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||Neutral Citation Number:  EWHC 3451 (Ch)
||Case No: CF057/2012A
IN THE HIGH COURT OF JUSTICE
CARDIFF DISTRICT REGISTRY
ON APPEAL FROM CARDIFF COUNTY COURT
(HH JUDGE JARMAN QC)
||Cardiff Civil Justice Centre
2 Park Street,
Cardiff, CF10 1ET
B e f o r e :
MR JUSTICE MORGAN
|| PADDY ARNOLD
||- and -
RODNEY BRITTON & OTHERS
Michael Daiches (instructed by Morgan La Roche) for the Appellant
Mark Loveday (instructed by Fursdon Knapper) for the Respondents
Hearing date: 9th November 2012
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Morgan:
- This is an appeal by the Claimant against the declarations made by HH Judge Jarman QC, sitting in the Cardiff County Court, on 1st June 2012. The Claimant is the lessor of the Oxwich Leisure Park, Oxwich, Gower, Swansea and the Defendants are the various lessees, under 25 long leases, of chalets on that park. There are, currently, some 91 chalets constructed on the park.
- The dispute concerns the true interpretation of 5 versions of a clause which has been described as a service charge clause. The judge held that all 5 versions produced the same result and he construed all of the versions of the clause in favour of the Defendant lessees. The lessor has appealed with permission granted by the judge.
- On this appeal, Mr Daiches appeared for the lessor and Mr Loveday appeared for the lessees.
- The evidence before the judge was of a formal character and there were no disputes of fact. The case turns on the true construction of the 5 versions of the relevant clause. I will therefore set out the 5 versions and refer to any other provisions of the leases which might be material.
- Version 1 of the clause was originally contained in a lease dated 9th August 1977. That lease related to chalet 40. I was told that version 1 had also originally appeared in the leases of chalets 36, 39 and 69 and that the four leases which contained version 1 were granted between 9th August 1977 and July 1980. In due course, version 1 in these 4 leases was replaced by version 5, by deeds of variation dated 20th August 2000.
- The lease dated 9th August 1977 recited that the lessors were the owners in fee simple of an area of land edged pink on a plan attached to the lease and defined as "the Estate". That plan showed the extent of the Estate and the extent to which, at the date of the lease, the Estate had been developed by the construction of chalets on parts of the Estate. The lease also recited that it was intended to erect chalets on the Estate and to grant leases upon terms similar in all respects to the lease of 9th August 1977.
- By the lease dated 9th August 1977, chalet 40 and car parking space 40A and some adjoining land was demised for a term of 99 years from 25th December 1974. The lease was expressed to be granted in consideration of the expense to be incurred by the lessee in erecting a chalet on the demised premises. The lease granted to the lessee certain ancillary rights including the right to pass and repass over roads and footpaths on the Estate, the right to use sewers and pipes and ducts and the like and the right to use a recreation area shown on an attached plan, subject to such regulations as might be made by the lessors.
- The lease dated 9th August 1977 reserved a rent of £10 per annum increasing thereafter by £5 for every subsequent 21 year period or part thereof.
- Clause 3 of this lease contained the lessee's covenants. The lessee covenanted with the lessors and with the owners and lessees from time to time during the currency of the term of the other plots on the estate so far as the obligations in clause 3 were capable of benefiting them.
- The relevant clause which I have called version 1 was clause 3(2) which was a covenant by the lessee in the following terms:
"To pay to the Lessors without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent Three year period or part thereof."
- By clause 3(3) of this lease, the lessee covenanted to complete the construction of a chalet on the demised premises. The lessee covenanted to repair and paint and insure the demised premises. By clause 3(12), the lessee covenanted to use the demised premises as a whole for a holiday residence of a single family only, during a specified part of the year only; there was provision for the possibility of the specified part of the year changing during the term.
- The lessors' covenants were set out in clause 4 of this lease. In summary, the lessors covenanted: (i) to construct and maintain roads and footpaths; (ii) to mow the grass and prune the trees; (iii) to keep the recreation ground in a reasonable state of repair and maintenance; (iv) to keep fences, sewers and pipes and wires and the like in good and tenantable repair; (v) to issue regulations dealing with various matters; (vi) to arrange for refuse collection; and (vii) to patrol the Estate twice by day and once at night to discourage various anti-social activities. The lessors also covenanted that the leases granted of all other plots on the estate should contain covenants on the part of the lessees to observe the like obligations as were contained in that lease.
- Clause 5(1) of this lease was a forfeiture clause which referred to rent and other payments reserved by the lease and also referred to the covenants in the lease not being observed and performed.
- Version 2 was contained in a lease dated 22nd September 1980 relating to chalet 76 and car parking space 76A. This lease was granted in consideration of the lessee paying a premium of £13,000. Apart from a difference in the wording of clause 3(2), the provisions of this lease were the same as the provisions of the lease dated 9th August 1977. I was told that version 2 of the clause also appeared in the leases of chalets 55, 56, 57, 58, 61, 62, 63, 64, 65, 66, 67, 68, and 72 and that the leases which contained version 2 were granted between August 1980 and February 1983.
- Version 2 of clause 3(2) was a covenant by the lessee in the following terms:
"To pay to the Lessors without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance and renewal of the facilities of the Estate and the provisions of services hereinafter set out the yearly sum of Ninety pounds and Value Added tax (if any) for the first year of the term hereby granted increasing thereafter by ten pounds per hundred for every subsequent year or part thereof."
