Blackpool Borough Council and another v Morris

Landlord and tenant – Service charge – Management costs – Discretionary services – Appellant holding flat on long lease with provision for payment of service charge – Respondent landlords charging for management costs of providing services not required to be provided under lessor’s covenants in lease – Whether such costs recoverable under provision in lessee’s covenants empowering respondents to make regulations and to recover certain costs “notwithstanding the absence of any specific covenant… to incur them” – Whether that provision confined to services in respect of which regulations made – Appeal dismissed The respondents owned and managed almost 6,000 residential properties. Most were rented to secure tenants but 401 had been enfranchised under the right-to-buy legislation and were consequently let on long leases at low rents. The appellant held an enfranchised flat on such a lease in the respondents’ standard terms, which included provision for the payment of a service charge in respect of the respondents’ costs of performing the covenants set out in a schedule. Another schedule set out the lessee’s covenants; by para 14, it empowered the respondents to make regulations and provided that: “Any costs or expenses incurred by the Council preparing or supplying copies of such regulations or in doing works for the improvement of the Property providing services or employing gardeners porters or other employees shall be deemed to have been properly incurred by the Council in pursuance of its obligations… notwithstanding the absence of any specific covenant by the Council to incur them”. The service charges billed by the respondents included their management costs of providing “leaseholder services”, including a proportion of staff costs representing time worked by senior staff, business support assistants, the finance team, the human resources team, the information technology team, the anti-social behaviour team, the customer involvement team and the repairs hotline. In April 2011, the respondents invoiced the appellant for a service charge of £425, which included a management charge of £194.78. The appellant disputed the respondents’ entitlement to charge that sum. On an application by the appellant under section 27A of the Landlord and Tenant Act 1985, the leasehold valuation tribunal (LVT) held that the costs recoverable under para 14 were confined to matters in respect of which the respondents had made regulations; accordingly, they could not charge for any management costs incurred on “discretionary leasehold services”, provided at the respondents’ discretion rather pursuant to the terms of the lease, in the absence of any evidence that they had passed relevant regulations in relation to them. That decision was reversed by the Upper Tribunal on an appeal by the respondents: see [2013] UKUT 377 (LC). The appellant appealed. Held: The appeal was dismissed. On the proper construction of para 14, the costs or expenses incurred by the respondents were not dependent on the passing of “any reasonable regulation” in order to be recoverable. The second part of para 14 was not simply addressing work done by the respondents in connection with, or pursuant to, such regulations. To construe it as being confined in that way would fail to give effect to the word “or”, before the words “in doing works for the improvement of the Property providing services or employing gardeners porters or other employees” or to the way in which the items to which costs or expenses could apply were separated. Nor would it take into account the wide application of the second part of para 14 so far as it made reference to “providing services” and “employing gardeners porters or other employees”. The clear intention was that the leaseholder would be under an obligation to pay for the costs or expenses incurred by the respondents in providing such services, as though the respondents were carrying out their scheduled obligations, notwithstanding “the absence of any specific covenant by the Council to incur them”. The most likely reason for including the disputed provision in the schedule dealing with the lessee’s covenants was to confer on the respondents a power to provide services, and to charge for them, without imposing on them the corresponding obligation that would have arisen had the provision been contained in the schedule containing the lessor’s covenants. While such a provision could more elegantly have bene placed in a separate provision in the main body of the lease, coupled with appropriate wording preventing it from giving rise to any obligation to provide such services, its sense was nonetheless clear. Its meaning was that, despite the absence of any obligation on the respondents to provide the particular service in question, a discretionary service in fact provided to a lessee would be deemed to have been properly incurred in pursuance of the respondents’ obligations, and that the lessee would accordingly be obliged to pay any management costs involved in their provision. That was the meaning that the second part of para 14, read in the context of the other lease provisions, would objectively convey to a reasonable person with all the knowledge that would have been available to the parties at the time of contracting. The clear intention was that some services provided to lessees might not be the express subject of a covenant. As a matter of commercial reality, the evolving challenges faced by a landlord might well require some room for adaptation as to what services best met its lessees’ requirements. That was particularly so in the case of a local authority landlord owning the freehold of 401 properties. There was no room in the instant case to have recourse to the contra proferentem rule so as to construe para 14 narrowly against the respondents. The rule came into play only if the court found itself unable on the material before it to reach a sure conclusion on the construction of a reservation or other contractual term. The wording of the appellant’s lease was not so vague or ambiguous that the court was unable to reach a sure conclusion on the material before it, applying the established principles of contractual interpretation; accordingly, the rule never came into play: St Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No 2) [1975] 1 WLR 468; 1975] 2 EGLR 115 applied. That conclusion did not give free rein to the respondents to provide voluntary services as they saw fit and pass on the charges to lessees. The charge was subject to a requirement of reasonableness bot under the express terms of the lease and by sections 18 and 19 of the 1985 Act, by which the recovery of a service charge depended on the extent to which “relevant costs” have been “reasonably incurred”. Peter Knox QC (instructed by Fylde Law, of Blackpool) appeared for the appellant; Sebastian Clegg (instructed by the legal department of Blackpool Borough Council) appeared for the respondent. Sally Dobson, barrister Click here to read transcript: Blackpool v Morris