McHale v Cadogan

This appeal concerns two questions of law which have arisen out of the legislation concerned with the collective enfranchisement of leasehold property. The first raises the issue of whether or not the leasehold interest, like the freehold interest, should, for the purpose of ascertaining the marriage value which the statute says has to be shared between those interested in each, be valued in what has been called the “no Act world”, ie on the basis that the right to enfranchisement does not exist. That issue has been adjourned to a separate hearing, and this judgment is not concerned with it.

The second issue, with which this judgment is concerned, raises a question about the valuation of a caretaker’s flat in the property subject to enfranchisement. Should it be valued on the basis that it is dedicated to housing a caretaker rent free and thus of little value, or should it be valued on the basis that the tenants (underlessees) of the premises collectively nevertheless have to pay a service charge which is designed to provide compensation for that loss of rent? If it is the former, then the value of the leasehold interest is lower and the marriage value is correspondingly higher; and vice versa.

The property concerned is 10 Sloane Gardens, London SW1, a building divided into six flats of which the respondent, the Rt Hon Earl Cadogan, is the freeholder (the “freeholder”) and the first appellant, Mr McHale is the intermediate landlord under a headlease. The second appellant, 10 Sloane Gardens Management Company Limited, is the nominee purchaser for the purposes of the collective enfranchisement of the property under section 24 of the Leasehold Reform, Housing and Urban Development Act 1993 (the “1993 Act”). It will be sufficient if I refer to the two appellants as simply “Mr McHale”.

Five of the six flats are underlet on long leases. The sixth is a caretaker’s flat in the basement. By an initial notice served on 20 July 2004, three of the tenants, being two of the long underlessees and Mr McHale as tenant of the caretaker’s flat under the headlease, claimed to acquire the freehold of the premises under the 1993 Act. On 15 December 2004 the freeholder applied to the Leasehold Valuation Tribunal (the “LVT”) to determine the enfranchisement price under Schedule 6 to the 1993 Act. That was before the amendments to the valuation date made by the Commonhold and Leasehold Reform Act 2002 came into effect. The terms of the transfer, other than price, were agreed on 16 May 2006, which thereby became the valuation date for the purposes of Schedule 6.

The LVT determined the enfranchisement price in the sum of £770,940 on 17 January 2007 in its decision of that date. On 7 February 2007 Mr McHale submitted an application for leave to appeal which the LVT granted on 23 February 2007. One of the issues raised related to the valuation of the caretaker’s flat. On 30 October 2008 the Lands Tribunal (George Bartlett QC, President, and PR Francis FRICS) dismissed the appeal, but adjusted the enfranchisement price because of a small mathematical error to £780,405.

The issue for the purpose of the caretaker’s flat is whether the headlessee, currently Mr McHale, is entitled to charge the underlessees by way of service charge rent in respect of the caretaker’s flat. The Lands Tribuanl decided that he was not.

By clause 2(3) of the head lease the lessee was obliged at its own expense to carry out the works for converting the premises into self-contained flats as set out in the first schedule to the lease, which referred to the caretaker’s flat in the basement. Clause 2(10) also mentioned the caretaker’s flat in the basement as referred to in the first schedule and in drawings incorporated in the lease. Clause 2(11)(c) then contained a covenant on the part of the lessee –

“TO use its best endeavours to provide for the premises throughout the said term a full-time Caretaker…who shall reside in the Caretaker’s flat rent-free as a licensee on a service basis…”

The underleases of the five other flats reserve a service charge. Thus clause 2(4) of a sample underlease provides for payment of a proportionate part of the “expenses and outgoings incurred by the Lessor in…the provision of services therein and the other heads of expenditure as set out in the Third Schedule hereto”. By para 3 of the Third Schedule that service charge includes a proportionate part of –

“The cost of employing a housekeeper or housekeepers and also in respect of the accommodation (if any) to be provided for such housekeeper or housekeepers (a) the cost to the Lessor of outgoings for such accommodation (including loss of rack rent thereon)…”

The question therefore became whether the underlessees had to contribute to the cost to Mr McHale of providing the caretaker flat rent free in the form of “loss of rack rent”. Mr McHale, who has represented himself throughout, said that they did, and the freeholder said that they did not. As Mr Radevsky, on behalf of the freeholder put it to us, there could be no loss of rack rent where Mr McHale was required by his underlease to provide a caretaker’s flat for a caretaker to live in rent free. The Lands Tribunal agreed with the freeholder.