- Version 3 was contained in a lease dated 1st July 1985 relating to chalet 96 and car parking space 96. This lease was granted in consideration of the lessee paying a premium of £16,500. Apart from a difference in the wording of clause 3(2), the provisions of this lease were the same as the provisions of the lease dated 9th August 1977. I was told that version 3 of the clause also appeared in the leases of chalets 88 and 95 and that the leases which contained version 3 were granted between July 1985 and January 1988.
- Version 3 of clause 3(2) was a covenant by the lessee in the following terms:
"To pay to the Lessor without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added tax (if any) for the first Year of the term hereby granted increasing thereafter by Ten Pounds per hundred for every subsequent year thereof."
- Version 4 was contained in a lease dated 22nd March 1991 relating to chalet 29 and car parking space 29. This lease was granted in consideration of the lessee paying a premium of £16,000. Apart from a difference in the wording of clause 3(2), the provisions of this lease were the same as the provisions of the lease dated 9th August 1977. I was told that version 4 of the clause also appeared in the leases of chalets 30, 81 and 86 and that the leases which contained version 4 were granted between December 1988 and March 1991.
- Version 4 of clause 3(2) was a covenant by the lessee in the following terms:
"To pay to the Lessor without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out for the yearly sum of Ninety Pounds and value Added tax [if any] for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year thereof."
- Version 4 was subject to a proviso which was for the personal benefit of the original lessees under each of the 4 leases which contained version 4. The proviso was in the following terms:
"PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED that whilst the term hereby created is vested in the said William Richard Short and the said Janice Short or the survivor of them then maintenance shall be calculated as follows:- To pay to the Lessor without any deduction in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added tax (if any) for the first Three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent Three-year period or part thereof."
- In each case, the terms of the leases containing version 4 have been assigned so that the proviso has ceased to be applicable.
- Version 5 was contained in a Deed of Variation dated 20th August 2000 which varied the lease dated 9th August 1977, which contained version 1 of clause 3(2). I was told that there were similar deeds of variation in relation to the other leases which originally contained version 1 of the clause. The deed of variation revised the extent of the land demised by the lease and the lessee surrendered to the lessor a part of the premises originally demised. The deed of variation also substituted a new clause 3(2) for the original clause 3(2) but otherwise the terms of the lease remained unaltered.
- Version 5 of clause 3(2), the version substituted by the deed of variation, was a covenant by the lessee in the following terms:
"To pay to the Lessors without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance and renewal of the facilities of the Estate and the provisions of services hereinafter set out the yearly sum of £90.00 and Value Added Tax (if any) for the first year of the term hereby granted commencing on 25th December 1974 increasing thereafter by ten pounds per hundred for every subsequent year or part thereof."
- The claim was brought in the Cardiff County Court pursuant to CPR Part 8. Attached to the Claim Form was a copy of the freehold registered title to the Estate (now known as the Oxwich Leisure Park) and the specimen leases (or deed of variation) which contained the five versions of clause 3(2). The Defendants served a short pleading by way of response to the claim. There was no evidence before the judge.
- Accordingly, the parties did not attempt to rely on much by way of background to the documents which were entered into and which fell to be construed. However, the court was told various things in the course of submissions and there does not appear to be any objection to those matters being taken into account.
- I was told that the Oxwich Leisure Park currently comprises 91 chalets which are all let on long leases. The present proceedings concern 25 of those leases. In each of these 25 leases, whether pursuant to the original terms of the leases or pursuant to deeds of variation, clause 3(2) refers to an increase of 10% for every year of the term. I was told that the other 66 leases had clauses similar to clause 3(2), save that the clauses referred to an increase of 10% for every three years of the term.
- There was no evidence as to how the initial figure of £90 was calculated.
- The lessor provided the court, without objection from the lessees, with information from the Office of National Statistics as to the retail price index (RPI) in the period 1948 to 2012. I will refer to some of the annual rates of inflation, as shown by the RPI figures for some years, in particular for the years in which the leases to which I have earlier referred were granted. In 1974 (the terms commenced on 25th December 1974) the annual rate of change in RPI was 16.0%. In 1975, 1976 and 1977, the annual rates of change were 24.2%, 16.5% and 15.8%, respectively. In 1980, 1985, 1991 and 2000, the annual rates of change were 18.0%, 6.1%, 5.9% and 3.0%, respectively.
- For the sake of completeness, I will refer to the statutory position, from time to time, as to controls on variable service charges in leases of flats and houses. Those controls were contained in section 90 of the Housing Finance Act 1972, section 124 of the Housing Act 1974, section 136 of and schedule 19 to the Housing Act 1980 and then sections 18-30 of the Landlord and Tenant Act 1985, as later amended by the Landlord and Tenant Act 1987, the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002. Until the amendments made by the Landlord and Tenant Act 1987, all of these statutory controls only applied to leases of flats. It could not be said that the chalets in this case were "flats". The 1987 Act extended the controls to "dwellings" which were defined by section 38 of the Landlord and Tenant Act 1985. This definition extends to both houses and flats. There has been some dispute in the past as to whether the definition of dwelling extended to "holiday homes". At one point, the Lands Tribunal held that it did not: see King v Udlaw  L&TR 28. Later, a Deputy Judge in the Queen's Bench Division held the opposite, expressly disagreeing with the earlier decision of the Lands Tribunal: see Phillips v Francis  L&TR 28. Accordingly, it is not wholly clear what a reasonable party to a lease entered into after the coming into force of the amendment made by the Landlord and Tenant Act 1987, and before these decisions, would have thought about the statutory controls on service charges pursuant to leases, if he had thought about them at all.
