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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Morshead Mansions Ltd v Mactra Properties Ltd [2013] EWHC 224 (Ch) (15 February 2013) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2013/224.html Cite as: [2013] EWHC 224 (Ch) |
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
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MORSHEAD MANSIONS LIMITED |
Appellant |
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- and - |
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MACTRA PROPERTIES LIMITED |
Respondent |
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Edwin Johnson QC (instructed by Mishcon de Reya) for the Respondent
Hearing date: 28th November 2012
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Crown Copyright ©
Mr Justice Warren :
Relevant provisions of the Lease
i) Paragraph 1(a) defines the "Accounting Year" as the calendar year save where the landlord otherwise determines (which it has not).
ii) Paragraph 1(b):
"the Expenses" means in respect of each Accounting Year the cost to the Landlord of the items set out in the 5th schedule and shall be deemed to include not only those expenses and outgoings which have actually been paid or incurred by the Landlord during the year in question but also such reasonable proportion of the expenses and outgoings of a periodically recurring nature (whether recurring regularly or irregularly) whenever paid or incurred (whether prior to thecommencement of the lease period or otherwise) including a sum or sums by way of reasonable provision for anticipated expenditure as the Landlord or his accountants or managing agents (as the case may be) may in their discretion allocate to the year in question as being fair and reasonable in the circumstances."
iii) Paragraph 1(c):
"the Service Charge" means .96154% of the Expenses"
iv) Paragraph 2 is headed "Calculation of expenses":
"The amount of the expenses shall be determined by reference to the Accounting Year"
v) Paragraph 3 provides that the landlord may require the tenant to pay, quarterly, reasonable interim payments on account of the Service Charge.
vi) Paragraph 4 (the interpretation of which is in issue):
"As soon as practicable after the end of each Accounting Year the Landlord shall furnish to the Tenant an account of the Expenses and the Service Charge payable for that Accounting Year such account to be certified by the Landlord's auditors and to contain a summary of the expenses incurred during the Accounting Year to which it relates and the relevant details and figures forming the basis of the Service Charge."
vii) Paragraph 5 which deals with the making of a balancing payment consequential on the production of the account:
"If the amount of the Service Charge is found to be less than the sum of the Interim payments made by the tenant in respect of the Accounting Year the excess shall be refunded by the Landlord to the Tenant or at the option of the Landlord credited against the next Interim Payment due and if the amount of the Service Charge is found to be greater than the sum of the interim Payments made by the Tenant in respect of the Accounting Year the Tenant shall pay the balance due in respect of that Accounting Year within 14 days following notification of the account of the Expenses and Service Charge to the Tenant."
"the cost of preparing and supplying the account of the Expenses and Service Charge including the charges and expenses of a qualified accountant employed to prepare audit and provide copies of the same"
i) Paragraph 1: MML is to "maintain a reserve fund to accumulate in advance the expected cost of " and there follow three specified items, namely "(a) major repairs to the roof and foundations (b) exterior decoration and (c) decorating and furnishing the common parts". These works are defined as "reserve fund works". The reserve fund is also to cover the expected costs "generally in connection with the matters mentioned in paragraph 1 of the 5th Schedule".
ii) Under paragraph 2, MML is to hold the reserve fund in trust for those for the time being liable to pay the cost of reserve fund works.
iii) Paragraph 3:
"The Landlord estimates the contribution needed by the reserve fund each year and that sum is a service cost when calculating the service charge"
iv) Paragraph 4: If part of the Property is not let on terms obliging the lessee to contribute, MML has to contribute to the reserve fund "the balance". This can only be the amount which a lessee would have had to pay if that part of the Property had been let on terms obliging him to pay his appropriate portion of the total cost.
v) Paragraph 5:
"The cost of any reserve fund works must be paid from the reserve fund, and only if and to the extent that the fund is insufficient is it to be charged as a service cost"
vi) Paragraph 6:
"The reserve fund is to be deposited at interest and all interest earned shall be credited to the fund"
vii) Paragraph 7:
"Every service charge statement is to include a statement of the balance of the reserve fund and of the income and expenditure since the previous statement"
Background
The proceedings
"[MML] has failed to provide [MPL] with a certified account of the Expenses and Service Charge for the years 2003, 2004, 2005, 2006 and 2007."
i) The Manager's methods of record keeping were "unheard of in today's accounting procedures".
ii) Accounting for the service charge reserve fund was vital and was not possible from the Manager's records.
iii) The Manager had a lack of understanding of the accruals concept and a lack of understanding of the need for documents in support.
i) They obtained the Account of the Expenses paid or incurred by MML in the provision of the services listed in the 5th Schedule (ie the services in relation to which MML is entitled to levy the Service Charge) and checked whether the figures in the account were extracted correctly from the accounting records maintained by or on behalf of MML; and
ii) They checked, based on a sample whether entries in the account were supported by receipts, other documentation or evidence which they had inspected, and by explanations. They drew attention to the fact that they had not carried out an audit or a review in accordance with specified International Standards.
