Friends Life Management Services Ltd v A & A Express Building Ltd

This is a dispute about a service charge in a lease of commercial premises. The Claimant was the Tenant and the Defendant was the Landlord under the relevant Lease. The principal point which divides the parties is as to what is to happen in a case where the Tenant, over a period of years, has been charged sums by way of service charge, which sums did not represent actual expenditure by the Landlord at the time the charges were made, but which were a “provision” in respect of expenditure on major works which were expected to be carried out in future years. When the Lease in this case ended, those major works had not been carried out but they were begun after the Lease ended and then they were carried out later in the year in which the Lease ended and continued into the following year.

Mr Dutton QC appeared on behalf of the Tenant and Mr Wonnacott QC appeared on behalf of the Landlord.

The dispute arises in relation to a Lease dated 10^th March 1998. The Lease demised most of the office accommodation in a building known as the Express Building, Great Ancoats Street, Manchester, together with the whole of a nearby car park. The building is a substantial office building constructed over seven floors (the ground and six upper floors) in the late 1930s. It was built in the art deco style and is Grade II listed. The building was constructed to house the northern operations of the Daily Express newspaper but that occupier vacated the building in the 1980s. The building was then refurbished in the 1990s. The Lease was granted by a predecessor in title of the Defendant to a predecessor in title of the Claimant. In around 2002, the Claimant acquired the term of the lease from an associated company, which had been the original lessee. In around 2006, the Defendant acquired the reversion on the lease.

The office accommodation demised by the Lease comprised the ground and first to fifth floors (inclusive) of the building. The demised office accommodation was referred to in the Lease as “the Premises” and the demised car park was referred to in the Lease as “the Car Park”. The Premises and the Car Park were demised for a term of 15 years from and including 25 March 1998. The tenancy created by the Lease was not contracted out of the security of tenure provisions in Part II of the Landlord and Tenant Act 1954. Clause 7.13 of the Lease permitted the Tenant to determine the Lease on the expiry of the 12^th year of the term (i.e. 24 March 2010), subject to the Tenant complying with certain conditions, namely, the Tenant had to give 12 months prior written notice, pay the rents reserved by the Lease and give vacant possession on the expiry of the notice. The Claimant did in due course successfully rely upon clause 7.13 to determine the Lease on 24 March 2010.

The Lease contained a number of definitions which are relevant in this case, as follows:

The Lease reserved a yearly rent, subject to review every five years during the term, and, by way of further rent, an insurance rent and the Service Charge (and some other sums which were to be paid). Clause 3.1.2 of the Lease provided that the principal rent was to be paid by equal quarterly payments in advance on the Payment Days and “proportionately for any period of less than a year”. The reservation of the Service Charge by way of further rent stated that the Service Charge was payable at the times and in the manner provided in the Third Schedule. The Tenant covenanted to pay the reserved rents “throughout the Term”.

By clause 5.2 of the Lease, the Landlord covenanted to provide the Services. By clause 7.1, the Landlord was entitled to forfeit the lease for non-payment of rent or breach of covenant on the part of the Tenant.

The Third Schedule to the Lease made further provision in relation to the Service Charge. Part A of the Third Schedule provided for the Payment of the Service Charge and para. 1 in Part A was in these terms:

“1.

Payment of the Service Charge

1.1

The Tenant shall pay for the period from the Occupation Date to the Calculation date next following the date of this Lease the Initial Provisional Service Charge the first payment being a proportionate sum in respect of the period from and including the Occupation Date to and including the day before the next Payment Day after the date of this Lease to be paid on the date of this Lease subsequent payments to be made in advance on the relevant Payment Days in respect of the relevant quarters

1.2

The Tenant shall pay by four equal quarterly payments in advance on the Payment Days for the next and each subsequent Financial Year a provisional sum calculated upon a reasonable and proper estimate by the landlord supplied in writing to the Tenant of what the Annual Expenditure is likely to be for that Financial year

1.3

The Landlord shall as soon as reasonably practicable after each Calculation Date prepare an account certified by the Accountant showing the Gross Annual Expenditure and the Annual Expenditure for the Financial Year ending on the Calculation Date and containing a summary of the expenditure referred to in it and upion such account being certified by the Accountant subject to manifest error it shall be conclusive evidence for the purposes of this Lease of all matters of fact referred to in the account except in the case of manifest error

1.4

If the Service Charge for any Financial Year shall:-

1.4.1

exceed the provisional sum for that Financial Year the excess shall be due to the landlord on demand or

1.4.2

be less than such provisional sum the overpayment shall be credited to the Tenant against the next quarterly payment of the Service Charge or in the case of the Financial Year ending on or after the determination of the Contractual Term repaid by the Landlord to the Tenant”.

Part B in the Third Schedule dealt with the individual Services which were to be provided. The Services were of a conventional character in respect of a commercial office block and do not need specific mention. Part C in the Third Schedule dealt with the Ancillary Items which, again, were of a usual character and do not need specific mention.

I was invited to have regard to a number of other matters which I will record here. At all material times, the Defendant retained Savills to manage the building on its behalf. In 2007, Savills prepared a schedule of works required or desirable as planned preventative maintenance. This schedule was provided to the Claimant’s representative at a meeting in May 2008.

The Lease provided for the principal rent thereunder to be reviewed with effect from 25 March 2008. The amount of the reviewed rent was not agreed and was referred to an independent expert for determination. The reviewed rent was to be the rent which could be achieved on a notional letting of the demised premises in the open market on the rent review date for a term of 10 years from that date, but without a tenant’s break clause. From my reading of the reasoned decision of the independent expert, it appears that both parties made submissions to him as to the amount of the service charge which would be likely to be become payable during the term of the notional lease. One of the parties submitted to the expert that the service charge would, or at least could, include capital expenditure of between £4.00 and £5.00 per square foot over the first three years of the notional lease. The expert thought that the notional willing tenant would consider this to be “an issue” in assessing its rental bid. The expert considered that it was reasonable to assume that the landlord would undertake capital works to the building. The expert reduced the rent by £0.75 per square foot to reflect this fact.

