Deepesh Kapadia & Ors v The Church Commissioners for England

This appeal concerns service charges payable by leaseholders of flats on the Church Commissioners’ Water Gardens Estate in Central London.

The Water Gardens is one of a number of sub-estates forming part of a larger estate owned by the Commissioners and known as the Hyde Park Estate. It is a mixed-use estate lying immediately to the west of Edgware Road comprising 250 residential units in four towers together with commercial units on Edgware Road itself, a basement car park and landscaped areas.

The appellants are leaseholders of five of the flats in the estate, Flats 18, 24, 38, 153 and 254. In May 2024 they applied to the First-tier Tribunal, Property Chamber (the FTT) for a determination under section 27A, Landlord and Tenant Act 1985 of their liability to pay service charges for the service charge year ending 25 March 2021.

By a decision handed down on 7 July 2025 the FTT determined the liability of the leaseholders to pay charges under 59 separate headings. The FTT reduced three of the charges (the amounts payable for internal cleaning, fire protection and equipment, and the provision of CCTV) but otherwise confirmed that the disputed sums were reasonable and payable. The leaseholders now appeal on five distinct issues.

At the hearing of the appeal the leaseholders were represented byPhilip Rainey KC and Piers Harrison and the Commissioners by James Fieldsend and Richard Miller. I am grateful to counsel for their submissions.

In the weeks before the hearing the Tribunal received applications from a large number of leaseholders of other flats on the Water Gardens Estate who were not party to the proceedings in the FTT. These leaseholders asked the Tribunal to make orders in their favour under section 20C, Landlord and Tenant Act 1985 providing protection against any liability they may have to contribute through their own service charges to the Commissioners’ costs of the appeal. These leaseholders will be joined as additional respondents to the appeal for the purpose of making their applications which I will consider after I have published this decision on the appeal.

There are two standard forms of lease in use on the Water Gardens Estate. The older form has been referred to as Type 1 and is the form under which Flats 18 and 153 are let. The example I was shown was the lease of Flat 18, which was granted on 4^th November 1988. The alternative form, referred to as Type 2, was used in the lettings of Flats 24, 38 and 254. The example I was shown was the lease of Flat 254 dated 1^st July 1998. In both examples the lease was granted for a term of 99 years from 25 December 1986.

The leases are in conventional form and include covenants given by the Commissioners as Lessors that they will provide the usual services (in the Sixth and Seventh Schedules). The Lessees covenant to pay the rents and service charges described in the Second Schedule. The service charge is a specified percentage of the relevant costs incurred by the Commissioners. I will refer to the relevant provisions of the leases in more detail when dealing with the issues to which they relate.

I was informed that there are very few differences between the Type 1 and Type 2 leases and only one was drawn to my attention. That is the definition in paragraph 3 of the Third Schedule of the expression “the Surveyor”. In the Type 1 leases that expression means “the Surveyor for the time being of the Lessors”. In the Type 2 leases the same expression is defined as meaning “the Surveyor or Managing Agents for the time being of the Lessors”.

Permission to appeal was given on five issues of which one was compromised and four were the subject of argument. These were:

The issue which the parties were able to compromise concerned the recoverability as a service charge of part of a commission received by the Commissioners in connection with insurance. I will return to that issue at the conclusion of my decision.

The leases each reserve the rents set out in the Second Schedule which, by paragraph 2, include a sum equivalent to a fixed percentage (0.332% in the case of Flat 18 and 0.443% in the case Flat 254) of the expenses outgoings and costs “estimated from time to time by the Surveyor as likely to be incurred by the Lessors” in connection with services and “Additional Matters” found in the Seventh and Eighth Schedules “in respect of any period ending on the Twenty Fifth day of March in every year (or on such other date as the Lessor may from time to time by notice in writing stipulate)”. Notice of the amount payable in respect of services and Additional Matters is to be served on the leaseholder by the Lessors or the Surveyor.

Mr Kapadia and Ms Sayegh, the leaseholders of Flats 18 and 153, have taken issue with the sum notified to them on 5 March 2020 in a letter from the Commissioners’ agents, Knight Frank. The letter enclosed the budget for the year ending 24 March 2021 together with an invoice dated 4 March 2020 seeking payment of the service charge due on 25 March. They say that they are not liable to pay the amount demanded because it was not “estimated … by the Surveyor”.

In the Type 1 lease “the Surveyor” means “the Surveyor for the time being of the Lessors”.

In their statement of case the leaseholders put the Commissioners to proof that the charge had been estimated by a surveyor, asking that the relevant person be identified and their credentials specified.

