The tenant occupied a maisonette under a long lease granted by the landlord, a local authority, which was the freehold owner of an estate of some 1,000 flats and maisonettes, including the tenant’s. Under the lease the tenant covenanted to pay as part of the service charge a reasonable part of the costs and expenses “incurred” by the landlord in carrying out repairs to the property, such service charge to be a “fair proportion”, to be determined by an officer of the landlord, of all costs, expenses and outgoings incurred. The tenant and the landlord both applied under section 27A(1) of the Landlord and Tenant Act 1985 for a prospective determination of the tenant’s liability to pay service charges in relation to a proposed refurbishment of the entire estate. The landlord received funding under the Community Energy Savings Programme (“CESP”) for some of the work done to the property, but the amount which it claimed from the tenant by way of service charge when the work was completed was not reduced to reflect this. The Leasehold Valuation Tribunal found that the costs had been reasonably incurred. The Upper Tribunal allowed the tenant’s appeal in part, holding that, to the extent that the landlord’s expenditure on the work had been funded under the CESP, that part of the cost had not been “incurred” by the landlord within the meaning of the lease and so should not have been included in the service charge.
On appeal by the landlord—
Held, appeal dismissed. (1) A construction of the lease would produce a result which reasonable parties in the position of the landlord and the tenant could not sensibly have intended, if its service charge provisions permitted the landlord to make double recovery. It was no answer to say that the prohibition of double recovery in relation to some forms of grant in section 20A of the Landlord and Tenant Act 1985 pointed to a mutual understanding, under the lease, that double recovery was in principle permissible save where specifically prohibited. The statutory provision might equally, and more sensibly, be regarded as a form of “belt and braces” where a particular lease made no sufficient provision for the avoidance of double recovery in relation to such grants. Therefore a way had to be found to interpret the lease so as to prevent all such forms of double recovery, upon the simple basis that the lease would otherwise lack common sense, as between long leaseholder and landlord. Accordingly the Upper Tribunal had been right to treat the avoidance of double recovery as a necessary objective in seeking to construe the lease (paras 42, 45–46, 60, 66).
(2) There was very real force in the landlord’s objection that a cost was “incurred” for the purposes of the lease once there was a liability to pay it on the part of the landlord, regardless of how that liability was defrayed or recouped. Accordingly the Upper Tribunal had been wrong to seek to avoid double recovery by invoking a special rather than natural meaning of the word “incurred” in the lease. The preferred option (Lewison LJ dissenting) was to treat the avoidance of double recovery as a matter to be taken into account when determining a “fair proportion” of the landlord’s incurred costs, expenses and outgoings to be paid by the tenant under the terms of the lease (paras 48–49, 51, 65–66).
(3) The provision of the lease which provided that the landlord’s officer was to determine the “fair proportion” of the costs, expenses and outgoings to be paid by the tenant was rendered void by section 27A(6) of the 1985 Act, which provided that an agreement by a tenant was void in so far as it purported to provide for a determination in a particular manner of any question which might be the subject of an application under section 27A(1). A distinction was to be drawn between a situation where the determination was to be carried out in a prescribed manner (for example, by a person with discretion as to the result), which fell foul of section 27A(6), and a situation where a particular determination was the only possible consequence of the application of an agreed formula, which did not, because the precise amount to be paid had been determined by the parties’ agreement in accordance with section 27A(4)(a). The Upper Tribunal had not, at least in form, carried out its own assessment of what was a fair proportion. It followed that the present court had to determine the fair proportion of the landlord’s costs incurred to be levied as a service charge upon the tenant without having first to conclude that the determination of the landlord’s officer was unfair or unreasonable. That would require giving credit for the relevant parts of the CESP funding received in relation to, and only by reason of, the works carried out in respect of the tenant’s property. On the facts, however, this analysis produced no different monetary outcome from that which the parties had obtained from the Upper Tribunal (paras 53–56, 59, 64, 66).
Christopher Baker (instructed by Solicitor, Sheffield City Council Legal Department, Sheffield) for the landlord.
James Fieldsend and Amanda Gourlay (instructed directly through the Bar Pro Bono Unit) for the tenant.