- The other material point as to the statutory controls is that they apply to a "service charge", which is currently defined in section 18(1) of the Landlord and Tenant Act 1985, in these terms:
" "service charge" means an amount payable by the tenant of a dwelling as part of or in addition to the rent –
a) which is payable, directly or indirectly, for services, repairs, maintenance, or improvements or insurance or the landlord's costs of management, and
b) the whole or part of which varies or may vary according to the relevant costs."
- The relevant costs are defined by section 18(2) by reference to the costs incurred, or to be incurred, in connection with the matters for which the service charge is payable. It is not disputed that if the relevant clauses are to be construed in the way contended for by the lessees they provide for a service charge as so defined. The lessor accepts the decision in Phillips v Francis  L&TR 28 as to the meaning of "dwelling". Conversely, if the relevant clauses provide for the payment of a fixed sum of £90 increased by 10% per annum then they do not provide for a service charge as so defined.
- I was not given any information as to the history of the dispute between the parties which led to the present proceedings. It seems to me to be a fair inference that for many years the lessor charged the lessees in accordance with the lessor's interpretation of the service charge provisions and that the lessees paid the sums charged. It might have been relevant for there to have been specific evidence in relation to that matter. For example, if there had been specific evidence that the lessees who had leases containing version 1 of the clause had been paying in accordance with the lessor's interpretation of version 1 and had then entered into the deeds of variation containing version 5, that evidence might have been highly material background information.
- Plainly at some time before the present proceedings started, the parties disagreed about the meaning and effect of the service charge provisions. The lessor brought these proceedings for declaratory relief and the lessees have opposed that claim. The lessor claimed a declaration that each version of clause 3(2) obliges the lessee to pay a fixed sum of £90 in the first year of the term and thereafter a fixed sum which rises at the rate of 10% per annum and a further declaration that the sum payable pursuant to each version of clause 3(2) was not a "service charge" within the meaning of section 18 of the Landlord and Tenant Act 1985 (because it provided for a fixed charge and not a charge which varied with the cost of relevant services). The lessees' response to the claim stated that the lessees' position was that each version of clause 3(2) provided for a variable service charge with a cap of £90 in the first year of the term and thereafter a cap which rose at the rate of 10% per annum.
- There was agreement between the parties on two matters. The first matter which was agreed was that the reference to "the first year of the term", in each version of clause 3(2) which used that phrase, was to the year commencing 25th December 1974. The second matter was that the parties agreed that the 10% increase for each year was on a compound basis.
The judgment under appeal
- HH Judge Jarman QC ruled in favour of the lessees. In his judgment, he set out essentially the same material as I have referred to above. He referred to the RPI figures. He also referred to calculations which had been carried out on behalf of the lessees. These showed the mathematical result of the lessor's interpretation. In particular, on these calculations, the sum said to be due for the year from 25th December 2011 to 24th December 2012 (the current year) is £3,060.36. Further, the sum due for the last year of the 99 year term, 2072 to 2073, would be £1,025,004.22.
- The judge then summarised in detail the arguments for the parties. He referred to the fact that he had not permitted counsel for the lessees to obtain from the lessor, or to put before the court, material which would show "the accounts of the business" of the lessor. No doubt, the lessees wished to try to demonstrate that, at the current rate of charge, on the lessor's interpretation, the lessor was making a profit in relation to the services she provided under clause 4 of the leases. The judge recorded that counsel who then appeared on behalf of the lessor accepted that at the commencement of the leases it would have been in the contemplation of the parties that in any given year the lessor "may" make a profit. The judge also appeared to have been ready to accept the submission of counsel for the lessees that the services to be provided under clause 4 were "fairly limited". The judge also accepted a submission that there was a principle that a court should lean against a construction whereby a service charge clause would allow a landlord to make a profit out of the provision of services. Finally, the judge considered the question of business common sense and the submission that the purpose of the clauses was to allow a landlord to recover his costs and not to make a profit.
- The judge then reached his conclusion as to the meaning of the clauses. He treated all the versions of the clause in the same way. He said that he did not find it an easy task. He identified the lessees' submission as being that the words "limited to" should be implied into the clause. He then concluded that he preferred the lessees' submissions to those of the lessor. He felt that the purpose of the clause was to allow the lessor to recover her costs and not to make a profit, in particular, not a profit at the very high level shown by the mathematical calculations to which I have referred. Finally, the judge referred to the arguments which he had heard as to the contra proferentem principle. He reached his conclusion without relying on that principle but he indicated that, if he had to consider that principle, he would have applied it in favour of the lessees.
- The order made by the court consisted of declarations that :
i) Upon a true construction of clause 3(2), the lessees are liable to pay a proportionate part of the expenses and outgoings incurred by the lessor in the repair maintenance renewal and provision of services set out in the leases;
ii) The above charge was limited to a yearly sum of £90 and VAT (if any) for the first year of the term and increasing by 10% for every subsequent year of the term; and
iii) The above charge was a "service charge" within the meaning of section 18(1) of the Landlord and Tenant Act 1985.