There is some previous discussion of this issue in earlier decisions. In Cadogan v. 44/46 Lower Sloane Street and McHale, a decision of the Lands Tribunal (HHJ Rich QC and Mr Rose FRICS, 30 July 2004, LRA/29/2003 and LRA 30/2003), the provisions of the headlease and of the underlease were for material purposes identical to those found here: that is to say that the head lessee by clause 2(12)(c) covenanted that the caretaker “shall reside in the Caretaker’s flat rent-free as a licensee on a service basis”, and the underlease by para 3 of its Third Schedule provided for the service charge to include “The cost of employing a housekeeper…and also in respect of the accommodation (if any) within the Building to be provided for such housekeeper…(b) the cost of providing such accommodation (including the loss of rack rent thereon)…”. As in the present case there was a dispute as to whether there had been a “loss of rack rent” in such a situation. But for a separate point of the Lands Tribunal’s own taking, not argued before it (as we know because Mr McHale and Mr Radevsky were involved on opposite sides in that case too), Mr McHale would have succeeded in that case, as the following passage from the Lands Tribunal’s decision makes clear:

“24.

In our judgment, if paragraph 3 of the Third Schedule, in providing for the recovery of the cost of housekeeper’s accommodation within the building, could only be referring to the caretaker’s flat in the basement, the specific inclusion of “the loss of rack rent” within the definition of the “maintenance contribution” would, notwithstanding the provisions for certification of such charges being “incurred”, entitle the under-lessor to include the rack rental value of the basement flat, precisely because the language is used in the context of the head-lease which requires it to be let rent-free. We would be forced to give some meaning to the provision, rather than reject it as meaningless or mere surplusage or an obvious mistake, and that is the only meaning it could have.”

So far, that was a decision in Mr McHale’s favour and if the matter had ended there in that case, Mr McHale would have succeeded there, and, if it were translated into this case and upheld by our decision in this court, would succeed as well here. However the Lands Tribunal had its own point to the effect that it was possible that the headlease’s reference to the caretaker’s flat and the underlease’s reference to accommodation for a housekeeper were not perhaps speaking of the same thing. The Lands Tribunal ultimately decided the point against Mr McHale, on what was essentially a contra proferentem basis. It said, continuing at para 24 of its decision:

“Once, however, it appears that the words could, at least theoretically, have meaning and effect even if they do not entitle the underlessor to recover a loss which he has not in fact suffered, there is no reason to construe “the cost of providing such accommodation (including loss of rack rent thereon)” as including a loss not incurred or suffered in an amount made irrecoverable by the terms of the head-lease. The underlease should not be construed as entitling the underlessor to recover as part of the maintenance charge a sum in excess of providing the services, unless such construction is unavoidable.”

Because that decision was ultimately in Lord Cadogan’s favour there could be no appeal by him against the obiter observations of the Lands Tribunal previously cited above. In this appeal, however, Mr Radevsky submits that those observations were wrong.

The issue came up before the Lands Tribunal again in The Earl Cadogan v. 27/29 Sloane Gardens Limited (HHJ Rich QC, 7 April 2006, LRA/9/2005). The headlease again referred to a caretaker’s flat in which the caretaker was to reside rent free. The underlease, however, provided for a service charge to include “an annual sum equivalent to the market rent of any accommodation provided rent-free by the Lessor”. The Lands Tribunal considered the 44/46 Lower Sloane Street case and other authorities on service charge provisions and rejected a submission that the headlease prohibited the recovery of a notional rent for the caretaker’s flat from the underlessees. The Lands Tribunal said:

“21…By clause XI(c) the flat is to be provided to the Caretaker rent-free. That does not preclude a provision in any underlease to charge a rent to the underlessee for the flat granted to the underlessee, fixed by reference to the market value of the Caretaker’s flat. No more does it, in my judgment, prohibit the requirement of a covenant to pay the same sum under the name of a service charge but recoverable as rent. On its proper construction there is nothing in the headlease to affect the question to be decided, save that it is part of the context under which the underleases must be construed, that the headlessee is bound to provide a Caretaker and to accommodate him rent-free. Mr Munro accepted that such obligations could sensibly be imposed by the freeholders for estate management reasons, namely to avoid the risk of any caretaker obtaining security of tenure, but to maintain the standard of the premises for the benefit not only of the demised premises but also of the surrounding area…

25.

