To my mind, Martin Rodger QC reveals himself to be rather iconoclastic and – ahem – a little inconsistent in this appeal, which treads the well-worn path of disputes about the recoverability of legal costs.

Assethold Ltd was the head lessor of a modern block of flats at 4 Westport Street, London, E1.

Mr Watts and his fellow lessees were the leasehold owners of 13 of the 14 flats in the block. Assethold was their immediate landlord.

The block’s flank wall was built on the boundary with 12 Westport Street, which was owned by Freetown Ltd.

On 20 January 2011, Freetown served Party Wall Act notices on Assethold and the lessees, notifying them that it intended to carry out works on the boundary.

Assethold appointed a surveyor, Mr Simon Levy, to act for it.

The lessees who responded to the Party Wall Act notice appointed McBryer Bing surveyors to represent them.

On 05 May 2011, the surveyors for Freetown and the lessees jointly published a party wall award, but there was no agreement with Assethold by the time Freetown began trial excavations on its land for a building which was to adjoin the boundary with Assethold.

Assethold therefore issued a claim for an injunction and applied for an interim injunction in the High Court.

Vos J. granted an interim injunction, prohibiting Freetown from continuing with construction works within 6 metres of the boundary for seven days or until publication of an award binding Assethold and Freetown.

Where the surveyors appointed by landowners under the Party Wall Act etc 1996 cannot agree, a third surveyor is appointed to resolve the impasse.

The third surveyor solution was needed to achieve an award binding Assethold and Freetown.

That award was published on 22 July 2011. The injunction was therefore discharged.

Party wall awards can be challenged in the County Court, and that was Freetown’s next move in August 2011.

The first issue to exercise the appeal courts was whether the appeal had been issued within the statutory 14 day time limit.

Freetown ultimately carried the day when the matter was heard in the Court of Appeal (Freetown Ltd v Assethold Ltd [2012] EWCA Civ 1657).

Assethold was ordered to pay Freetown’s costs of the appeal hearings.

In March 2012, some seven months after the discharge of the interim injunction, Assethold applied for permission to discontinue its claim.

Where civil proceedings are discontinued:

• By CPR 38.2, the court’s permission is required where an interim injunction has been granted or a party has given an undertaking to the court, and
• As a general rule, the claimant is obliged to pay the defendant’s costs.

The discontinuance was not without its disagreements.

Assethold considered that Freetown should pay its costs.

Freetown disagreed. It argued that it had suffered loss because the interim injunction should never have been granted. Therefore Assethold should pay its costs.

It took three days of hearings before a Chancery Master to sort out the dispute. In September 2012, Master Marsh held that:

• The original injunction had been properly granted;
• Assethold could withdraw its proceedings;
• Freetown should pay Assethold’s costs of the proceedings up to 30 November 2011, but that Assethold should pay Freetown’s costs from 01 December 2011 to 13 March 2012 because it should have discontinued its claim earlier, and
• Freetown should pay Assethold’s costs of the hearings before Master Marsh, including a £40,000 payment on account.

The costs incurred in obtaining the interim injunction and the party wall award were put through the service charge for the year ending 31 December 2011. The sums were:

• £4,188.90 for the fees of the surveyor, and
• £55,600.52 for the fees of Greenwood & Co, solicitors.

Together, those fees were nearly four times the £16,391 chargeable to the service charge account for all of the other services provided by Assethold that year.

Meeting resistance the lessees, Assethold made a section 27A application.

The costs of Freetown’s challenge to the Party Wall Act award were not part of that application, but Assethold was clear that if it succeeded on this appeal, it would put the costs of Freetown’s challenge to the Party Wall Act award through the service charge.

The financial stakes of this appeal were therefore potentially high. To that end, both parties were represented by Counsel: Assethold by Philip Sissons, and the lessees by Justin Bates.

The lease included conventional service charge provisions which required Assethold to provide services in exchange for payment of a service charge by Mr Watts and his fellow lessees.

The LVT determined that the lease:

• Allowed Assethold to put the surveyor’s costs of the Party Wall Act award through the service charge, but
• Did not allow it to do the same with the legal costs of the award or the injunction application.

Assethold appealed the second of these two findings.

Martin Rodger QC began his analysis of the merits of the appeal by reviewing the correct approach to interpreting service charge covenants.

No special rules apply to the construction of service charge covenants. Authority for that proposition can be found in:

• The Court of Appeal’s judgment in Arnold v Britton [2013] EWCA Civ 902, and
• Francis v Philips [2014] EWCA Civ 1395.