The law as to the construction of leases
- Both counsel took me to a number of recent authorities at the highest level dealing with the approach a court should adopt to the construction of a commercial instrument such as the leases in the present case. As it happens, most of the material to which I was referred, and more besides, was helpfully digested by Lord Neuberger of Abbotsbury MR in his judgment in Pink Floyd Music Ltd v EMI Records Ltd  EWCA Civ 1429 (part only of this judgment is reported at  1 WLR 770) and it is convenient to adopt his summary of the principles and his references to earlier authority. He said this:
"The approach to contractual interpretation
16 Each of the declarations granted below raises a question of interpretation of a provision in a commercial contract. The answer to such a question does not simply depend upon the words used in that provision: it is also dependent on the other provisions of the contract, on commercial common sense, and on the surrounding circumstances (or the matrix of facts) at the time the contract was made. Accordingly, when construing a provision in a commercial document, one should not carry out "a detailed semantic and syntactical analysis of the words used" — per Lord Diplock in The Antaios II  AC 185 , 201.
17 The ultimate aim of interpreting such a provision is to determine what the parties to the contract meant by it. And that involves ascertaining what a reasonable person would have understood the parties to the contract to have meant. In that connection, we were referred, in particular, to passages in the speeches of Lord Hoffmann in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd  AC 749, passim, Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, 912F-913G and in Chartbrook Ltd v Persimmon Homes Ltd  1 AC 1101, paras 21-26.
18 Those well known and important passages demonstrate that while one may proceed on the prima facie assumption that the words at issue mean what they naturally say, they cannot be interpreted in a vacuum. The words must be interpreted by reference to what a reasonable person (who is informed with business common sense, the knowledge of the parties, including of course of the other provisions of the contract, and the experience and expertise enjoyed by the parties, at the time of the contract) would have understood by the provision. So construed, the words of a provision may have a meaning which is not that which they may appear to have if read out of context, or the meaning which they may appear to have had at first sight. Indeed, it is clear that there will be circumstances where the words in question are attributed a meaning which they simply cannot have as a matter of ordinary linguistic analysis, because the notional reasonable person would be satisfied that something had gone wrong in the drafting.
19 In both Investors Compensation  1 WLR 896 and Chartbrook  1 AC 1101, Lord Hoffmann made it clear that there is a fundamental difference between interpretation and rectification: the difference arises from the fact that in a claim for rectification, the court can take into account, and in an appropriate case can give effect to, the negotiations between the parties, whereas it cannot do so on an issue of interpretation. This case is concerned with interpretation, so what was said in negotiations is irrelevant and thus inadmissible (thereby ruling out some of PFM's evidence).
20 Further, as Lord Hoffmann also made clear in Investors Compensation  1 WLR 896, there is a difference between cases of ambiguity, which may result in giving the words a meaning they can naturally bear, even if it is not their prima facie most natural meaning, and cases of mistake, which may result from concluding that the parties made a mistake and used the wrong words or syntax. However, he emphasised the court does "not readily accept that people have made mistakes in formal documents" — Chartbrook  1 AC 1101, para 23. He also pointed out in paragraph 20, that, as the court, and therefore the notional reasonable person, cannot take into account the antecedent negotiations, the fact that the natural meaning of the words appears to produce "a bad bargain" for one of the parties or an "unduly favourable" result for another, is not enough to justify the conclusion that something has gone wrong. One is normally looking for an outcome which is "arbitrary" or "irrational", before a mistake argument will run.
21 Accordingly, before the court can be satisfied that something has gone wrong, the court has to be satisfied both that there has been "a clear mistake" and that it is clear "what correction ought to be made" (per Lord Hoffmann in Chartbrook  1 AC 1101, paras 22-24, approving the analysis of Brightman LJ in East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61, as refined by Carnwath LJ in KPMG LLP v Network Rail Infrastructure Ltd  Bus LR 1336
22 To the same effect, Chadwick LJ said in City Alliance Ltd v Oxford Forecasting Services Ltd  1 All ER (Comm) 233, para 13 (in a passage cited with approval in Lediaev v Vallen  EWCA Civ 156, para 68) that the court cannot "introduce words that the parties have not used" into a contract unless "satisfied (i) that the words actually used produce a result which is so commercially nonsensical that the parties could not have intended it, and (ii) that they did intend some other commercial purpose which can be identified with confidence." "
- Since that decision, the correct approach to construction of commercial instruments has been considered again by the Supreme Court in Rainy Sky SA v Kookmin Bank  1 WLR 2900, where Lord Clarke of Stone-cum-Ebony JSC (with whom the other members of the court agreed) said the following:
"The correct approach to construction
14 For the most part, the correct approach to construction of the bonds, as in the case of any contract, was not in dispute. The principles have been discussed in many cases, notably of course, as Lord Neuberger of Abbotsbury MR said in Pink Floyd Music Ltd v EMI Records Ltd  EWCA Civ 1429, para 17, by Lord Hoffmann in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd  AC 749, passim, in Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, 912F-913G and in Chartbrook Ltd v Persimmon Homes Ltd (Chartbrook Ltd Part 20 defendants)  AC 1101, paras 21–26. I agree with Lord Neuberger (also at para 17) that those cases show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffmann made clear in the first of the principles he summarised in the Investors Compensation Scheme case  1 WLR 896, 912 h, the relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
21 The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.
23 Where the parties have used unambiguous language, the court must apply it. This can be seen from the decision of the Court of Appeal in Co-operative Wholesale Society Ltd v National Westminster Bank plc  1 EGLR 97. The court was considering the true construction of rent review clauses in a number of different cases. The underlying result which the landlords sought in each case was the same. The court regarded it as a most improbable commercial result. Where the result, though improbable, flowed from the unambiguous language of the clause, the landlords succeeded, whereas where it did not, they failed. The court held that ordinary principles of construction applied to rent review clauses and applied the principles in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios)  AC 191. After quoting the passage from the speech of Lord Diplock cited above, Hoffmann LJ said, at p 99:
"This robust declaration does not, however, mean that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement."