The FTT found that the person who had made the estimates for 2020-21 was Mr William Bell. Mr Bell explained in a witness statement filed in response to the leaseholders’ challenge that at the relevant time he was employed by Knight Frank, the Commissioners’ then agents, as their Residential Asset Manager for the Water Garden Estate. He provided details of his credentials, as requested, saying that he had an undergraduate degree in countryside management, a master’s degree in real estate management, and that he is a member of the Property Institute and has worked in block management since 2016.

Evidence about the process by which the service charge budget was set was given by Peter Devere-Catt MRICS, a Chartered Surveyor and partner in Knight Frank at the relevant time, who described himself as the team leader for the Hyde Park Estate. Mr Devere-Catt explained that he reviewed and approved the draft budget prepared by Mr Bell and that they discussed it with the Commissioners’ senior asset manager at a budget approval meeting in February each year. The budget was then signed off and demands based on it were prepared.

The FTT dealt with the leaseholders’ challenge robustly, as follows:

“The Tribunal has no hesitation in rejecting the Applicants’ submission. A “surveyor” in ordinary parlance is not limited to a person with professional qualifications. There is nothing in either the task given in the lease to the Surveyor or the context of the lease as a whole that would require the profession of the person in question to be anything in particular. The Surveyor simply refers to the person appointed by the Respondent to carry out this and other related tasks relevant to fulfilling their obligations under the lease.”

On behalf of the leaseholders Mr Rainey submitted that the FTT’s approach was flawed and that in concluding that “the Surveyor” need not be a person with any particular professional background, and referred simply to the person appointed by the Commissioners to perform the tasks allotted by the lease to the Surveyor, it failed to give sufficient weight to the fact that the role of the Surveyor was not only to estimate costs but also to carry out apportionments and other functions for which specific expertise was required. Moreover, the FTT had given no weight to the fact that the definition of “the surveyor” included the word “surveyor” and meant “the Surveyor for the time being of the Lessors”, not any other sort of person. It was clear, Mr Rainey submitted, that a valid estimate for the purpose of the lease could only be made by someone who was properly described as a surveyor. They need not be a Chartered Surveyor but they must be someone who, by professional qualification or experience, could be recognised as a surveyor. Mr Bell did not claim to be a surveyor and was not a surveyor, so an estimate of outgoings made by him could not satisfy the requirement of paragraph 2 and could not give rise to a contractual obligation to pay the sum he estimated.

Mr Rainey pointed out the variety of tasks allocated by the leases to the Surveyor. These could require the Surveyor to exclude costs wholly related to the commercial parts of the Estate and to apportion other costs between the residential and commercial parts; to determine which parts of the building were structural and which were non-structural (a classification relevant to the extent of the demise); to authorise access to the roof of the building; to give binding decisions (other than on issues of law) on disputes between neighbours and on the meaning of the Estate regulations; to determine whether the standard of repair and decoration achieved by a leaseholder was satisfactory; to approve the quality of floor coverings or the design of dustbins; and to give or withhold consent for the keeping of pets.

I was referred by Mr Rainey to a number of cases in which parties had agreed a task would be performed by a surveyor or managing agent.

In New Pinehurst Residents Association (Cambridge) Ltd v Silow [1988] 1 EGLR 227 the Court of Appeal upheld a trial judge’s determination that a committee of six leaseholders (who were also shareholders in the landlord company) could validly certify service charge contributions for the purpose of a lease which required certification by “the Lessor’s managing agents acting as experts and not as arbitrators”. Kerr LJ, at page 229, said that it was essential that the managing agents be legally distinct from the lessor, but that they need not be “professional persons with professional qualifications”.

In Jacey Property Co Ltd v De Sousa [2003] EWCA Civ 510 a tenant agreed “To pay a proper and fair proportion as determined by the Landlord’s surveyor of the expense of repairing … sewers and drains”. The landlord claimed a contribution towards the cost of repairs based on a proportion determined by its solicitor. The Court of Appeal held that the charge was not recoverable. As Arden LJ explained, at [48], the parties had submitted to the determination of the landlord’s surveyor: “It is not open to the landlord to substitute another person, however well qualified in other respects, and even though he is appointed to act in a surveying role.”

Finally, in Akorita v Marina Heights (St Leonards) Ltd [2011] UKUT 255 this Tribunal (HHJ Huskinson) decided that the tenant’s liability to pay was conditional on a valid certificate by the lessor’s surveyor acting as an expert. An auditor’s certificate which did not purport to certify the appropriateness of the amounts demanded could not fulfil that requirement.