“Previous decisions which might have suggested that there were special rules ought properly to be understood as examples of the application of universal principles of contractual interpretation”, said he, listing among those previous decisions:

• McHale v Earl Cadogan [2010] 1 EGLR 51 (Rix LJ at [17]);
• Gilje v Charlegrove Securities [2002] 1 EGLR 41, and
• Sella House Ltd v Mears [1989] 1 EGLR 65 (Taylor LJ).

In Arnold, there was no connection between the cost of the services provided and the amount payable by the lessees. The lessees’ payments were therefore not service charges within the meaning of section 18 of the 1985 Act.

The problem was that, on the landlord’s interpretation, the leases increased the service charge at an alarming rate, by regular compounding of the amounts payable. The result was that the landlord was recovering the cost of the services provided – and then some.

At first instance the county court disagreed with the landlord’s interpretation of the leases, and capped the amount which could be demanded, so as to preclude the landlord from making a profit.

The landlord appealed to the High Court. Morgan J. reversed the county court judge’s decision. You can read my review of Morgan J.’s judgment here and here.

The lessees then appealed to the Court of Appeal. Case law relied on there included:

• Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896;
• Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101;
• Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988; and
• Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900.

The Court of Appeal was not however drawn into any discussion of those authorities, observing that: “over-elaborate citation of such authorities carries with it a danger of obfuscating the task in hand: which is, ultimately, to interpret the words used, set in their context.”

The Court of Appeal also refused to put service charge clauses in a special category which, as a matter of principle, did not allow the landlord to make a profit unless there was clear wording to that effect:

“Typically – at all events nowadays – a clause which is designed to be a service charge clause can be taken not normally to be intended to provide to a landlord a profit over and above the cost of the services provided (or, for that matter, a loss). Such a clause, if it potentially gives rise to such a result, therefore must be closely read to see if the wording requires such a conclusion… That is simply a facet of the ordinary process of construction, having regard to the presumed commercial objective of such a clause used in the particular case. But ultimately it all depends on the meaning of the language, set in context and having regard to the commercial purpose. As Morgan J put it in his judgment at paragraph 43:

“I do not see why a service charge clause in a lease should be subject to a special principle… I consider that what is required is that the court must examine the wording of the charging provision, in its context and against all the admissible background and in the light of the apparent commercial purpose of the clause, and then decide what the provision means and how it operates.””

The lessees’ appeal was dismissed.

(Note: The Supreme Court heard the lessees’ appeal at the end of January 2015).

Martin Rodger QC invoked Francis v Phillips, that now almost mythical case, for the Court of Appeal’s words of wisdom on the interpretation of leases.

Those words were dispensed in connection with the second, and arguably secondary, issue in the case: whether a management charge was recoverable under the terms of the leases.

The Court of Appeal adopted the same approach as it had in Arnold, albeit that on this occasion it was differently configured. It held that:

• The ordinary rules of contractual interpretation were to be applied, and
• There was little to be gained by comparing one clause in one lease with another in another.

At [72]-[74] the Chancellor, Sir Terence Etherton, explained:

“72. The starting point is that ordinary principles of contractual interpretation apply to the relevant provisions of the Lease. The meaning of a contract is that which a reasonable person who has all the background knowledge which would reasonably have been available to the parties to the contract in the situation in which they were at the time of the contract would have understood the parties to have meant. In deciding that meaning, the court must have regard to all the relevant circumstances: Investors Compensation Scheme v West Bromwich Building Society [1988] 1 WLR 896, 912-913 (Lord Hoffmann). The more unreasonable a particular interpretation the less likely the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 251 (Lord Reid). If there are two possible interpretations, that is to say a real ambiguity, the court is entitled to prefer that one which is consistent with business common sense and to reject the other: Kookmin Bank v Rainy Sky SA [2011] UKSC 50, [2011] 1 WLR 2900 at [22] (Lord Clarke).

“73. As is apparent from those basic principles, even slight variations in the language of similar categories of lease provisions may result in a different meaning.  There have been many cases on the interpretation of service charge provisions and some of them raise similar issues to the present case in terms of recovery of management charges. … It has not been suggested by counsel before us that the material provisions of the leases in those cases are absolutely identical to those in the present case and so there is no advantage in referring to them for a detailed comparison.

“74. On the other hand, the reported cases are generally consistent with a broad principle that 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…”

To Martin Rodger QC’s mind, paragraphs 72 and 73 set out the principles for the starting point for contractual interpretation: paragraph 74 applied those principles.

He turned to review some of the reported cases on the recoverability of legal costs where only general words were used. Legal costs were held to be:

• Recoverable In Reston v Hudson [1990] 2 EGLR 81 and Iperion Investment Corporation v Broadwalk House Residents Ltd [1995] 2 EGLR 47, but
• Irrecoverable in St Mary’s Mansions Ltd v Limegate Investment Co Ltd [2003] 1 EGLR 41.