- Those general statements of the approach to be adopted apply to the present case. In addition, counsel for the lessees submitted that there was a principle that a service charge provision should not be construed (in the absence of clear words) so as to entitle the landlord to a profit over and above reimbursement of his costs incurred in providing the relevant services. Further, he submitted that there was a principle that service charge provisions should be construed restrictively. I need to examine both of those submissions.
- As to the suggested principle that a service charge provision should not be construed (in the absence of clear words) so as to entitle the landlord to a profit over and above reimbursement of his costs incurred in providing the relevant services, counsel relied on the statement to that effect in Woodfall on Landlord and Tenant, Vol. 1 para. 7.175. The textbook refers in this context to Jollybird v Fairzone  2 EGLR 55. I do not think that this decision lays down any general principle, to the effect suggested in the textbook. In that case, the Court of Appeal had a choice between rival constructions of a service charge provision in a commercial lease. The landlord's construction produced an absurdity. The tenant's construction meant that a phrase in the clause was not strictly necessary and merely stated something that would have been the position in any event. The court preferred the tenant's construction in order to avoid producing an absurdity. The court applied an entirely conventional approach to the question of construction before it. The landlord's construction would have given the landlord a profit over and above reimbursement of the relevant costs but that was not the reason given for rejecting the landlord's construction.
- The statement in Woodfall contains an element of truth where the clause which falls to be construed allows a landlord to recover a sum calculated by reference to the cost of services. In such a case, the word "cost" would not normally be construed to include anything by way of profit to the landlord in addition to reimbursement of the actual costs. Furthermore, a typical service charge clause does not provide for the landlord to make a profit in addition to the cost of services. Beyond that, where there is a dispute about a non-typical service charge provision, I doubt if the proposition in the textbook is of much help to a court asked to construe that provision. I do not see why a service charge clause in a lease should be subject to a special principle. If there were a special principle about charging for services, it should apply generally and not be confined to leases. 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. In other words, the court applies the general principles summarised about as to the construction of commercial instruments.
- Counsel for the lessees contrasted the service charge provisions in the leases with the provisions as to ground rent. He submitted that it would be surprising if the service charge provisions resulted in a substantial profit to the lessor when the ground rent provisions were much more modest in their effect. While it is right to have regard to all the provisions of a lease to see if they throw light on the provision being construed, I do not consider that the ground rent provisions do throw any light on the question before the court. It is conventional to reserve a small ground rent even where the lessee has paid a premium for the grant of the lease. Lessors like to have ground rents and lessees are prepared to pay them, provided they are modest. The ground rent provisions in the leases in this case in the end give no help as to the intended operation of the service charge provisions.
- As regards the suggested principle that service charge provisions are to be construed restrictively, I take a similar view to the view I expressed in relation to the suggested principle that service charge provisions are normally not to be construed so as to give a lessor a profit. I consider that I should apply the general principles which relate to the interpretation of commercial instruments. It is true that Rix LJ said in Mc Hale v Cadogan  1 EGLR 51 at  that:
"… it is the policy of the authorities not to bring within the general words of a service charge clause anything that does not clearly belong there. To put the matter another way, service charge provisions have been construed restrictively."
In that case, the Court of Appeal held that the ordinary meaning of the words used was in accordance with the submissions of the landlord and not with those of the tenant. The general remarks in that case no doubt mean that if a landlord wants to be entitled to charge for some particular work or service, it is reasonably to be expected that the landlord will specify that work or service in any list of recoverable matters and that general words will not be read in an extensive way to cover matters which could have been adequately specified.
- There was general agreement at the hearing that leases provide for a landlord to be remunerated in relation to the provision of services in different ways and that the various provisions have different advantages and disadvantages. The lease might provide for an inclusive rent; the rent is for the premises and for the benefit of the landlord's covenant to provide services. Such a provision means that the parties have certainty as to future costs and there need not be any machinery for prior consultation nor for collection of payment. A disadvantage may be that the fixed element of the rent might over-compensate or under-compensate the landlord for his costs in relation to the performance of his covenant. Another lease might provide for a fixed sum by way of service charge. Such a clause will have a similar balance of advantage and disadvantage as an inclusive rental. Another lease might provide for a fixed sum which is index linked by reference to an index which is considered to be an appropriate. Again, there will be ease of calculation of the sum which is payable but the indexation process might lead to over-compensation or under-compensation of the landlord. Another lease might provide for the landlord to be entitled to a variable service charge which means that a tenant will pay a fair share of the landlord's costs, but neither more nor less than those costs. Such a clause prevents over-compensation or under-compensation but involves more work (and room for dispute) as to the calculation of the sum payable and may introduce an element of unpredictability as to the level of future charges. Indeed, in the case of residential property, the variable service charge has been considered to give rise to various problems which have required the intervention of legislation for the protection of tenants.