These cases demonstrate that where a lease requires that an estimate or a certificate be provided by a surveyor or a managing agent, an estimate or certificate provided by someone who is not a surveyor or managing agent will not do and will not trigger liability to pay the sum in question. But they do not address the question which arises in this appeal, which is a question of construction of the Type 1 lease, namely: what qualifications or characteristics must a person have before they may provide the estimate which gives rise to a liability on the part of the Type 1 leaseholders to pay a service charge? They must be a surveyor, but what does that mean in this lease?

The FTT considered that “the Surveyor” simply referred to the person appointed by the Commissioners to carry out the tasks ascribed to that person under the lease. I accept that description up to a point, but it is incomplete. It is significant that the person is to be selected by the Commissioners, but I agree with Mr Rainey that the pool from whom the selection may validly be made is limited to surveyors. The Commissioners could not appoint a dentist or a vet as their surveyor, just as the landlord in Jacey Property Co Ltd could not appoint a solicitor. But what is a surveyor?

The lease conspicuously avoids identifying any qualifications which the Surveyor must possess. It is not said that they must be a Chartered Surveyor (in contrast to the Auditor, who must be a Chartered Accountant). Nor is any of the very many different types of surveyor specified. The parties may be taken to have assumed that the Church Commissioners would select someone appropriately qualified to perform the particular task required and did not consider it necessary to narrow the choice other than by using the very general and imprecise description “surveyor”.

It was suggested by Mr Rainey that only one person could be the Surveyor, but that seems to me to be too restrictive an approach. It gives no weight to the direction in paragraph 3(a) of the Third Schedule that throughout the lease, where the context so admits, the singular includes the plural. Given the range of tasks which the Surveyor might be called on to perform, it is unlikely that the parties assumed that one individual would be the most appropriate choice for each of them, or that the Commissioners’ choice should be limited to a single appointee. I can see no reason why the parties must be taken to have intended that the person who determines which parts of the building are structural and which are non-structural must be the same person as is tasked with resolving disagreements between neighbours or interpreting the Estate rules. The Surveyor can be different people for different purposes, or (in some instances) more than one person for the same purpose.

Mr Rainey accepted that the term “surveyor” covered a very wide range of activities, and that it was not necessary that the person selected must possess a particular professional qualification; there may even be individuals without formal professional qualifications who by reason of their practice and experience would be capable of fulfilling the role of Surveyor under the lease. In view of that acknowledgement, which I think is clearly right, I find it difficult to see what objection there can sensibly be to Mr Bell. At the relevant time he was an employee of a substantial firm of surveyors, working in a professional environment and specialising in residential property management, which is a specialism of many surveyors. He was plainly an appropriate person to perform that part of the Surveyor’s function which involved estimating annual service charge expenditure. The fact that he may have been unqualified to undertake other functions of the Surveyor does not seem to me to matter.

As I have said, I think it is significant that the lease defines the Surveyor as the Surveyor of the Lessors and leaves the choice of who is to fill that role to them. The parties could have limited their choice by specifying a particular type of surveyor or minimum qualifications but they chose not to do so. In those circumstances their choice should be open to challenge in only the most extreme situations (the dentist or vet), and not where the person chosen has Mr Bell’s provenance, qualifications and experience. I am therefore satisfied that the estimate provided by Mr Bell was an estimate provided by “the Surveyor” and that the demands based on it were valid and I dismiss the first ground of appeal for these reasons.

That conclusion makes it unnecessary for me to consider the alternative argument advanced by Mr Fieldsend on behalf of the Commissioners which was that the leaseholders were estopped from denying Mr Bell’s ability to fulfil the role of the Surveyor. As the leaseholders were not made aware of Mr Bell’s qualifications until the issue was raised in these proceedings it might be difficult to show that the parties shared some relevant common assumption or that the leaseholders assumed responsibility for it. But as the FTT made no findings of fact and did not consider this argument in any detail, there is no solid basis on which it can be considered on appeal.

I would add, though the case was not argued in this way, that I can see no reason why the involvement of Mr Devere-Catt, who is a Chartered Surveyor, or that of other members of the staff of Knight Frank engaged in the budgeting process should be left out of account in determining the validity of the interim demand. One perfectly sensible answer to the question, who is the Commissioners’ surveyor, or who are their surveyors, would be that their surveyors are Knight Frank, who clearly did provide the estimate on which the demands were based. But as the appeal was not argued on that basis I do not place any weight on it and I dismiss the appeal on this ground for the reasons I have previously given.

The contractual machinery for fixing the amount of the service charge which each leaseholder is obliged to pay (under both Type 1 and Type 2 leases) is contained in paragraph 2 of the Second Schedule referred to in paragraph [10] above. These provisions are in wholly conventional terms.