I was shown a number of years service charge accounts prepared on behalf of the Defendant and served on the Claimant. I will have to refer in due course in more detail to the accounts which were prepared for the accounting period ending 31 December 2010. For present purposes, it will suffice to say that in a number of years, the Defendant included in the service charge accounts a sum which did not relate to actual expenditure in the service charge year but which was included by way of a provision for anticipated expenditure on Services in future years. The accounts are far from clear as to what the Defendant did in this respect but it has emerged that the total sums included in the accounts in this way amounted to £875,000, broken down as follows: (1) year ending 31.12.06: £100,000; (2) year ending 31.12.2007: £135,000; (3) year ending 13.12.08: £350,000 later reduced to £320,000; and (4) year ending 31.12.09: £320,000. Of these figures, the Claimant was asked to pay, and did pay, 90.87%, amounting to £795,112.50.

After the termination of the Lease on 24 March 2010, the Defendant procured the carrying out of major works to the Building. The major works included work of replacing boilers and chillers, work to the fan coil units, air handling units and the building controls and further works to the lifts and the fire alarm system. I understand that it is accepted that all of this work came within the list of chargeable items in Parts B and C of the Third Schedule to the Lease. Some or all of the major works were within the schedule prepared by Savills in 2007 but not all of the work in that schedule was included in the works which were actually carried out. There seems to be agreement that the major works cost £1,046,691.36.

What may be significant is the time when the major works were carried out. They were not carried out before the Lease ended, pursuant to the operation of the break clause, on 24 March 2010. The work appears to have started later in 2010, in around September or October. Some work was done before 31 December 2010 and the remainder of the major works were completed in 2011. Although I was not taken to the detailed facts as to how payments became due from the Defendant to the contractors and consultants involved in the work, it seems clear enough that the contractual arrangements required the contractor or consultant to submit a valuation or a certificate or a demand in relation to work previously done and the sum payable became due on or, more likely a short time after, the submission of the valuation or the certificate. In this way, there would be a time lag between the carrying out of the work and the date when the Defendant became liable to make a specific instalment payment in relation to a part of that work.

The claim relates to the Financial Year to 31 December 2009 and to the last accounting period under the Lease.

On 6 August 2010, in relation to the Financial Year to 31 December 2009, the Landlord served on the Tenant documents which showed that the Service Charge for that year was £730,789.30 and the provisional sums under para. 1.2 of the Third Schedule for that year were £763,689.40. On this basis, there was an overpayment by the Tenant of £32,899.60. The Tenant does not challenge this computation. Accordingly, pursuant to para. 1.4.2 of the Third Schedule, it would seem that this overpayment was available to be credited to the Tenant against the next quarterly payment of the Service Charge. The reference to a quarterly payment of the Service Charge would seem to be a reference to a quarterly payment of a provisional sum pursuant to para. 1.2 of the Third Schedule. However, the amount of the credit was not established until the Landlord served the computation on the Tenant on or about 6 August 2010 and, by that date, the Lease had already ended.

On 10 August 2010, the Landlord’s managing agents issued the Tenant with a credit note for £32,899.60 plus VAT, totalling £38,6576.03. In these proceedings, the Tenant claimed payment of that sum and it has since been paid. There is an outstanding question as to interest. I understand that the sole question is as to the appropriate rate of interest. It has been agreed that this question will be determined following the hand down of this judgment.

The Tenant’s principal claim relates to the computation of the Service Charge, and all consequential matters, for the last accounting period under the Lease. The submissions made by the parties at the trial were not identical to the way the matter was pleaded. For example, the Tenant has pleaded reliance on a certificate for an accounting period to 31 December 2010 but yet it submitted at the trial that the correct accounting period was from 1 January 2010 to 24 March 2010 and not to 31 December 2010. In due course, I will set out the questions as to the last accounting period under the Lease which were disputed in the course of the trial and I will then attempt to deal with those questions. Before doing so, I will briefly describe the three accounting stages which are required by the express provisions of the Lease.

The express provisions of the Lease provide for there to be three stages of accounting or computation. The first stage is required by paragraph 1.3 of Part A of the Third Schedule to the Lease; I will refer to this stage as “the first stage”. The second stage is required by the definition of Service Charge; I will refer to this as “the second stage”. The third stage is required by paragraph 1.4 of the Third Schedule to the Lease; I will refer to this as “the third stage”.

The first stage involves an element of collaboration between the Landlord and the Accountant. The Landlord is to prepare an account and the Accountant is to certify such an account. The account as certified is to show, for a relevant Financial Year: (1) the amount of the Gross Annual Expenditure; (2) the amount of the Annual Expenditure: and (3) a summary of the expenditure referred to in it.

The first stage involves the following steps:

The second stage involves an apportionment to be carried out by the Landlord of the Annual Expenditure in relation to the Premises and of the Annual Expenditure in relation to the Car Park. The Lease does not expressly provide that the figure for Annual Expenditure must be the figure stated in the certificate provided at the first stage. No doubt if there were such a certificate and the certificate were conclusive as to the amount of the Annual Expenditure, then the figure in the certificate would have to be used. It is not necessary to resolve the question whether if there were no valid certificate, the landlord could still determine an apportionment of Annual Expenditure at the second stage.

The second stage involves the following steps:

The third stage involves a comparison between the amount of the Service Charge for the Financial Year and the amount of the provisional sum for that Financial Year. Paragraph 1.4 provides for what is to happen where the Service Charge exceeds the provisional sum or where it is less than the provisional sum. In particular, in the latter case, for the Financial Year ending on or after the determination of the Contractual Term, the amount of the overpayment is to be repaid by the Landlord to the Tenant.