The task before Martin Rodger QC was therefore to examine the wording of the provisions relied on:

• In their documentary context;
• Against all the admissible background, and
• In the light of the apparent commercial purpose of the clause.

Assethold relied on three specific provisions in the lease:

1) Its obligation “to maintain and keep in good and substantial repair and condition”;

2) Its entitlement to do “all works installations acts matters and things as in the reasonable discretion of the Landlord may be considered necessary or desirable for the proper maintenance safety amenity and administration of the Development”, and

3) Its entitlement to recover “the proper fees and disbursements … of the Surveyor the Accountant and any other individual firm employed or retained by the Landlord for (or in connection with) such surveying or accounting functions or the management of the Development purposes of assessing the full cost of rebuilding and reinstatement and any individual firm providing caretaking or security arrangements and services to the Development”.

“To maintain and keep in good and substantial repair and condition”.

Martin Rodger QC accepted that there was a difference between “to maintain” and “to repair”. Maintenance included:

• Preventing the subject of the covenant from falling out of its original condition, as was shown by Young J in Greetings Oxford Koala Hotel Pty Ltd v Oxford Square Investments Ltd (1989) 18 NSWLR 33, 39;
• Prevention rather than cure. In Hamilton v National Coal Board [1960] AC 633, 647, Lord Keith of Avonholm said that the word “maintain” used in the Mines and Quarries Act 1954 “should be construed as meaning to keep in proper order by acts of maintenance before the thing to be maintained falls out of condition”;
• Preserving a functional condition by acts of maintenance performed on or to the thing to be maintained, and
• As a matter of ordinary language, guarding against the risk of deterioration through use, rather than injury or damage caused by the exceptional activity of another.

By contrast, repair involved undertaking work to restore the subject to a former condition from which it has deteriorated.

“Maintainance”, “repair” and activities incidental to maintenance and repair however suggested doing something directly to the object in question – as opposed to at a distance, such as providing legal services.

The repairing covenant was a positive covenant that required the landlord to take action.

To Martin Rodger QC’s mind, the legal costs were all the less recoverable as a result: “It would be surprising for a landlord to covenant in terms which positively obliged it to commence proceedings against a neighbouring owner, especially where individual lessees (with a more valuable interest to protect) are able individually or collectively to take action on their own behalf”.

He was supported in that view by provision elsewhere in the lease, which entitled Assethold to recover the cost of abating a nuisance through the service charge if such action was required.

He observed that that entitlement demonstrated “that the draftsman did give some thought to the costs of preserving the Building from external threats, but did not make it a positive obligation of the Landlord”.

He concluded therefore that the LVT had been correct in concluding that the legal costs were not recoverable pursuant to the repairing covenant.

“All works installations acts matters and things as in the reasonable discretion of the Landlord may be considered necessary or desirable for the proper maintenance safety amenity and administration of the Development”.

The words as a matter of impression

• The net of activities caught within the scope of this provision was wide: “all works installations acts matters and things” for the specified purposes;
• The specified purposes were also described in broad terms by reference to their general character. They covered more than work carried out directly on the block because they included costs incurred for “maintenance, safety, amenity and administration”.

Interpreting unclear language

Starting from first principles, Martin Rodger QC accepted that: “as a general principle of interpretation, if contracting parties intend that a payment obligation such as a service charge should cover a particular type of expenditure they will wish to make that clear. Unclear language should therefore be read as having a narrower rather than a wider effect”.

He then put on his radical hat: “Nonetheless, I do not think that principle should be pushed to the point where language which was clearly intended to encompass expenditure in a wide variety of situations which the parties have not explicitly catalogued should be so restrictively construed as to deprive it of any real effect.

“It seems to me to be wrong in principle to start from the proposition that, with certain types of expenditure, including the cost of legal services, unless specific words are employed no amount of general language will be sufficient to demonstrate an intention to include that expenditure within the scope of a service charge.  Language may be clear, even though it is not specific”.

Radical support

Martin Rodger QC noted that, in the lease before him, most of the activities for which the service charge was payable were described fairly precisely.

Despite this, he determined that the parties, through their fairly precise wording, had “clearly evinced an intention that expenditure by the Landlord falling within all of the listed categories, whether specific or general, should be recoverable through the service charge. A general provision … is included in a lease precisely because the parties appreciate that they cannot anticipate all eventualities”.

This was all the more the case in a contract like a lease for a term of 125 years, where the parties may not, when contracting, be able to foresee payments for which they would wish to make provision.