First, each leaseholder is to pay on request as further and additional rent their agreed percentage of the outgoings estimated by the Surveyor as likely to be incurred in connection with the Services and the Additional Matters “in respect of any period ending on the Twenty Fifth day of March in every year (or on such other date as the Lessor may from time to time by notice in writing stipulate) (hereafter in this Schedule called “the Service Charge Period Date”)”.

Having made this provision for an estimate, the paragraph then deals with accounting for costs once they have been incurred as follows:

It will be seen that, as is to be expected, the comparison required by these provisions is between the actual costs of the outgoings for the period ending on the Service Charge Period Date in the relevant year and the amount of “the Surveyor’s estimate thereof” i.e. the Surveyor’s estimate of the outgoings for the same period. It will also be seen that the obligation to pay arises on the satisfaction of a condition (“if the actual cost … shall be in excess of the Surveyor’s estimate … then the Lessee will … pay an amount equal to the difference”). Unless the condition is satisfied the obligation does not arise.

The second issue turns on the fact that although the estimate notified to the leaseholders by Knight Frank in March 2020 was for the year ending 24 March 2021, when the annual accounts were prepared by the Auditors to show actual expenditure they were accounts for a period (said to be a year) ending on 31 March 2021. Those accounts were served by Knight Frank on all leaseholders on 22 June 2022 under cover of a letter which made no reference to the difference between the year end date on which the estimate had been based and the year end date selected for the accounts. The letter informed leaseholders that the accounts showed a deficit of £126,383 between the service charge expenditure and the amount collected and enclosed a demand for payment of the leaseholder’s share of that deficit.

The evidence showed that Mr Devere-Catt and others at Knight Frank appreciated that the accounts had been produced to a different year end date from the estimate (although Mr Bell suggested in his witness statement that this “was not picked up”). Mr Bell clarified that outgoings for the period between 25 March and 31 March 2021 had totalled £107,754. I take the evidence to mean that, despite the accounts stating that they were for the “year ended 31 March 2021”, in fact they cover the period from 25 March 2020 to 31 March 2021. I do not understand the evidence to mean that outgoings of £107,754 were omitted altogether from the accounts, or that there was a gap of seven days which was not covered by either the 2020 or the 2021 accounts. The period covered by the accounts was extended. Had the period not been extended, the deficit to be covered by the leaseholders for 2020-21 would have been £18,629 rather than £126,383.

The leaseholders submitted to the FTT that because of the discrepancy between the period covered by the estimate and the period covered by the accounts they were not liable to contribute towards the 2020-21 deficit. The Commissioners argued that the service of the accounts gave the leaseholders notice of a change in the Service Charge Period Date and that the demands based on the accounts were valid. The FTT dismissed that suggestion:

“[T]hat cannot be right because the Service Charge Period Date is defined as the date to which the estimates are calculated. The same date must then be used for the actual costs. The scheme of the lease is that the estimated and actual costs should be for the same period.”

Nevertheless, the FTT rejected the leaseholders’ submissions for the following reasons:

“The Applicants argued that the demands were not valid because the accounts had not been certified to the correct date. However, it is a logical fallacy to assume that a failure to comply with one aspect of the arrangements automatically invalidates the entire process. Service charge demands are not rendered wholly invalid by the inclusion of an element which is not payable – otherwise nothing would be payable every time, for example, if the standard of cleaning were successfully challenged or the cleaning of lessees’ windows wrongly included.

16.

Mr Bell stated in his witness statement that costs referable to the additional period amounted to £107,754.55. The Applicants pointed out that this would not have been apparent to any recipient of the demands but the same applies in the event of any non-payable charges being included. The fact that the precise correct sum owing is not discernible cannot render the entire amount not payable.

17.

The correct period to 25th March was contained within the period used to 31st March. It would be wholly contrary to the service charge scheme of the lease for the lessees to be relieved of liability for the entire year on the basis that it had been wrongly extended by 6 or 7 days. Effectively, the lessees were being asked to pay a small proportion early. If they could show that any loss arose to them as a result, they would be entitled to sue for damages for breach of covenant, but it is notable that they did not claim to have suffered any loss as a result.”

One problem with this passage is that it is unclear whether the FTT considered that the full amount demanded was payable, or only what it described as “the precise correct sum owing” for “the correct period to 25^th March”. But leaving that ambiguity to one side, the FTT’s analysis treats the auditor’s certificate and the ascertainment of the sum payable (or to be credited) as inessential procedural details when, in reality, the parties cannot know whether anything is due unless and until the correct calculations have been performed. Whether a failure to comply with one aspect of the service charge arrangements invalidates the entire process depends on the detail of the parties’ agreement and on the particular step which has been omitted. It is not possible to equate a failure to perform the accounting exercise required by the lease with the inclusion of a charge which ought not to have been included. Nor does the validity of the demand depend on transparency. Either the condition which triggers the liability to pay has been satisfied, or it has not.