The parties’ submissions dealt with many issues. Some of the submissions were put forward in the alternative to earlier submissions. Taking account of all of the matters which were disputed at the trial, I have identified the following issues which I need to address:

What is the relevant Financial Year for the last accounting period under the Lease?

If the Lease had continued until the end of the Contractual Term, it would have ended on 24 March 2013. The lease in fact ended on 24 March 2010. There are other ways in which the tenancy created by the Lease could have ended at a date which was not 31 December in any year. One example would be where the Lease was forfeited on such a date. Another example would be where the tenancy created by the Lease continued under Part II of the Landlord and Tenant Act 1954 and then ended on such a date. It was therefore foreseeable that the tenancy created by the Lease would end on a date other than 31 December. Indeed, having regard to the range of possibilities, it was unlikely that the tenancy created by the Lease would end on 31 December in any year.

The first, second and third stages of the computation as described above require the identification of a Financial Year. This phrase is defined as the period between consecutive Calculation Dates. A Calculation Date is defined to mean 31 December “in every year”. The exception to this is where the Landlord nominates a different date. If the Landlord nominates a date which is different from 31 December, the consequence will be that the period from the immediately preceding Calculation Date (which would have been on 31 December) will not be exactly one year in length.

So what is the Financial Year for the last accounting period for the Lease where the term ended on 24 March 2010? If one applies the express terms of the Lease, the position would appear to be as follows. The year 2010 is a year within the phrase “every year” in the definition of Calculation Date. In the absence of the Landlord nominating a different Calculation Date (and the Landlord did not), the relevant Calculation Date is 31 December 2010. The Financial Year is therefore the year to 31 December 2010.

It is obvious that the year to 31 December 2010 ends after the end of the term. However, para. 1.4.2 of the Third Schedule specifically refers to the possibility of “the Financial Year ending on or after the determination of the Contractual Term”. Speaking generally, there would appear to be good reason for the Financial Year to be capable of continuing until 31 December in the year in which the tenancy created by the Lease ends, rather than the Financial Year being forced to end on the date which happens to be the date of the last day of the tenancy, whether the tenancy ends pursuant to the break clause, or by effluxion of time or by forfeiture or by the end of a period of continuation under the 1954 Act. The Lease will probably not be the only lease of premises in the building. It is understandable that the Landlord would wish to have the same Financial Year for the Tenant and any other tenant in the building. If the Financial Year runs to the 31 December in a year and the term ends at an earlier point in the year, it is agreed by the parties that the Tenant only pays for the period of time up to the end of the tenancy. There is room for argument as to what provision, express or implied, produces the result of an apportionment for time, but the parties agree that there would have to be an apportionment for time, in some way or other.

The Tenant submits that the last accounting period in this case must end on 24 March 2010. The principal reason for that submission being made is that the Tenant wishes to go on to submit that the Landlord can only recover a Service Charge for Services actually provided during the relevant accounting period; on this basis the cost of any Services (in particular, the major works) provided after 24 March 2010 could not be charged to the Service Charge recoverable from the Tenant. An accounting period ending on 24 March 2010 rather than 31 December 2010 may also have the advantage that the accounting procedures could begin after 24 March 2010 and need not wait until after 31 December 2010; that might advance the time at which the Tenant might become entitled to be repaid a sum of money under para. 1.4.2 of the Third Schedule (if it turns out that such a sum is repayable). Further, the fact that the Financial Year would end on 24 March 2010 would mean that it would be unnecessary to apportion a Service Charge computed for the year to 31 December 2010 to reflect the fact that the tenancy ended on 24 March 2010.

The Tenant cannot point to any express language in the Lease which produces the result it contends for. It therefore submits that to make the Lease work, or to give effect to what was obviously intended, or possibly for some other reason, the court should imply the words “of the term” into the definition of Calculation Date after the phrase “in every year”. This would mean that 31 December 2010 could not be a Calculation Date because it does not fall within the term. That would seem to produce the result that the Lease does not itself provide for a Calculation Date and so, if the Landlord wished to recover a payment from the Tenant, the Landlord would have to nominate a Calculation Date. It is suggested that the obvious date to nominate would be 24 March 2010. However, that approach does not in terms deal with a case where the Landlord knows that a computation under the Lease would result in the Landlord having to repay money to the Tenant. In such a case, could the Landlord simply decline to nominate a Calculation Date? I suppose these problems could be avoided if the court implied a different term so that the Calculation Date automatically became the last day of the tenancy created by the Lease. Whatever term were to be implied, it might be said that the result would be unwelcome to the Landlord who would have to prepare an account ending on a date in the middle of the calendar year and at the same time may wish to prepare an account ending on 31 December in that year for any other tenant in the building.

Quite apart from the Tenant being unable to point to any express words in the Lease which provide the answer it contends for, the Tenant has to recognise that the wording of para. 1.4.2 of the Third Schedule shows clearly that the parties thought it was possible for the Financial Year to end after the end of the tenancy. The Tenant then argues that that wording was really meant to deal with a case of forfeiture and not to deal with the other foreseeable ways in which the tenancy could end before the end of the Financial Year. However, there is nothing in the wording of para. 1.4.2 which would allow one to read it down so that it could only apply in a case of a forfeiture. Furthermore, if I were to hold that, in the case of a forfeiture, the Financial Year could end on a 31 December which was later than the end of the tenancy created by the Lease, that would be inconsistent with the implied term contended for by the Tenant.

