, including for example the cost of proceedings to recover unpaid rent.

The language of the long leases were nowhere near clear enough for that to be an option for the landlord here.

Disposal of the appeal

The appeal was dismissed.

Observations

A matter of impression

In Paddington Walk Management Ltd v Governors of the Peabody Trust [2010] L&T R 6, HHJ Hazel Marshall QC observed several times that the meaning of certain phrases was a “matter of impression”. One of those phrases was the definition of “qualifying works” in section 20ZA of the 1985 Act.

She said:

“90. “Qualifying works” means, “works on a building or any other premises”. That is not a very illuminating definition. [Counsel for the landlord] reminds me of the history where, of course, the Act originally provided protection in relation to works on a building. She says that window cleaning is not “works on a building” or “building works” because it falls more naturally in the category of “services”. By definition, it is “cleaning”, which itself is part of “services” and not “works”.

“91. [Counsel for the lessee] says it is “works” and it is works being done “on a building”. Window cleaning is not that different from stone cleaning, which itself is not that different from maintenance work on stone surfaces. There is really no ground for distinguishing any form of such works that are being done, and window cleaning works, therefore, fall within the definition.

“92. It is again a short point and a matter of impression. I prefer [the landlord’s] argument. Window cleaning may be “work” and even “work on a building” but it is not, in my judgment, “works on a building”. Works on a building comprise matters that one would naturally regard as being “building works” and it does not seem to me that window cleaning naturally falls within that concept.

“93. I therefore find that on that issue, [the landlord] is correct and consequently this was not a contract for “qualifying works”. It follows that the question of the imposition of the cap on any expenditure does not arise”.

It strikes me that the same point can be made on the meaning of phrases in a lease. A disputed phrase may have one meaning, strictly and technically interpreted, but the direct opposite on a more purposive, teleological – some might say looser – analysis.

Rectification and obsolescence

One of the topics discussed by Snowden J. at the Chancery Bar Association winter conference last weekend was decease of rectification as a remedy in financial instruments. Its decease, he suggested, was due partly to the rapidity at which financial instruments change hands, and the fact that their terms are rarely considered, let alone in detail.

The doctrine of rectification depends on the parties’ intentions not being reflected in the instrument or document which is the subject of the claim. Snowden J.’s thesis was that the speed of purchase and sale meant that the parties could not claim to have intended different wording because they simply had not read the instrument.

Listening to Snowden J., I could not help but think of leases, and the lack of knowledge of their contents all-too-frequently displayed by both landlords and lessees.

Does this mean that rectification has fallen off its perch in the leasehold world too? I don’t think so: in principle landlords and lessees generally have much more time to consider the terms of their agreement than traders.

Whether that time is put to use – and whether legal advice about the contents of a lease is given, good and/or noted – is however quite another question.

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8 January, 2016
by Amanda Gourlay
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Pen Portrait No.3: Margaret Wilson

“I became a barrister because when I was at school and had to decide what to read at university the Bar sounded like an exciting and glamorous job.  There was no such thing as “work experience” in those days so I hadn’t a clue about how difficult it was for a woman to get into chambers then (much better now), and of course it never occurred to me to worry about combining the Bar with having children.  And once I had got a practice together I found I had to stop at a critical time, when I was thinking about taking silk, because of horrendous nanny problems. Then, after a gap which was intended to last two years, but turned into a decade, it made sense to get a part-time judicial job rather than return to the Bar, and the first one to come up was what has now become the First-tier Tribunal (Property Chamber), where I was a judge for twenty years.  Now I have retired I have been lucky enough to be invited to join Tanfield Chambers as a mediator of service charge disputes.

The best thing about being a mediator is the fantastic sense of satisfaction one derives from helping to bring about a settlement in the afternoon of a dispute which seemed utterly intractable in the morning.

If there was one thing I could change about the legal profession it would be that so many students are tempted to do the professional training courses for both branches of the profession at great expense, only to find that when they finish there is no room for them.

The highlight of my career was to appear in the great case of Wachtel, well known to all family lawyers, and afterwards to receive a letter from Ormrod J congratulating me on my performance in it.

The longest day of my career was in my early days at the Bar when I was instructed to appear at a planning inquiry (never done one before or, understandably, since) in Norwich which I thought would begin at 10.30 but in fact was supposed to begin at 10.00.  I turned up at 10.15 to face a room full of rather angry people.  It went downhill from then on.

I know I will have reached the peak of my career as a mediator when I have too many cases to handle.

If I had not been a barrister I have to admit, boringly, that I expect I would have been a solicitor.  I should have loved to be a doctor but I think chemistry A level would have been a hurdle too far.

Personally I would prefer to live in a property managed by a property manager appointed by an investor freeholder than by an RTM company or a freeholder appointed after a collective enfranchisement because I would prefer to have someone I could usefully blame if the property was mismanaged. So many residential leasehold disputes involve tenants pointlessly chasing their own tails because if they succeed in showing that service charges were not reasonably incurred they bear the loss anyway.

Should property managers self-regulate or be subject to statutory regulation?  I would prefer strict self-regulation by a professional body, akin to, but independent of, the RICS.  Statutory regulation is almost bound to miss the point in some crucial way.

The biggest challenge currently facing property managers is the difficulty of persuading tenants to pay an adequate fee for management, particularly in small blocks where the recoverable charges for management may make the venture uneconomic for the manager.

I’m not sure that that challenge can be overcome except by constantly reminding tenants that if they pay peanuts they may get monkeys and will be worse off in the long run.

My favourite books of the moment are any novels by Anne Tyler or Alison Lurie, but perhaps the most gripping book I’ve read in the last year or so is An Officer and a Spy by Robert Harris, a marvellous account of the Dreyfus Affair, told as a novel.

My favourite film was Boyhood, or maybe The Squid and the Whale (or anything else directed by Noah Baumbach).

My favourite building is the Martello Tower in Aldeburgh, which is owned by the Landmark Trust.  We stayed there as a family.  It is lashed by the sea and there is a drawbridge.

If you come to London you should visit Dulwich Picture Gallery.  It’s human in scale and you can look at the pictures in peace.  And it’s easier to get to than you think.”

Margaret Wilson

For twenty years Margaret Wilson was chairman of the London leasehold valuation tribunal, and latterly a Judge of its successor, the First-tier Tribunal (Property Chamber) until she retired in April 2015.

In 2007 she trained as a mediator, and subsequently carried out a large number of mediations for the leasehold valuation and First-tier Tribunals in the Greater London and Birmingham areas, specialising in service charge and similar disputes. She is now a highly experienced, proactive mediator with a very high record of success.

In April 2015, she joined Tanfield Chambers as a mediator, specialising in residential leasehold disputes.