Cadogan & Anor v 27/29 Sloane Gardens Ltd & Anor

LORD JUSTICE LLOYD: This is the oral hearing by way of renewal of an application for permission to appeal on the part of the Earl Cadogan and Cadogan Estates Limited against a decision of His Honour Michael Rich QC sitting in the Lands Tribunal, given on 7th April 2006 on one of two issues which arose in determining the price to be paid by the nominee purchaser, 27/29 Sloane Gardens Limited, in respect of the freehold of six flats at the address indicated by the name of the first respondent, the nominee purchaser. The issue on this particular point arose between the appellants, who are in effect the freeholders, and not so much the first respondent whom I have mentioned but rather the second respondent, Wayil Mahdi, the intermediate lessor who holds under a headlease from the Cadogan Estate dated 15th February 1979.

The Lands Tribunal decision was itself an appeal from a decision of a Leasehold Valuation Tribunal so that in a sense this appeal is a second appeal. As I said when refusing permission on paper on 6th July, it is not a second appeal within the terms of section 55 of the Access to Justice Act 1999 because it is not from the County Court or the High Court, it is from a legally qualified expert tribunal, but the subject matter of this aspect of the decision is a question of the construction of leases, the headlease and the underlease, and accordingly it seemed to me then (and I remain of the same view) that this is not one of those cases where the second appeal is from a specialist tribunal with different expertise from the court to which reference was made in Cooke v Secretary of State for Social Security [2001] EWCA Civ 734. There are no doubt other appeals from the Leasehold Valuation Tribunal to which those principles would apply. I therefore think it right to approach this case on the normal principles as regards the test for permission to appeal: as to whether the appeal would have a real prospect of success or whether there is some other compelling reason why the appeal should be heard.

Mr Munro, renewing the application for the appellants, submits that not only is there a significant sum of money at stake, which since the hearing has become identifiable in the sum of around £130,000, but also it is a matter of wider significance given the fact that his clients use headleases in no doubt standard, or more or less standard, terms and there is a familiar pattern of headlease and underleases of flats consisting of parts of the premises comprised in the headlease, so that similar issues may well arise in respect of other premises within the Cadogan Estate. Indeed, the judge's attention was drawn, as was ours, to a previous decision of the Lands Tribunal concerning 44 and 46 Lower Sloane Street in a case referred to as McHale, which was a decision about other premises within the Cadogan Estate raising similar issues on somewhat similar lease terms. So there is a degree of significance to the case. It does, however, turn on the construction of two documents, the headlease, to which I have referred, and the underlease which it is agreed was granted in standard terms and on which we have an example in the underlease of Flat 2 which was granted on 18th October 1989.

The headlease relevantly has in the lessee's covenants a covenant called I(XI) as to the user of the premises, which provides that the flats and maisonettes are to be used as single private residences each, with a caretaker's flat in the basement of the premises. The theme of the caretaker's flat, which is at the heart of this case, is taken up in clause XII(c) which is of critical importance to Mr Munro's submissions. That is a covenant by the headlessee, Mr Mahdi, to provide for the demised premises throughout the term a full-time caretaker:

The other provision of the headlease that is important in this context is clause XIX and, in particular, clause XIX(d) which deals with underlettings of parts of the demised premises. Clearly it was foreseen that the various flats or maisonettes would be underlet separately and clause XIX(d) provides a covenant that underlettings are permitted only at rents which are not less than the rent reserved under the headlease apportioned over the flats and maisonettes disregarding the caretaker's flat. The relevant words are these:

The underlease, of which we have an example, does undoubtedly comply with the express terms of XIX(d) in that it includes, as one would expect, a service charge provision under which the underlessee is to pay a proportionate part of the lessee's costs of performing the various covenants. So far so good. What is at issue in this case is that the headlessee contends that the terms of the underlease permit him to recover from the underlessees collectively, in effect, the market rent of the caretaker's flat which he is not entitled, consistently with the headlease, to recover from the caretaker; in addition, of course, to recovering costs and expenditures including, no doubt, the remuneration of the caretaker.

Mr Munro submits that although such a provision would not, on the face of it, conflict with clause XIX(d) of the headlease which simply says what the underlease shall contain, not what it shall not contain in this respect, he says that it does conflict with the headlease taken overall because it conflicts with the obligation to provide the caretaker rent-free. That, I think, is at the heart of the case, but I must come back to that having referred to the relevant terms of the underlease.

The underlease identifies the headlease, and I note that it refers to the particular lease and includes any deed or document supplemental thereto. Service charge is provided for and the landlord, by clause 5(5)(p), covenants to observe and perform the covenants in the headlease except insofar as they are passed on, in effect, to the underlessee by the terms of the underlease. Also by clause 5(5)(h) the headlessee covenants to employ one or more caretakers, cleaners, porters, maintenance staff, gardeners, or such other persons as the lessor may from time to time reasonably consider necessary.

The service charge is dealt with by the Fifth Schedule and two parts of that are of major significance. In paragraph 1(1), the opening words, "service charge expenditure" is defined as meaning:

On the terms of the headlease and the underlease that I have mentioned, the Leasehold Valuation Tribunal held that under the terms of the underleases, the headlessee is entitled to recover from the underlessees by way of a service charge, in effect, the market rent of the caretaker's flat. His Honour Judge Michael Rich, sitting in the Lands Tribunal, upheld that decision. He too held that the case depended on whether the underlease was to be construed as entitling the intermediate lessor, the headlessee, to recover the cost of the caretaker's accommodation by way of service charge from the underlessees. He held that although the headlease was relevant, there was nothing in it that was inconsistent with such entitlement in the underlease.