Having reviewed the submissions in relation to the Financial Year for the last accounting period of the Lease, I consider that it is clear that the express terms of the Lease should be given effect so that (in the absence of any different nomination by the Landlord) the Financial Year was the year to 31 December 2010. That is what the express terms provide. The result is perfectly workable and one can see why the parties would have intended it. It is not necessary to imply any contrary term and indeed such a term would be contrary to the express provisions of para. 1.4.2 of the Third Schedule unless one reads down the ordinary meaning of para. 1.4.2 and there is no indication that such a process of reading down is appropriate.

The amount within paragraph (a) of the definition of Gross Annual Expenditure

I will hereafter refer to costs and other matters which fall within paragraph (a) of the definition of Gross Annual Expenditure as “paragraph (a) costs”. There are two points in particular which arise in relation to paragraph (a) costs.

The first point arises because the sums which were paid by the Landlord to the contractors and consultants for the major works were paid over a period of time which spanned 2010 and 2011. Although this point did not appear to be common ground when the trial began, during the course of the trial it seemed to me that it came to be agreed that only some of the sums paid by the Landlord for the major works qualified as costs “actually incurred … during the Financial Year”. If that matter was not agreed, I hold that that is indeed the correct approach: see Capital & Counties Freehold Equity Trust Ltd v BL plc [1987] 2 EGLR 49, Barrington v Sloane Properties Ltd [2007] 3 EGLR 91 and Morshead Mansions Ltd v Mactra Properties Ltd [2013] EWHC 224 (Ch).

The documents which were placed before me contained a breakdown of the sums due and when the Landlord received invoices or demands for those sums and when they were paid. I was not in the end asked to determine the precise figure for the costs actually incurred for the major works for the Financial Year to 31 December 2010. However, it follows from the above that not all of the sum of £1,046,691.36, charged to the Landlord by the contractor and by consultants, can be included with paragraph (a) costs.

The second point which arises in relation to paragraph (a) costs is whether one “credits” or “nets off” the provision of £875,000 against the sums otherwise within paragraph (a) costs for the Financial Year to 31 December 2010, and, if so, how one does so. The word “credits” may not be an entirely accurate word for the process which may be involved but it is nonetheless convenient to use it to describe such a process.

The Landlord contends that it is necessary to credit the provision of £875,000 (or possibly only some part of it) at the first stage computation. The Landlord further submits that if the sums within paragraph (a) costs against which credit is to be taken are less than £875,000 then the resulting figure for the purposes of paragraph (a) costs will be “nil” and not a negative figure.

The Tenant contends that the provision of £875,000 is not credited against paragraph (a) costs at all. Indeed, the Tenant submits that the provision of £875,000 or the Tenant’s contribution to that provision is not taken into account at any of the three stages of accounting or computation provided for by the Lease and which I have described above. The Tenant contends that there is an implied fourth stage and it is only at the fourth stage, after all the other calculations are done, that one credits the Tenant’s contribution to the provision of £875,000. The Tenant says that it is only then that the resulting negative figure is determined and this determines the amount which the Landlord is, again by implication rather than expressly, obliged to repay to the Tenant. In the alternative to this approach, if the Landlord is right that one credits the provision of £875,000 against the paragraph (a) costs, then the result can be a negative figure.

It is agreed that it was envisaged that, in a typical case, credit would be given at some point for a provision that has been collected under paragraph (c) of the definition of Gross Annual Expenditure. I will hereafter refer to such provision as “paragraph (c) provision”. If a Landlord charged a paragraph (c) provision over a number of years for, say, future works of replacement of a lift and then the Landlord procured the carrying out of those works and paid a contractor for them, it could not be right that the Landlord could then retain the paragraph (c) provision and, in addition, claim the full cost of the lift works as a paragraph (a) cost. This suggests that there must be an express or (conceivably) an implied term in the Lease dealing with the crediting of the paragraph (c) provision.

On a preliminary read through the Lease, it is not immediately obvious where credit is to be given for the paragraph (c) provision which has earlier been charged. Later in this judgment, I will address the Landlord’s submission that credit can be given against the paragraph (a) cost. If credit is not given at that stage, there seem to me to be difficulties in credit being given as part of an apportionment exercise (at the second stage) pursuant to the definition of Service Charge. It was at one time faintly suggested that credit for the provision should be given at the third stage under para. 1.4 of the Third Schedule and that a paragraph (c) provision was a “provisional sum” for the purposes of para. 1.4 of the Third Schedule. However, it is clear to me that a “provisional sum for that Financial Year” for the purposes of para. 1.4 is the provisional sum dealt with in para. 1.2 of the Third Schedule and does not extend to a paragraph (c) provision. Accordingly, if credit is not given for a paragraph (c) provision against paragraph (a) costs, then it may be that there is no express term of the Lease which provides for such credit to be given and one would be driven to consider the possibility of an implied term providing for such a credit.

In other circumstances, I would have been inclined to interpret the words providing for the paragraph (a) costs as referring to the sums which the Landlord became obliged to pay to third parties for the provision of Services. On that basis, the costs incurred by the Landlord in relation to the Major Works would be the sums payable by the Landlord to the contractors and consultants and not only the excess of those sums over the paragraph (c) provision already charged to the Tenant (and other tenants in the building).