- The cases illustrate and discuss different types of service charge clauses. In Hyams v Titan Properties Ltd (1972) 24 P&CR 359, the Court of Appeal explained why a variable service charge was fairer to both parties than a fixed service charge. In Cumshaw Ltd v Bowen  1 EGLR 30, the court had to construe a service charge provision which provided for the landlord to receive a fixed sum, subject to indexation in accordance with RPI. The question was whether the service charge provision had ceased to apply so that it could be replaced by a provision which allowed the landlord to recover a fair proportion of its costs. I note that it was the landlord who wished to move away from the indexed fixed sum. In Coventry CC v Cole  1 WLR 398, the provision allowed the landlord to recover a fixed sum to be increased in accordance with an index of building costs. In Edwards & Walkden (Norfolk) Ltd v City of London  EWHC 2527 (Ch), the court had to choose (pursuant to section 35 of the Landlord and Tenant Act 1954) between a provision allowing the landlord to recover a variable service charge (contended for by the landlord) or a sum assessed at the beginning of the lease and then subject to increase year on year by reference to the general rate of inflation.
- If the parties opt for a fixed sum subject to indexation, or subject to increase in some way to deal with future inflation, there are obviously a number of ways they might go about drafting such a clause. They could use RPI or they could use another index, more suitable for the type of costs likely to be incurred (such as an index of building costs). There are obvious dangers in providing for a fixed percentage by way of annual, or periodic, increase. In truth, it is not possible to predict the amount of inflation over a long period into the future. This point was well made by Lord Hope in Helmot v Simon  UKPC 5 where he referred to an Australian decision in these terms:
"In Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd  HCA 3, (1981) 145 CLR 625, 639 Gibbs J said that is was unreasonable to suppose that an economist will be able to predict with accuracy the nature and extent of changes in the purchasing power of money during a period extending for several decades ahead and that, while predictions as to the economic future in thirty years time might perhaps be made by a soothsayer, expert evidence could not rationally be given on such a subject."
- If the parties do adopt a fixed percentage increase to provide for future inflation, their choice may turn out to over-provide or under-provide for inflation. But if that is what they have done, then they are bound by the consequences. The landlord is not free to disregard the fixed percentage because it turns out to be inadequate. The tenant is not free to disregard the fixed percentage because it turns out to be too high. A court cannot alter the provision on the application of one party alone and it cannot be said that the contract is frustrated just because it turns out to be more onerous to one party than was originally foreseen: see Multiservice Bookbinding Ltd v Marden  Ch 84, in particular at 112 G.
- I have referred above to the five versions of clause 3(2). Version 1 has been replaced by Version 5 so that there are only four versions which are current and which affect the parties to this dispute. Nonetheless, it is convenient to construe each of the five versions to identify the result in each case. I will take the versions in date order.
- In version 1, the lessee covenants "to pay" something. The question is: what is the object of the verb "to pay". There are two candidates. The first possibility is expressed by the phrase: "a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance renewal and the provision of services hereinafter set out". If the clause had stopped there, the result would have been workable but not ideal. The clause would not provide how "a proportionate part" would be assessed nor by whom (if anyone other than a court in the event of a dispute) it would be assessed. The clause would not contain any indication of when the charge would be payable. Would the lessor be able to demand payment many times a year and at unpredictable intervals whenever the lessor had incurred enough expenses and outgoings to make it worth his while to recover payment from a lessee? Typical service charge provisions contain much more detailed machinery as to their operation. Of course, version 1 was entered into some time ago, in 1977, and the drafting of such clauses was a little less sophisticated then than it has later become. I accept that a court would strive to give meaning and effect to a basic clause which simply obliged the lessee to pay a proportionate part of the lessor's expenses and outgoings but I consider that the fact that this clause would be such a basic clause if it were construed to provide for that result is material when deciding what exactly is the effect of the clause.
- The other candidate as to the object of the verb "to pay" is contained in the phrase: "the yearly sum of Ninety Pounds etc ". If that were held to be the object of the verb "to pay", then the operation of that part of the clause would be clear.
- Whichever candidate as the object of the verb "to pay" is chosen, there is an obvious problem. How do the candidates operate in tandem with each other? If one held that the clause requires the lessee to pay £90 etc, then it is not difficult to read the clause so that it provides that the lessee is to pay a proportionate part of the expenses and outgoings [namely] £90 etc. The effect of the word "namely" could be understood even if the word itself had not been expressed. Another way to read the two phrases together would be to hold that the lessee is to pay the sum of £90 etc "as" a proportionate part of the expenses and outgoings.
- Conversely, if the clause obliges the lessee to pay a proportionate part of the expenses and outgoings, presumably pursuant to a demand which might require verification and could be challenged, what is the purpose of the reference to £90 etc? There could conceivably be three positions. One is that the proportionate part must be at least £90 etc. The second is that the proportionate part should be equal to £90 etc. The third is that the proportionate part should be limited to £90 etc. The second of these is of course the same as saying the real object of the verb "to pay" is the £90 etc. As between the first and third positions, there is really nothing as a matter of language to choose between them. It is not easy to get out of the language used the concept that the reference to £90 is to be either a floor or a ceiling. Further, there is nothing in the background circumstances to explain why the lessor would have been prepared to have a cap on the recovery of its costs. Conversely, there is nothing in the background circumstances to explain why the lessee would be prepared to pay a minimum figure.