Construction
The 6th Schedule
The 4th Schedule
The parties' submissions
i) MML may anticipate future expenditure, and make reasonable provision for that expenditure in one Accounting Year, so that the amount representing the reasonable provision becomes part of the Expenses for that Accounting Year.
ii) It is likely, if not inevitable that this amount, to the extent that it relates to reserve fund works, will go into the reserve fund, to provide the funding for the actual expenditure when it arises.
iii) When the actual expenditure arises it will fall to be met out of the reserve fund, as required by paragraph 5 of the 6th Schedule.
iv) If however the reserve fund is insufficient, MML is entitled, pursuant to the shortfall provision in paragraph 5 of the 6th Schedule, to charge the actual expenditure to the lessees as part of the Expenses for the relevant Accounting Year.
i) The definition of the Expenses in Schedule 4 paragraph 1(b) includes "such reasonable proportion of the expenses and outgoings of a periodically recurring nature … whenever paid or incurred ...". He maintains that this is the reserve fund referred to in the 6th Schedule. I agree but only up to a point. I have already noted the marked overlap between "anticipated expenditure" and the contribution to the reserve fund. But for the reasons given, there is not necessarily a precise match between the two. Thus the reserve fund could include items which are not of a periodically recurring nature and, in theory, there may be items of a periodically recurring nature which do not fall within paragraph 1 of the 6th Schedule. It may be necessary to carry provision made for such items to a special fund, but that will not be the reserve fund contemplated by the 6th Schedule which is concerned only with provision for the reserve fund works.
ii) Schedule 6 in turn refers back to Schedule 4: paragraph 3 of Schedule 6 confirms that the contribution required to the reserve fund each year "is a service cost when calculating the service charge". In other words the contribution to the reserve fund is a part of the service charge calculation: it is an Expense. I agree. But I do not consider that that feature leads to the Full Accounts approach to construction.
iii) To further underline the interaction between the 4th Schedules and the 6th Schedule, paragraph 5 of the 6th Schedule excludes the "cost of any reserve fund works" from the service charges calculations. Again, I agree up to a point. That is the effect of paragraph 5 although that is not how it is expressed. But it is only correct to the extent that the reserve fund is sufficient to meet the costs of the reserve fund works. Any excess is recoverable from the lessee as part of the Service Charge.
iv) Mr Seitler submits, on the basis of the preceding paragraph, that the service charge accounts must therefore show the Expenses, and the excluded reserve fund works. I disagree. A cost which is paid for out of the reserve fund does not form an Expense in the year when the cost is paid or incurred. It will already have featured as an expense in an earlier year when the contribution to the reserve fund was made, at least to the extent that the reserve fund is sufficient to meet the cost.
"Although a report of factual findings does not express the assurance that would follow from an audit or a review made in accordance with applicable International Standards, the statement gives comfort that the items listed in the report have been checked by a qualified accountant independent of the landlord/managing agent."
Defence on the facts
i) Time-consuming serial litigation with MPL.
ii) Litigation with other tenants.
iii) MPL's allegedly obstructive behaviour.
iv) The illness of Mr David Wismayer.
Discussion
i) The first is that MML was able to produce the 2009 Schedule at a time before the issue of construction had been determined (or indeed, so far as I am aware, even raised, but nothing turns on that).
ii) The second, related, point is that MML has been able, following the Judge's order, to produce accounts for the years 2003 to 2007 each of which is (a) stated to be an account pursuant to paragraph 4 of the 4th Schedule and (b) contains a certificate, albeit qualified as I have explained, which is, in my judgement, sufficient to comply with paragraph 4. Whatever difficulties MML might have experienced in relation to the actual figures, the nature of the expenditure in each case is similar, although, as I have noted, the accounts for 2003 and 2007 show contributions to the reserve fund, there being no contributions in the other years.
iii) The third point is that the accounts just mentioned under the second point make no reference to any expenditure which is payable out of the reserve fund under paragraph 5 of the 6th Schedule but do include as an item of expenditure for 2003 and 2007 contributions to the reserve fund, thus making the point that the reserve fund was adequate to meet such expenditure as there was.
Conclusions