In the event, I derive assistance in reaching a conclusion on the present point by considering the operation of para. 1.2 of the Third Schedule. Take the example of the Landlord preparing an estimate for its expenditure in the next Financial Year. In this example, the Landlord expects to replace the lift at a cost of £100,000. Assume that the Landlord has not previously charged any paragraph (c) provision in relation to this expected expenditure. In such a case, the Landlord’s reasonable and proper estimate of its expenditure in the ensuing Financial Year would include £100,000 for the works to the lift. The provisional sum payable by the Tenant by four equal payments in advance on the Payment Days for the ensuing financial year would then be “calculated upon” that estimate. Suppose then that the facts are different and that the Landlord has already charged £100,000 by way of paragraph (c) provision in earlier years in relation to the works to the lift. This means that when the Landlord procures the works to the lift, it will not be out of pocket but can draw on the paragraph (c) provision which it has already charged. There is, accordingly, no need for the Landlord to be funded for the works to the lift by charging a provisional sum under para. 1.2 of the Third Schedule by reference to a cost of £100,000 for those works. Further, it would be unfair to the Tenant if, having already made its contribution towards the £100,000 by way of paragraph (c) provision, it is then asked to pay a provisional sum under para. 1.2 so as to produce a further £100,000 for the Landlord. Although it might be said that the Tenant would eventually be given credit for the paragraph (c) provision in the accounts for the Financial Year in which the lift works were carried out, and any overpayment of Service Charge would be credited to a future year under para. 1.4.2 of the Third Schedule, there would still be a considerable cash flow disadvantage to the Tenant by being charged for a paragraph (c) provision of £100,000 and, in addition, paying provisional sums under para. 1.2 of the Third Schedule for the same expected expenditure of £100,000.

This position of the Landlord being able to operate the terms of the Lease to require the Tenant to pay twice on account of the same expenditure of £100,000 for the works to the lift, is avoided if the paragraph (c) provision has to be credited against “the costs .. actually incurred by the Landlord”, i.e the paragraph (a) costs, and therefore also credited against the estimate of “what the Annual Expenditure is likely to be” for the purposes of para. 1.2 of the Third Schedule.

It seems to me that it is permissible to read the words which provide for the paragraph (a) costs so that an appropriate credit is given for the paragraph (c) provision which had been already charged. That interpretation provides an answer to the question: where does the Lease provide for a credit to be given for the paragraph (c) provision? Further, this interpretation allows one to make sense of the combined operation of paragraph (c) dealing with provision for anticipated expenditure and para. 1.2 of the Third Schedule dealing with a provisional sum for future expenditure.

In the last paragraph, I referred to “appropriate” credit. This raises further questions. When should such a credit be given and how should it be given? As to when the credit should be given, it should be remembered that the paragraph (c) provision is in relation to “anticipated expenditure”. When that anticipated expenditure is incurred and would otherwise be included as a paragraph (a) cost, and not before, is the time when the paragraph (c) should be credited against that paragraph (a) cost. This can be illustrated by an example. If the Landlord from year 1 onwards anticipates that it will incur expenditure of £1m in year 6 and so charges a paragraph (c) provision of £200,000 in each of years 1 to 5, the Landlord will be required to credit the total paragraph (c) provision of £1m in year 6 but will not be obliged to credit any part of that provision of £1m against whatever happens to be the other paragraph (a) costs for years 1 to 5. Any other interpretation would undermine the process of charging paragraph (c) provision for anticipated expenditure in a future Financial Year. A possible alternative interpretation would be, in every year, to allow full credit for all paragraph (c) provision already charged against the paragraph (a) costs for that year and to produce the desired result by increasing the paragraph (c) provision in each year. Thus, in the above example, in year 5, where the paragraph (c) provision already charged amounted to 4 x £200,000 i.e. £800,000, a credit of £800,000 would be given in relation to paragraph (a) costs and then a new paragraph (c) provision of £1m would be charged in year 5 (to be spent in year 6); the net result in year 5 would be a net further provision of £200,000. I do not see why the account should be drawn in this convoluted way. It is surely better simply to credit the total of the paragraph (c) provision which has been charged when, and only when, the expenditure which was anticipated as the reason for the provision is incurred.

This process of crediting paragraph (c) provision when the anticipated expenditure would otherwise be brought into account as paragraph (a) costs does involve some element of matching of provision and expenditure. There ought not to be a difficulty in carrying out this process where the works on which the expenditure was anticipated were clearly identified when the paragraph (c) provision was charged. There might be more difficulty if the works were not then clearly identified but, even then, the process ought to be possible. It will be remembered that the Lease provides for the relevant account to be certified by an accountant and such an accountant may have to exercise judgement in relation to this process. I did not hear any expert accountancy evidence on this subject and I will therefore have to do the best I can in the absence of what might have been useful evidence. My assessment is that an accountant would be able to exercise such element of judgement as might be called for.

This process of crediting the paragraph (c) provision against the matching expenditure led to a discussion as to what would happen if the paragraph (c) provision exceeded the expenditure ultimately incurred. The Landlord submitted that it was entitled to keep the surplus paragraph (c) provision and never give credit for it against any other expenditure. I do not think that can be right. The obviously fair result is that, when it is clear that the paragraph (c) provision exceeds the expenditure for which that provision was originally charged, then there is no longer any reason to defer crediting that provision against the sums otherwise within paragraph (a) costs. Again, I suspect that accountancy evidence might have been of assistance as to the accountancy principles to be applied in such a case. In the absence of that evidence, I am not persuaded that it is not appropriate to credit any known surplus of paragraph (c) provision over the amount of the matching expenditure against the sums otherwise within the paragraph (a) costs.

Apart from the Landlord’s submission on this point of detail in a case where the paragraph (c) provision exceeded the matching expenditure, I accept the Landlord’s basic submission that the paragraph (c) provision is to be credited against the matching expenditure which would otherwise be brought into account as paragraph (a) costs.

In the Financial Year to 31 December 2010, can an amount be included within sub-para. (c) of the definition of Gross Annual Expenditure for expenditure in 2011?

Sub-para. (c) allows the Landlord to charge, in a Financial Year, a sum by way of provision for anticipated expenditure in any Future Financial Years. Given that the term of the Lease was expressed to expire on 24 March 2013, a question might have arisen as to whether it was open to the Landlord in a Financial Year ending before 24 March 2013 to charge provision for expenditure which was anticipated in a year after 2013. In fact, that question did not arise because the parties agreed that such a charge could not be made. They agreed that, certainly in relation to the Contractual Term to 24 March 2013, it was not possible to include a provision for expenditure which would not be incurred during that term or during the last accounting period under the Lease. It may be that the Landlord was encouraged to agree this matter by the reasoning in Brown’s Operating System Services Ltd v Southwark Roman Catholic Diocesan Corp [2008] 1 P&CR 7 at [27] and [32] but, in any event, the matter was agreed.