I am forced to the conclusion that unless the words of the sub-paragraph are rejected they must be construed as entitling the second respondent to recover a notional rent of the Caretaker’s flat as part of the Service Charge. That is the obligation that a reasonable tenant would perceive that he was entering into. There is no ambiguity and no need or right therefore to resort to the contra proferentem rule properly so-called…”

In the present case Mr Radevsky does not take the point which appealed to the Lands Tribunal of its own motion in the 44/46 Lower Sloane Street case concerned with the theoretical difference between a caretaker’s flat and a housekeeper’s accommodation. Instead, he submits that the Lands Tribunal was wrong in its underlying observations about the meaning of the identical provisions in the headlease and underlease in that case. He submits, as he had submitted to the Lands Tribunal there and below, that there could be no loss of rack rent in a situation where the caretaker’s flat had to have been licensed rent free. He also relied on two other authorities about service charges, acknowledging that they concerned different terms, but for the propositions that the courts are in general concerned not to recognise anything as being within service charges unless the landlord has actually incurred expenditure, and that clear words are required before an obligation to pay is imposed on tenants in a block of flats.

Thus he referred the court to Jollybird Ltd v. Fairzone Ltd [1990] 2 EGLR 55 (CA) where this court, upholding the decision of Morritt J, refused to extend a clause giving the landlord the costs of central heating to a situation where the landlord could make a profit over and above actual expenditure. The clause concerned was, however, described as “ill-drafted” (at 58M) and the particular issue of construction involved what this court saw as a choice between on the one hand an impermissible or absurd construction and on the other hand a construction whose only weakness was that its presence was not strictly necessary. I can derive no assistance from that case.

Mr Radevsky also relied on Gilje v. Charlgrove Securities Ltd [2002] 1 EGLR 41 (CA), where this court dismissed a landlord’s appeal against a decision that it could not recover notional rent for a caretaker’s flat, because such rent did not fall within the definition of “monies expended”. The leases in that case gave to the landlord a proportionate share of “All monies expended by the lessor in…providing the services…called for…”. Those services were scheduled in terms which referred to the caretaker’s flat as follows: “Gas, electricity, general and water rates and internal maintenance repairs of the flat occupied by the resident housekeeper or porter”. The question in these circumstances was whether the notional rent of the flat was included in “monies expended”. This court distinguished an earlier case Agavil Investment Co v. Corner (unreported, 3 October 1975), where the notional rent of the caretaker’s flat was permitted to be included in the service charge as being within the words “The costs, charges and expenses incurred…”. Laws LJ, with whom Mummery and Kennedy LJJ agreed, said that “costs” went beyond “expenses” and could embrace the notional rent as income forgone (at para 24). On the basis of that distinction and the ground of contra proferentem it was held that the notional rent was not within “monies expended” (at para 28). Mummery LJ went on to say this (at para 33):

“this underlease does not clearly include the notional rent of the caretaker’s flat forgone by the landlord in the various items that the landlord is expressly allowed to recover from the underlessee in the service charge.”

I readily acknowledge that it is the policy of the authorities not to bring within the general words of a service charge clause anything which does not clearly belong there. To put the matter another way, service charge provisions have been construed restrictively. In the present case, however, the critical clause expressly included “the cost to the Lessor of outgoings for such accommodation (including loss of rack rent thereon)”. Thus the loss of rack rent on the caretaker’s flat was specifically defined to be within “the cost of outgoings for such accommodation”. It seems to me to be impossible in such circumstances to say that the loss of rack rent is nevertheless not included in such outgoings because the flat is to be licensed to the caretaker rent free. It is precisely because the flat has to be provided for a caretaker who cannot be charged rent for it that the value of the flat in terms of rack rent has been lost. I agree with the Land Tribunal in 44/46 Lower Sloane Street that if this is not the meaning of the provision, then it is denuded of all meaning. The Lands Tribunal in the present case was simply content to follow the result in 44/46 Lower Sloane Street in the belief that that was mandated by the identical language in the present case. It does not seem to have appreciated that that result entirely turned on the housekeeper point, which Mr Radevsky does not pursue (in my opinion rightly so).

In the result, I would allow this appeal on the caretaker flat point. The headlease has to be valued on the basis that Mr McHale is entitled to be compensated in the service charge for the loss of rack rent on the caretaker flat. For the rest, this appeal is adjourned.

I agree.

I also agree.