- I consider that as a matter of language, the more natural reading of the clause is that the object of the verb "to pay" is the £90 etc. What then is the purpose of the not insubstantial phrase referring to a proportionate part of expenses and outgoings? It is not difficult to answer that question by saying that its purpose is to identify the character of the payment. The words are describing this sum of money, in the context of a lease which imposes an obligation on the lessor to provide specified services, as being due from the lessee for those services. It is probably going too far to say that the phrase is an unnecessary one as I consider that the phrase performs a useful function in identifying the character of the payment. It was suggested by counsel for the lessor that it was useful to spell out that the payment was not a payment of rent but a payment of money under a covenant. It was said that the description was useful when one was considering the lessor's right to forfeit for non-payment of rent or the right to distrain for unpaid rent. I accept that there is some force in this submission. But even if the phrase were held to be unnecessary, that does not inevitably produce the result that the meaning which I have identified for it is wrong. It is not uncommon for commercial documents to use words which are unnecessary and which do not alter the meaning which the document would have had if those words had been omitted.
- I consider that, as a matter of language, the words used in version 1 strongly point to the meaning that the lessee is to pay £90 etc by way of charge for the lessor's services.
- As the judge held, it is not appropriate to reach a conclusion as to the meaning of the clause without regard to the background and considerations as to the commercial purpose of the clause. In the event, there was really no background relied upon by either party to assist, apart from the historic levels of inflation shown by the RPI figures. There was some discussion as to whether the court was entitled to have regard to all the other earlier leases on the estate when considering the meaning of any particular lease. This point does not arise in relation to version 1 which is in the earliest form of the leases but the point could potentially arise in relation to later leases and it is convenient to discuss it at this point. It was submitted that the court could have regard to any earlier leases. It was pointed out that each lease states that the lessor intended to enter into the same form of lease for every chalet. However, that point might work in the other direction. If all the leases were intended to be the same, it might be said it would not help to see other leases in the same terms. In any case, I do not think on the facts of this present case that I get any help when construing one version of the relevant clause from considering another version of the relevant clause.
- As to commercial purpose, a clause which allows a lessor to recover an initial fixed sum adjusted for inflation serves an obvious commercial purpose. The criticism which can fairly be levelled against the lessor's interpretation of version 1 is that, as Lord Hope said in Helmot v Simon, it is just not possible to predict future levels of inflation, particularly over a long term, and 99 years is certainly a long term. However, in the period from 1977 to 1980 when version 1 was entered into, the parties are to be taken to have known of the levels of inflation prior to the grant of the leases. Version 1 provided for a 10% increase every 3 years. If one judged the matter at the date of those leases, that fixed percentage would appear to be very favourable to a lessee. Accordingly, I do not think that it can be said, certainly not said from the standpoint of the lessee, that a construction of version 1 whereby the lessee is obliged to pay £90 etc, lacked a commercial purpose or did not make sense or was absurd or irrational or contained an obvious error. Accordingly, I conclude that version 1 is to be construed in the way contended for by the lessor.
- The position in relation to version 2 is more straightforward. Again the question is: what is the object of the verb "to pay"? This time, there is only one candidate. The object must be the £90 etc. The object cannot easily be said to be the phrase: "as a proportionate part of the expenses and outgoings" because of the presence of the word "as". The question then is, as with version 1, does that reading of the clause produce a result which lacks a commercial purpose or does not make sense or is absurd or irrational or contains an obvious error. The answer to that question is not necessarily identical to the answer given in relation to version 1. With version 1, the sum was to be increased by 10% every 3 years. With version 2, the sum is to be increased by 10% every year. That is a more onerous provision from the point of view of the lessee. Moreover, version 2 is contained in leases in the period 1980 to 1983 where the historic inflation figures were different from those in the period 1977 to 1980, although they were still high. The figure for 1980 was 18.0% and for 1981 was 11.9%. Overall, I do not consider that it can be said that the foreseeable commercial consequences of choosing a rate of 10% per annum was absurd, or similar, or was pursuant to an obvious error. In addition, if I felt that the foreseeable commercial consequences for the lessee were such that I should resist the lessor's interpretation, it would not make much sense to adopt the rival construction that the parties intended the £90 etc to be a cap on the lessor's recovery of its costs. It is not obvious that the parties would have gone to the trouble of agreeing on a cap on recovery, and then used a formula which would produce a very high figure which would be likely to be wholly ineffective as a cap.
- The judge referred to the possibility of applying the maxim contra proferentem. The continued vitality of that maxim in modern times, and particularly in the context of the modern approach to the construction of documents, is controversial. The maxim is discussed in detail in Lewison on the Interpretation of Contracts, 5th ed., at para. 7-08. Whether the maxim technically applies or not, I have fully considered the point made by the lessees, and obviously given great weight by the judge, that in the last year of the 99 year terms, the sum payable (on the lessor's interpretation) appears extremely high. That fact has led me to look very critically at the wording of the clause to see if it is open to a meaning different from that contended for by the lessor and which would avoid what appears to be an extreme result. That approach may be somewhat similar to leaning against the lessor's interpretation. Notwithstanding that approach, I do not think that it is open to me, consistently with general principles as to the construction of commercial documents, to construe the clause in any other way. I do not consider that the wording is open to any other interpretation. In particular, I do not consider that I can arrive at the result contended for by the lessees consistently with the general principles as to construction which I am bound to apply. In that way, I conclude that version 2 is to be construed in the way contended for by the lessor in this case. In any case, the figure calculated for the 99th year of the term appears so high because that year is still a long way away and one is inclined to assume that inflation will not apply at 10% per annum for all of that time. That shows that the lessees made a bad bargain when they allowed for a 10% per annum inflation adjustment, but that is what they did. I conclude that version 2 is to be construed in the way contended for by the lessor.
