Richard Jonathan Greening v Castelnau Mansions Ltd [2011] UKUT 326 (LC)

In this case, the LVT held that Mr Greening was liable to pay all of the service charges, including legal fees, in respect of which it had been asked to adjudicate.

The President of the Lands Chamber granted Mr Greening permission to appeal on the question of whether the legal costs of the proceedings were recoverable under the terms of his lease.

Mr Greening’s lease required him to pay for:

• the employment of … “a firm of Managing Agents to manage the Building and discharge all proper fees salaries charges and expenses payable to such agents or such other person who may be managing the Building including the cost of computing and collecting the rents in respect of the Building or any parts thereof”, and
• the employment of “all such surveyors builders architects engineers tradesmen accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building”.

The lease in Sella House v Mears contained a number of identical provisions to Mr Greening’s, including the two covenants above, with the addition of the words “and Chartered Accountants” after “Managing Agents” in the first clause above.

At first instance, the judge held that the fees of solicitors and counsel were outside the ambit of either clause because:

• the first clause related to the management of the building. The words “including the cost of computing and collecting the rents” and service charges were clearly referable back to the words Managing Agents and Chartered Accountants and did not contemplate the fees of solicitors and counsel, and
• in the second clause the words “or other professional persons” must be related to the proper administration of the building, and did not appear therefore to cover legal proceedings for possession or arrears of rent.

The Court of Appeal dismissed the landlord’s appeal. Agreeing with Dillon LJ, Taylor LJ said:

“Nowhere in [either clause] is there any specific mention of lawyers, proceedings or legal costs. The scope of [the first clause] is concerned with management. In [the second clause] it is with maintenance, safety and administration. On the respondent’s argument a tenant, paying his rent and service charge regularly, would be liable via the service charge to subsidise the landlord’s legal costs of suing his co-tenants, if they were all defaulters. For my part, I should require to see a clause in clear and unambiguous terms before being persuaded that that result was intended by the parties.”

Here, the terms of the lease were different: the tenant covenanted to pay a service charge equivalent to 7.4 per cent of “the landlord’s costs”, defined as:

• “all costs … properly incurred by the Landlord in carrying out its obligations … under the covenants and conditions contained in the Head Lease … and in the proper and reasonable management of in and about (the flats). The items comprising and included in the Landlord’s costs are set out … in the eighth schedule.”
• The list in the eighth schedule included “The proper cost of management of (the flats)”.

Peter Gibson LJ considered the clauses at issue in Sella House, and said: “I am not able to derive any assistance from that case. The language of the relevant provision is very different from that in the present case. The definition of the landlord’s costs [in this case] seems to me to be broader… I would therefore hold that the costs incurred by the defendant in the litigation were costs which are included in the landlord’s costs and so recoverable … by way of the service charge”.

Mr Greening’s lease being identical in terms to the lease in Sella House, and the Lands Chamber being bound by the Court of Appeal, the President determined that the “conclusion that the terms of the lease do not cover legal fees is inescapable in the light of the decision in Sella House, and the appeal must be allowed”.

The President’s decision was not without its barbs. The limited company landlord in this case was owned by the tenants, who had exercised their right of collective enfranchisement. Mr Greening had himself recently become a shareholder of it.

Such companies are often without any assets save for the freehold, service charge monies being held on trust for the tenants. In that context, the President observed that “Mr Greening’s appeal is without any apparent merit. It is obviously desirable, where the landlord is a company owned by the tenants, that such legal fees as these, if not chargeable to the tenant himself, should be recoverable through the service charge”.

A comparison of Sella House and Iperion Investment Corporation show that it is risky to extrapolate general principles from the interpretation of the words of a particular lease. However, from these three cases it would appear that references in leases to Counsel, solicitors and legal fees are helpful in establishing a landlord’s entitlement to its legal costs, whereas broad “sweeping up” style clauses can be simply too unclear.

The tenant in this case succeeded on the legal costs element of the service charge ligation, but it seems to me that overall, his failure to pay service charges might be described as an own goal. If a tenant-owned, practically asset-less limited company landlord is faced with costs which cannot be recovered from the tenants, it may have the option of raising those funds from its shareholders, if the Articles of Association permit.

The 1985 Act does not govern the raising of funds in this way (see Morshead Mansions Ltd v di Marco [2008] EWCA Civ 1371). Ironically therefore, having avoided liability to pay the landlord’s legal costs through the service charge, Mr Greening may simply have exposed himself to contributing to those costs under a different regime.