Notwithstanding this agreement, the Landlord submitted that when it came to drawing up the account for the Financial Year to 31 December 2010, it would be possible in an account prepared after 31 December 2010 to make a charge under sub-para. (c) for expenditure which was expected to be incurred in 2011. This particular year was chosen because it was in that year that the Landlord procured the remainder of the major works. This submission was made on the basis that 2011 would have been within the Contractual Term if the Tenant had not operated the break clause to determine the Lease on 24 March 2013. I consider that it is not possible to distinguish between a case where the Lease ends by effluxion of time on 24 March 2013 and a case where the Lease ends pursuant to the tenant’s express right to determine the Lease on 24 March 2010. This is certainly the case where the relevant account for the Financial Year to 31 December 2010, in which the Landlord says that it can make a sub-para. (c) charge for 2011 expenditure is prepared at a time when it is certain (and known to be so) that the term of the Lease had previously ended on 24 March 2010.

What is to happen the paragraph (c) provision of £875,000 in the Financial Year to 31 December 2010?

The paragraph (c) provision of £875,000 was charged in relation to certain anticipated expenditure. When that provision was charged, it was anticipated that the expenditure would be incurred in a Financial Year in relation to which the Tenant would have to pay a Service Charge. It is accepted that the Landlord was entitled to charge that paragraph (c) provision at the times when it did so. The evidence which I received as to the definition of the works which were to be the subject of the anticipated expenditure was somewhat general. I will assume for the ensuing discussion that it can be shown that the major works which were carried out in 2010 and 2011 were within the works for which paragraph (c) provision was earlier charged. On this basis, if all of the major works (costing £1,046,691.36) had been carried out in the year to 31 December 2010, then there would be no problem; the paragraph (c) provision of £875,000 would simply be credited against that sum and the excess would be added to the paragraph (a) costs for that year.

However, not all of the major works were carried out in the year to 31 December 2010. As I understand it, the costs actually incurred in relation to the major works in the year to 31 December 2010 were less than £875,000. Although the Landlord has credited the whole of the £875,000 in the year to 31 December 2010, that is on the basis that the Landlord included the whole of the cost of the major works for 2010 and 2011 in that year. If, as I have held, the Landlord is only able to include part of the cost of the major works (by reference to costs actually incurred in the year to 31 December 2010) does the Landlord have to give credit for the whole of the £875,000? The alternative might be that the Landlord could apportion the £875,000 between the major works costs in 2010 and in 2011 and only give credit in the year to 31 December 2010 for an apportioned figure. If this alternative were correct, the Landlord would thereby be able to retain part of the Tenant’s contribution to the provision of £875,000 as there would be no later accounting period so far as the Tenant is concerned where credit could be given for the retained part of the provision.

The question I have posed is not an altogether easy one and it did not receive much attention in the course of the submissions. Indeed, the Landlord did give credit for the full amount of £875,000 in its account for the year to 31 December 2010 but it did so on the basis that it could also include all of the cost of the works done in 2010 and 2011 in that account (and I have now held that that was not permissible). The Tenant made the general submission that when one was dealing with the last Financial Year for the purposes of the Lease and when one had held (as I have) that it is not possible in that Financial Year to include paragraph (c) provision for expenditure in a future Financial Year, then it followed that one should give full credit for all paragraph (c) provision which had been charged up to that date. That seems to me to be the right approach to adopt in relation to giving credit for such provision. In so far as the Landlord argued the contrary, its argument appeared to be that it was not possible to give a credit for paragraph (c) provision which exceeded the amount of the matching paragraph (a) costs. I have already rejected that argument and accordingly I conclude that the account for the year to 31 December 2010 should include a credit for the paragraph (c) provision of £875,000.

At the second stage, what is the nature of the apportionment to be carried out and does that apportionment permit or require an apportionment by reference to the duration of the term within the relevant Financial Year?

The definition of Service Charge provides for the Landlord to determine “a fair and reasonable proportion” attributable to the Premises (or the Car Park as the case may be) of the Annual Expenditure relating to the Premises (or the Car Park as the case may be). This determination is to be done in respect of each individual item of the Services and the Ancillary Items. So, in relation to a particular item, in the case of the Premises (rather than the Car Park), the landlord is to determine what is a fair and reasonable proportion attributable to the Premises of the part of the Annual Expenditure relating to that item. No doubt that apportionment exercise should involve a consideration of the significance of that item to the Premises as distinct from other parts of the building, which includes property in addition to the Premises. It might be, for example, that the landlord would apportion the expenditure on an item by reference to the floor area of the Premises as a proportion of the total floor area of the Premises and the other property. I understand that the Landlord in this case did apportion expenditure to the Premises by reference to floor area and that the Landlord apportioned every item of the Services and the Ancillary Items in the same way, using a proportion of 90.87%. I was not told that there was any issue as to this method of apportionment.

The landlord seems to have adopted a similar approach in relation to the apportionment of the expenditure in relation to the Car Park. The definition of Service Charge directs the Landlord to take proper account of the fact that the Tenant has the benefit and use of the entirety of the Car Park (save that the Landlord has reserved the right to use three car parking spaces). Notwithstanding this right in relation to three spaces, the Landlord has apportioned all of the items relating to the Car Park (possibly only one such item) so that the Tenant pays 100% of that item. The sums involved are modest and I was not asked to rule on this approach to apportionment.