Distinguishing Sella House and Gilje

Martin Rodger QC opined that neither Sella House or Gilje (cited above) departed from the principles he had set out in respect of expenditure on legal advice and representation:

• In the first, the Court of Appeal did not regard proceedings against individual tenants to recover debts as acts for the maintenance, safety and administration of the building;
• In the second, the recovery of expenditure which had not been incurred was under review.

“Nothing said in those cases about the need for clear and unambiguous language required that language which is clear and of deliberately wide scope should be interpreted narrowly in the case of some categories of expenditure”, he concluded.

Specific provisions of leases must be interpreted in the light of the document as a whole.

In that endeavour, a certain amount of telepathy is vital in order to ascertain the draftsman’s thought processes when drafting the lease.

So far as I know, the Ministry of Justice does not yet supply crystal balls. Martin Rodger QC therefore compared the disputed provision with others in the lease.

It transpired that there were three other covenants where the draftsman had expressly envisaged that Mr Watts and his fellow lessees would be liable to reimburse expenditure by Assethold on legal advice and the cost of litigation.

To Martin Rodger QC’s mind, this did not however mean that legal costs were excluded where they were not mentioned in the disputed clause.

The incurring of those costs could, in his view, “appropriately be described as having been taken for the proper maintenance, safety, amenity and administration of the Building”.

He continued:

“… the service charge puts Assethold in a position to fund action for the common good which might be beyond the resources of individual tenants”.

Assethold’s entitlement to recover through the service charge all sums reasonably and properly incurred in the abatement of a nuisance was again consistent with that view.

Accordingly, Assethold was entitled to put the legal costs relating to the party wall award through the service charge.

“The proper fees and disbursements … of the Surveyor the Accountant and any other individual firm employed or retained by the Landlord for (or in connection with) such surveying or accounting functions or the management of the Development purposes of assessing the full cost of rebuilding and reinstatement and any individual firm providing caretaking or security arrangements and services to the Development” (sic).

Assethold was already home by the time Martin Rodger QC came to consider this third provision. That was probably just as well, because he decided that the LVT had been right to refuse to allow the legal costs under this provision, even though it considered that the surveyor’s fees were recoverable under it.

Syntax

The syntax appeared to have gone awry mid-way through the clause, “possibly by the omission of “and” or “or” before reference is made to assessing costs and providing caretaking or security arrangements and services to the Development”.

Focus

This third provision focussed specifically on professional fees and disbursements, which were recoverable if incurred in connection with one of three functions:

• Surveying;
• Accounting, or
• Management of the development.

The surveyor, the accountant – and the lawyer?

There was no room in the three listed functions for legal services, “especially in a Lease where such services have been described in express terms elsewhere”.

Fees recoverable in respect of those services were limited to the “Surveyor”, the “Accountant” or “any other individual firm”.

Caretaking or security arrangements and services

There were two reasons why “services” here could not include legal services:

• The phrase was “a composite expression covering caretaking arrangements and services and security arrangements and services, rather than referring to “services” in general”, and
• Litigation against a third party could not properly be regarded as a service.

Conclusion

Assethold’s appeal was allowed: it was entitled to recover the disputed legal costs for the year ending 31 December 2011 under the second of the three provisions it relied upon.

Martin Rodger QC was however at pains to emphasise that his conclusion:

• Was not determinative of the recoverability of service charge expenditure in any other year, and
• Did not necessarily mean that the costs of resisting Freetown’s appeal against the party wall award were recoverable.

For me, this is not Mr Rodger QC’s most consistent piece of reasoning. Specifically, his interpretation of the second provision (“All works installations acts matters and things …”) is troubling. He notes that:

• The second provision does not refer to the recovery of legal costs, and
• Elsewhere in the lease, there is specific reference to the recovery of legal costs.

To my mind, that would suggest that the draftsman had the recovery of legal costs in mind when preparing the lease, and excluded it from the second provision because the parties did not intend legal costs to be recovered under it.

I wonder how Lewison LJ would have decided this case. In a recent article, the authors of Nearly Legal noted that in the private rented sector, Lewison LJ’s recent judgments shared three features:

• They were fairly controversial;
• They all involved a return to the statute and a tight reading of it, and
• They upset received wisdom about what the provision meant.

The first and third of these strike me as being uncannily apt to describe this decision.

As to the second, whilst ‘tis true that, inconsistency aside, Martin Rodger QC’s broad and purposive approach in this case frankly sprints in the opposite direction to Lewison LJ’s tight handling of statute, it is also true that both judges nail their colours firmly to their respective masts.

At least we know where they are going – unless of course they are reversed on appeal.

In memoriam

This post is published in memory of my Father, Robin Gourlay. He was never keen on parties, but loved words. He passed away on 25 January 2015.

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