Although subject to an application for appeal, the recent Court of Appeal decision in 89 Holland Park (Management) Ltd v Dell provides both:
(i) comfort to tenants that the courts are likely to interpret service charge sweeper clauses restrictively; and
(ii) uncertainty for landlords regarding the enforceability of widely drafted service charge provisions in existing agreements.
Given that the Leasehold and Freehold Reform Bill, as currently drafted, proposes to limit the recovery of legal costs by landlords, this decision may give rise to increasing numbers of disputes in this area.
The main takeaway from this case is that the courts are likely to interpret service charge sweeper clauses restrictively. Also note these other important points that arise from this judgment:
- It is not clear where one should draw the line between types of litigation that may be covered by sweeper drafting. The Court of Appeal did not set out any new general rules, instead restating the position that each case will require a detailed assessment on its facts. The assessment of the Court of Appeal in this case was that the purpose of the expenditure by the Management Company was to prevent Ms Hicks’ proposed development. The expenditure was not to maintain/ensure the integrity or safety of the Building. It is not clear what factual matrix is required to enable a landlord to rely on concerns about the integrity or safety of a building but this distinction is now an important one for landlords and tenants to be mindful of.
- When Mr & Mrs Dell entered into their lease, the existence and nature of the adjacent land was known to the parties, as was the restrictive covenant and the fact that there had previously been litigation in respect of the same. Against this specific background, the absence of any specific drafting governing disputes and, more importantly legal costs, was important. Parties should be mindful of how a court will look for this type of context and seek to apply ‘commercial common sense’ and provide for drafting to deal with that even if the parties are simply utilising a standard form leasehold agreement.
89 Holland Park (the “Building”) is comprised of 5 flats in West London with the freehold held by 89 Holland Park (Management) Ltd (the “Management Company”). Mr and Mrs Dell hold a long lease in respect of Flat 5, 89 Holland Park.
The Building sits beside a parcel of land and benefits from a restrictive covenant precluding development of the land without prior consent of the freeholder of the Building. The parcel of land was acquired by architect, Sophie Hicks, with a view to build an ultra-modern underground home with a ‘glowing’ glass entrance at street level.
The Management Company, with initial support from the tenants of the Building, sought to enforce the restrictive covenant to prevent the development. Although the Management Company was successful in doing so, the financial cost of this victory was not insignificant. Unable to effect full recovery of these costs from Ms Hicks, the Management Company sought to recover the shortfall from the leasehold owners of the flats in the Building. The disputed service charges passed to Mr and Mrs Dell in connection with that litigation amounted to £430,411.
The service charge provisions in the Dells’ lease and, in particular clause 4.4, required the landlord, subject to payment of the Service Charge:
(g)(i)…to employ an Agent to manage the Building…
(ii) To employ all such surveyors builders architects engineers tradesmen solicitors accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building.
(l) Without prejudice to the foregoing to do or cause to be done all such works installations acts matters and things as in the reasonable discretion of the Lessor may be considered necessary or advisable for the proper maintenance safety amenity and administration of the Building.”
The definition of “Service Charge”, encompassed a percentage of the defined term “‘General Expenditure” which was defined as follows:
“‘General Expenditure’ means the total expenditure … incurred by the Lessor in any Accounting Period in carrying out her obligations under Clause 4(4) of this Lease and any other costs and expenses reasonably and properly incurred in connection with the Building including without prejudice to the generality of the foregoing…”
Dismissal of the Appeal
The Court of Appeal determined that the wording in clause 4.4 was “…general in nature, rather than ambiguous” and the question was therefore “…whether the expenditure in question falls within or outside [of the wording of the lease]”.
The Court of Appeal directly applied Arnold v Britton  - and explained that: “…the purpose of the clause and the lease and any relevant factual matrix, will be of particular importance in determining what the parties must be taken to have intended the words to cover. Commercial common sense will, at the least, provide a useful cross-check”.
The court concluded that the focus of clause 4.4 was the management and maintenance of the Building and to seek to recover the legal costs claimed would be to artificially stretch this drafting beyond that which was intended by the parties.
It is important to highlight the following aspects of the Court of Appeal’s judgment:
- The Court of Appel did not “…consider there to be any real merit…” in the attempt to rely on the definition of “General Expenditure” as the “…expenditure must relate to the building itself rather than anything else such as adjacent land.”. This interpretation is potentially significant for leasehold agreements which contain similar sweeper clauses as it sets a precedent that will likely be difficult to distinguish from.
- The lease expressly referred to litigation costs in certain other clauses. This suggested that, for clause 4.4 to incorporate such costs, they would need to be expressly referred to.
- Although the Court of Appeal accepted that certain specific litigation costs could be capable of being caught by clause 4.4 (potentially including claims connected to poor quality repair work), each such instance would need to be dealt with individually.