The question which arises in relation to apportionment of the Annual Expenditure is how one apportions it to reflect the fact that the last accounting period is the Financial Year to 31 December 2010, whereas the term of the Lease ended on 24 March 2010. The parties agree that there has to be an apportionment for time but disagree as to what provision of the Lease (express or implied) provides for such apportionment and how it is to be done.

It is clear that there is no apportionment for time at the first stage of computation provided for in the Lease. The second stage of computation does require an apportionment. The question which arises is whether the apportionment at the second stage is restricted to an apportionment by reference to the premises within the building which benefit from the Services and Ancillary Items or whether there can also be an apportionment at the second stage by reference to the duration of the tenancy during the last Financial Year.

I am not clear whether the Landlord contends that there can be an apportionment for time at the second stage. What the Landlord does submit is that the only permissible method of apportionment for time is apportionment on a daily basis. The Landlord says that because there were 83 days from 1 January 2010 to 24 March 2010 (both dates inclusive) then the right apportionment of the resulting figure in the account for the year to 31 December 2010 is 83/365.

The Tenant submits that the express terms dealing with the second stage do not permit apportionment for time. The Tenant instead submits that an apportionment for time is to be implied into the Lease. The Tenant further submits that one is not restricted to apportioning on a daily basis; instead, one should, by way of apportionment, strip out of the account for the year to 31 December 2010, the Services and Ancillary items that were not provided in the period to 24 March 2010, alternatively strip out the costs which were not incurred on those matters in that period.

The natural reading of the definition of Service Charge (which provides for the second stage of the computation) is that the only apportionment expressly provided for is an apportionment by reference to the extent of the premises. Further, the language of para. 1.4 of the Third Schedule (which provides for the third stage of computation) is consistent with the reference to the Service Charge being the figure for the whole of the relevant Financial Year. However, I consider that it is implicit in para. 1.4 that when one compares the amount of the Service Charge with the amount of the provisional sums under para. 1.2 of the Third Schedule, in the last accounting period under the Lease, one has to add in the words “or the relevant part thereof” after the words “for any Financial Year” or “for that Financial Year”. On that basis, one is not interpreting and applying the words “a fair and reasonable proportion” in the definition of Service Charge but is instead seeking to determine how much of the Service Charge should be allocated to the relevant part of the Financial Year.

If the apportionment at the second stage does not involve apportionment for time, how and when is such an apportionment to be carried out?

I have now concluded that an apportionment for time is not carried out at the second stage but at the third stage by reference to the relevant part of the Financial Year. How then is that apportionment to be done?

Speaking generally, an apportionment from day to day is a normal enough way to apportion a rent or a service charge. Clause 3.1.2 of the Lease provides for the rack rent to be paid “proportionately for any period of less than a year”. That seems to require an apportionment from day to day and it would be hard to justify any other method of apportionment in relation to the rack rent. Further, para. 1.1 of the Third Schedule appears to involve an apportionment from day to day of the Initial Provisional Service Charge.

An apportionment of the Service Charge from day to day would be a straightforward exercise. Any other exercise would involve more complication. If it were necessary to calculate what sums had been actually incurred in the period to 24 March 2010 there would have to be two accounting exercises. The first such exercise would be that done by the Landlord and the accountant under paragraph 1.3 of the Third Schedule and then the second would be a similar exercise but by reference to the period to 24 March 2010 only. If the apportionment was to be done by reference to the Services and Ancillary Items actually provided in the period to 24 March 2010 rather than the costs actually incurred in that period, then the amount due for the period to 24 March 2010 would be calculated on a different basis from that adopted for the whole calendar year. The Tenant emphasised that the definition of Service Charge referred to the Tenant having the benefit and use of the various services and suggested that was a pointer to the correct mode of apportionment. That submission might well go too far if it would mean, for example, that lift works which were done, and paid for, in the period to 24 March 2010 would result in no part of their costs being included on the ground that the lift works took the lift out of service and caused disruption rather than use and benefit in the relevant period.

I consider that the right method of apportionment to imply is apportionment on a day to day basis. I consider that it more reasonable to apportion on that basis and to avoid the additional complication and room for dispute of apportionment on any other basis.

Is there a fourth stage of computation when the Tenant’s contribution to the provision of £875,000 is deducted from the sum otherwise payable by the Tenant to the Landlord and, if appropriate, obliging the Landlord to pay the resulting sum to the Tenant?

As explained, pursuant to the express terms of the Lease, credit for the provision of £875,000 is to be given at the first stage of computation, in the account for the Financial Year to 31 December 2010. Because the express terms of the Lease permit, and require, the paragraph (c) provision to be brought into account at the first stage, it is not appropriate to bring the paragraph (c) provision into account again, or in a different way, at a later stage which is not provided for in the lease and is said to be implicit.

I recognise that it would be more favourable to the Tenant to leave the paragraph (c) provision out of account at the first three stages, resulting in the Tenant paying 83/365 of the paragraph (a) costs (not reduced by £875,000) and then claiming a refund of 90.87% of £875,000. However, if the express provisions of the Lease provide for the way in which the £875,000 is to be brought into account and as to the Tenant’s proportion of the resulting charges, then those provisions are to be given effect and not to be overridden by a suggested implied fourth stage of accounting.

The result of the above is that the liability of the Tenant should have been computed as follows (I will ignore the Car Park for this purpose):

What is the effect, if any, of certain certificates given or purported to be given under para. 1.3 of the Third Schedule?

Para. 1.3 of the Third Schedule required the Landlord to prepare an account showing the Gross Annual Expenditure and the Annual Expenditure and containing a summary of the expenditure referred to in it. Para. 1.3 then provides for the account to be certified by the Accountant and states that an account so certified shall be conclusive evidence for the purposes of the Lease of all matters of fact referred to in the account (except in the case of manifest error).