- Version 3 is like version 1 in that the word "as" does not appear. All of the points that I have made about the right reaction to the language used in version 1 can be made again in relation to the language of version 3. Version 3 is like version 2 in that the increase of 10% is every year rather than every 3 years. Version 3 was in leases granted in the period 1985 to 1988. In or just before that period, inflation was running at levels between 3.4% and 6.1%. The points that can be made about the commercial purpose of the provision and the foreseeable consequences of the provision in relation to version 2 apply to version 3 but with less force in view of the levels of inflation shortly before the grant of the leases which include version 3. It seems to me that judged at the dates of those leases, it was beginning to look quite likely that the clause would turn out to be more onerous to the lessee than to the lessor. It was beginning to look quite likely that the clause would turn out to be a bad bargain for the lessee. However, I do not consider that that assessment means that the clause lacked a commercial purpose or was absurd or irrational or clearly mistaken. I do not consider that considerations as to the commercial consequences allow a court to give a meaning to the language as contended for by the lessee. The language easily evinces an intention that the clause should operate in the way contended for by the lessor and my conclusion is that is indeed the meaning that a court must give to the clause.
- Version 4 is different from the earlier versions in that it includes the word "for" before "the yearly sum of Ninety Pounds etc". I consider that the force of the word "for" is that it quantifies the proportionate part of the expenses and outgoings which the lessee is to pay. Thus, although the object of the verb "to pay" is the proportionate part of the expenses and outgoings, that liability is not to be calculated by examining the relevant expenses and assessing, somehow, a proportionate part of those expenses; rather, the proportionate part is quantified and determined by the formula which refers to the £90 etc. As to the commercial considerations that ought to have been in the minds of reasonable parties when the leases which included version 4 were entered into, ignoring the proviso to version 4 for the moment, the figures for inflation in the preceding years were a little higher for version 4 than for the leases which included version 3. Thus ignoring the proviso to version 4 for the moment, I consider that version 4 is to be construed as contended for by the lessor.
- As to the proviso to version 4, there are two relevant differences from the main part of version 4. First, the word "for" is omitted and secondly, the 10% increase is every 3 years and not every year. The inclusion of "for" in the main part of version 4 and its omission from the proviso powerfully suggests that the omission is a mistake. I consider it is highly improbable that reasonable people in the position of the parties would have intended that the proviso would operate in a different way in this respect from the main part of version 4. As to the commercial consequences of an increase of 10% every 3 years, I do not consider that it can be argued that those consequences could allow one to override what would otherwise by the sense of the language used or to alter the meaning of the almost identical language used in the main part of version 4 (where the 10% increase instead operates every year). Accordingly, having considered the proviso, I construe version 4 in the way contended for by the lessor.
- Version 5 is essentially the same as version 2 and I would reach the same conclusion in relation to version 5 as I did in relation to version 2. Of course, inflation in the years preceding 2000 was much lower than at earlier times. However, it is inescapable that the lessee was giving up, by entering into the deed of variation, the benefit of the 10% increase being calculated over 3 years and taking on the burden of the 10% increase having effect each year. In those circumstances, I do not think that an argument from the lessee that version 5 would be likely to operate onerously for the lessee can be given much weight. If it is right to say that a reasonable lessee ought to have appreciated in 2000 that version 5 was likely to turn out to be a bad bargain, then it was a bargain which the lessee appeared to be making with his eyes open. I would construe version 5 in the way contended for by the lessor.
The overall result
- I have now considered all of the points in dispute in relation to the five versions of the relevant clause. I noted earlier that there were two points which might have arisen in relation to the relevant clause but which were not argued. I will comment briefly on those two points.
- The first such point is that version 1 of the clause refers to the first three years of the term and versions 2 to 4 of the clause refer to the first year of the term. The parties agreed that these references were to the first three years, or one year, respectively, from 25th December 1974. I agree that that is the ordinary meaning of the language used. It seems a little odd in a lease granted many years after 1974 to specify a figure for the first year from 1974 and then to inflate it for all the years between 1974 and the date of grant of the lease. Nonetheless, I think that there is no real alternative to the construction adopted by both parties.
- The second point related to the parties' agreement that the 10% formula operated in a compound way and not as a simple increase of 10% of £90 (i.e. £9) for each year. I asked counsel for the parties whether either side wished to argue for a simple increase of 10% each year. Neither side submitted to me that this was the correct reading of the relevant provision. I agree that the ordinary meaning of the provision involves the compounding of yearly increases. If the parties had intended to provide for a fixed increase of £9 per year, that could have been simply stated. Further, the reference to £10 "per hundred" suggests that the figure of which 10% was to be taken was not the same figure each year.
- The result is that I construe each of the five versions in the same way and, in each case, in accordance with the construction contended for by the lessor.
- It follows that the relevant clause in each case does not provide for the payment of a service charge as defined in section 18(1) of the Landlord and Tenant Act 1985.
- I will therefore allow the appeal. I will ask counsel to agree a minute of order to give effect to this judgment.
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