At paragraph 20 of his decision he summarised the relevant principles of construction as derived from a number of earlier cases and Mr Munro does not take issue with the five propositions that he set out there. Applying those principles, he held that the provisions of Schedule 5, paragraph 1(1) of the underlease covered both items of actual expenditure and, by virtue of the latter part of the opening words -- and in particular subparagraph (iv) -- something which could not be called actual expenditure, namely the market rent which, by virtue of the headlease, the headlessee is unable to exact from the caretaker, of the caretaker's flat.

The appeal to this court raises the same contentions as before, and does so in the context of what can fairly be described as a somewhat restrictive approach as against the landlord of rules adopted by the court as to the construction of service charge obligations. Mr Munro submits, first of all, that the words of the service charge provision refer to expenditure and that a notional rent is not expenditure.

Secondly, Mr Munro submitted that it was inconsistent with the terms of the headlease for the headlessee to be able to recover indirectly a market rent for the caretaker's flat from the underlessees. He made the commercial point that when the headlease was granted at a premium which appears to have been £30,000, that will have been by way of a commercial negotiation which will have taken into account the fact that part of the premises was a flat which was going to have to be occupied by a caretaker rent-free. Mr Munro accepted that, from the freeholder's point of view, one of the concerns lying behind the obligation to provide the caretaker's flat rent-free was to avoid the caretaker getting any security of tenure as such. That is perhaps emphasised by the words "rent-free as a licensee on a service basis". But Mr Munro submitted (and he may well be right) that that is not the only point lying behind those words. I can well see that the Cadogan Estate may well have been concerned that in high class premises such as these no doubt were, the presence on the premises of, and the services of, the caretaker would be a feature which might be thought to contribute towards the maintenance of the quality and tone of the premises and therefore of the estate as a whole.

Except in that respect, I am not sure that I can see why the Cadogan Estate should have been concerned as to whether the headlessee could recover anything in addition to the actual expenditure from the underlessees by way of service charge. The headlessee would need to be able to recover actual expenditure from the underlessees so that the headlessee remained economically viable. Of course, if by any chance the headlease were itself ever forfeited, the Cadogan Estate would want to make sure that the underlessees were themselves subject to appropriate contribution covenants.

So far as Mr Munro's first basis of submission as to the terms of the headlease are concerned, it seems to me that it is not seriously arguable that the combination of XII(c) and XIX(d) in the headlease amount to a prohibition on the headlessee recovering a contribution to the market rent foregone to the caretaker's flat by way of service charge. Mr Munro submitted, as I said, that the underlease was in breach of the terms of the headlease if it was to be construed as entitling the headlessee to recover such a contribution. I cannot see, bearing in mind the normal principles of construction of the headlease, that that is so.

However, that is not the whole of Mr Munro's submissions. Mr Munro said that the headlease was part of the context of the construction of the underlease. In that the judge agreed with him, and I would agree with him. It is referred to expressly in the underlease and there is the obligation to comply with its terms in clause 5(5)(b). Even so, ultimately if the provision at issue in the underlease is not itself to be seen as inconsistent with the terms of the headlease, referring to the headlease is of limited assistance. Accordingly, it really comes to the terms of the underlease and Mr Munro's submission that in the relevant circumstances the service charge expenditure should not be construed as including a contribution to a market rent foregone of the caretaker.

His Honour Michael Rich accepted that if the word concerned had only been "expenditure" or "expenditure incurred" that might well be right, but he accepted the submissions on behalf of the headlessee that service charge expenditure was not limited to items properly describable as expenditure, particularly because of the words "and all other costs, expenses, outgoings and matters" which I have already quoted in paragraph 1(1), and even more particularly because of the express reference in subparagraph (4) in the Fifth Schedule to including an annual sum equivalent to the market rent of any accommodation provided rent-free by the lessor. It is true to say that the reference there is "any accommodation" rather than "the accommodation", which one might have expected to see given the obligation in the headlease.

Mr Munro in his written submissions referred to the McHale case which I have mentioned. Although he has not taken us to it this morning, I took the opportunity of looking at the case in advance in the light of his written submissions. In that case there was a reference to the cost of providing accommodation, if any, including the loss of rent on it, but the accommodation for the caretaker need not have been in the premises in question. There was an express reference to a caretaker "whether or not resident on the premises". As Mr Munro accepted, previous cases about other leases are very dependent on the precise words used in the documents at issue in those cases, and accordingly they are of limited value to a later decision except in so far as they set out a general proposition. But as I have said, the general propositions are not really in dispute.

The challenge for Mr Munro is to explain away the reference in subparagraph (iv) of paragraph 1(1) of the Fifth Schedule to a market rent as meaning anything other than the market rent of the caretaker's flat foregone by the headlessee. His submission is that it can be accounted for by the possibility that the freeholder and the headlessee might reach a further agreement varying the terms of the headlease so as to delete the obligation to provide the caretaker rent-free. That could be by a deed supplemental to the headlease which could come within the definition of the superior lease in the underlease, and so I suppose it might be said that that could be binding on the underlessees.

It seems to me that that really is, as it seemed to His Honour Michael Rich, a far-fetched proposition and one which cannot adequately explain the inclusion of the words in subparagraph (iv) of paragraph 1(1) of the Fifth Schedule of the underlease. I therefore remain of the view, despite Mr Munro having put the point succinctly and attractively to us this morning, that there is no serious prospect of success for the freeholders in persuading this court on appeal that the headlessee is not entitled to recover by way of service charge contributions to the notional market rent of the caretaker's flat. Both for that reason and because there is no other compelling reason why the appeal should be heard, I would refuse permission to appeal.

LORD JUSTICE PILL: I agree. Thank you, Mr Munro.