In the present case, there are two accounts prepared by the Landlord and certified or purported to be certified by the Accountant. The certified accounts are dated 4 November and 20 December 2011. The Tenant says that the account dated 4 November 2011 complies with para. 1.3 of the Lease and all matters of fact referred to in the account are conclusive and binding on both parties for present purposes. The Tenant also would contend that if the account of 4 November 2011 is a certified account for the purposes of the Lease, then the account of 20 December 2011 cannot be a certified account for that purpose as the Lease contemplates one binding account and not two inconsistent accounts.

By the end of the trial, the parties effectively agreed most of the legal principles which fall to be applied in relation to these two certificates, or purported certificates. In particular, it was agreed that if the Accountant did not comply with the instructions contained in the Lease to be followed in relation to the certificate then the purported certificate would have no legal effect. Although the Lease referred to the certificate being conclusive on matters of fact, save where there was a manifest error, it was also accepted by the parties that the Accountant’s failure to comply with the instructions contained in the Lease did not have to be manifest in that sense; instead, it was accepted that if it was established at the trial that the Accountant had departed from his instructions, then the court would give effect to that conclusion whether it had been manifest prior to the trial or at the time of the certificate. I am content to proceed on the basis of the common ground between the parties as to these legal principles.

I did not hear evidence from the managing agents who, it seems likely, prepared the first version of an account on behalf of the Landlord nor from the accountant who certified the account. However, I did hear evidence from a representative of the Landlord who gave me evidence as to what the Landlord and those acting for it believed to be the total cost of the major works. From this evidence I infer on the balance of probabilities that when the certificate of 4 November 2011 was prepared it was believed by the Accountant that the total cost of the major works incurred in 2010 and 2011 was £1,128,352.36 from which was deducted the provision of £875,000, leaving a net figure of £253.352.36 and the certificate of 4 November 2011 certified this last figure as the cost incurred by the Landlord in relation to the major works during the year to 31 December 2010.

In relation to the certificate dated 20 November 2011, I find that what the Accountant did was to take the cost of the major works at £1,046,691.36 and deduct the provision of £875,000.

In the case of both certificates, the Accountant departed from the instructions contained in the Lease, as I have interpreted it in this judgment. In both cases, the Accountant included costs incurred in 2011 in a certificate of costs incurred in 2010. This was not because the Accountant made any mistake of fact but instead the Accountant proceeded on the incorrect legal basis that he could include in an account of the costs incurred in 2010 the costs actually incurred in 2011. The Landlord suggested at the trial that the figures used by the Accountant in the certificate of 20 December 2011 could be justified on the basis that what the Accountant was entitled to do was to include a paragraph (c) provision in 2010 for the costs actually incurred in 2011 and so the correct figure under paragraph (a) for 2010 together with this paragraph (c) provision would equal the total of the costs actually incurred in 2010 and 2011. There is no sign that the Accountant made any such provision but even if he had purported to do so then, again, that was not permitted by the instructions contained in the Lease.

It follows that both purported certificates were of no effect because they departed in these respects from the instructions given to the Accountant in the Lease as to the contents of such a certificate.

Both certificates were examined in detail at the trial and it was further submitted that the certificates were bad as a matter of form. The certificates were certainly not a model of their kind. What the Lease required the Accountant to certify included the amount of the Gross Annual Expenditure and of the Annual Expenditure yet neither of these phrases appears in either certificate. In view of my earlier conclusion as to these purported certificates, I do not think it is appropriate for me discuss how I would have reacted to the shortcomings as to the form of the certificates if I had been able to hold that the certificates complied with the instructions given by the Lease to the Accountant. Similarly, it is not appropriate to discuss whether I would have held that an error of fact in the computation of the figure of £253.352.36 (if there had been such an error) would have been a manifest error.

What is the effect, if any, of certain determinations made or purported to be made under the definition of Service Charge?

At the second stage of the computation, it is for the Landlord to determine a fair and reasonable proportion of the expenditure. The Landlord did serve on the Tenant two documents which purported to determine this proportion. In fact, these documents were issued by the Accountant and not by the Landlord. I will assume, in the absence of argument to the contrary, that the Landlord was entitled to delegate the task of determination to the Accountant or, alternatively, that the Landlord itself did the apportionment and the Accountant merely passed on the Landlord’s determination. In accordance with what I earlier decided, the apportionment by the Landlord at the second stage had to be confined to an apportionment by reference to the Premises and the Car Park. The Landlord determined a proportion by reference to floor are in relation to the Premises (90.87% for each item) and a proportion of 100% for the Car Park. In these proceedings, no issue has been raised about these percentages.

However, the figures used by the Landlord in its determination were the figures certified by the Accountant and these figures did not conform to the instructions contained in the Lease. It follows that the Landlord’s determination of the sum due for the Financial Year cannot be binding on the Tenant even if (which I do not decide) a determination by the Landlord which did conform to the instructions contained in the Lease would bind the Tenant.

The same documents as apportioned the charges by reference to floor area also apportioned the charge for the Premises by reference to time using the fraction of 83/365. I have held that that is correct approach and does not depend on the decision of the Landlord to that effect.

There is a small detail in relation to the apportionment of the charges for the Car Park. These charges totalled £5,000. This was not apportioned for time by using the fraction 83/365; instead the Landlord’s document included the full amount of £5,000. The Landlord pointed out at the trial that this may have been incorrect but the Landlord also pointed out the charge of £5,000 in relation to the Car Park was for the employment of a car park attendant who was only employed until 24 March 2010. As this point was not argued, having mentioned the point, I need say no more about it.

I have identified the computations which should have been carried out, on my interpretation of the Lease. Those computations have not yet been carried out. It may be that they can now be agreed between the parties. If the computations cannot be agreed then one course would be for the parties to operate the machinery of the Lease to lead to a determination of the amounts due. Another course would be for me to direct an account to be taken by the court for that purpose. Following the hand down of this judgment, I will hear counsel on which course should be adopted.