For the Commissioners, Mr Fieldsend made two submissions in defence of the FTT’s approach.

First, Mr Fieldsend submitted that the certification of actual outgoings to a particular date was not a pre-condition to the leaseholders’ liability to pay. The liability arose simply on service of the demand. I do not agree. The language of proviso (a) in paragraph 2 of the Second Schedule is unambiguous: if the outgoings certified by the Auditor for the period ending on the Service Charge Period Date in any year are in excess of the Surveyor’s estimate, the leaseholder will immediately, on written demand, be required to pay the difference. If the certified outgoings in the relevant period do not exceed the Surveyor’s estimate, no payment is due, and if the certified outgoings are less than the estimate a credit is due. Until the outgoings are certified to the correct date and until it is known whether they exceed the estimate, and by how much, it cannot be known whether any payment is due. It is irrelevant that outgoings certified as having been incurred in a period ending on a different date from the Service Charge Period Date may exceed the estimate, because those outgoings are not the subject of the required comparison.

Secondly, Mr Fieldsend argued that the FTT had been wrong to dismiss the suggestion that the service of the accounts themselves was sufficient to change the Service Charge Period Date. The Surveyor may stipulate another Service Charge Period Date by notice in writing, but the leases do not prescribe the timing, form or content of such a notice. That is true, but there is force in Mr Rainey’s submission that the contractual language (the Surveyor may “by notice in writing stipulate” a new date) requires some element of formality in the process of changing the Service Charge Period Date. In any event, whether the notice need be formal or not, it must be expressed in terms which make it clear to the recipient that a change is being made. In this case Knight Frank gave notice of their estimate of outgoings for the year ending 24 March 2021 on 5 March 2020. On 22 September 2021 they gave notice under section 20B, Landlord and Tenant Act 1985 summarising the expenditure for the year ending 24 March 2021. Neither of those documents suggested any change was anticipated. Nor did the covering letter of 22 June 2022 suggest that the Service Charge Period Date had been changed. By that time, the estimate for 2021-22 had already been served in March and again made no mention of a change of date. The suggestion that the year end date had been changed is inconsistent with estimates for 2020-21 and for 2021-22.

Mr Fieldsend countered this suggested inconsistency by submitting that the leases do not require that the same Service Charge Period Date be used for estimated and actual expenditure. I do not agree. The language of proviso (a) assumes that the estimated and the actual outgoings will be calculated to cover the same period, as the FTT held. The calculation requires that the outgoings “for any period” be compared to “the Surveyor’s estimate thereof”; it is therefore a requirement that the period of the estimate and the period over which the actual cost is calculated be the same. For that reason it appears that any change in the Service Charge Period Date must be made prospectively, and not later than the date when the leaseholders are notified of the estimate for the forthcoming period. Having elected to estimate the relevant outgoings for the years ending 25 March 2021 and 25 March 2022, it was not open to the Commissioners to change the 2021 Service Charge Period Date to 31 March.

In the absence of an explanation, a reasonable leaseholder who received the accounts for the year ending 31 March 2021 would be likely to assume that a mistake had been made, rather than that notice was being given that the Service Charge Period Date for a year which had long since ended was being changed. The service of the accounts was therefore not effective to change the Service Charge Period Date. It follows that no liability to pay a balancing charge was created by the service of the accounts drawn up to a date which was not the Service Charge Period Date. The necessary calculation could not be done to ascertain whether a payment, or a credit, was due and the contractual condition on which the leaseholders’ liability to pay was not satisfied.

The FTT was concerned that leaseholders would be “relieved of liability for the entire year on the basis that it had been wrongly extended by 6 or 7 days”. That concern was misplaced. The only liability from which the leaseholders will be relieved is the liability to pay the balancing charge (their respective proportions of the difference between the estimated and the actual outgoings). The evidence suggests that figure was in the order of £18,600. Liability to make those contributions will crystalise once accounts drawn up for the correct period have been prepared.

For these reasons no balancing charge is yet due for the year 2020-21 and the appeal on ground 2 is successful.

Each of the appellants’ long leases require that they contribute a specified percentage of the Commissioners’ outgoings and the cost of the Additional Matters. The long leases of other flats on the Estate follow the same pattern, with each leaseholder contributing an agreed percentage. None of the leases require that any flat which is let by the Commissioners in future must be let on terms requiring the tenant or leaseholder to contribute to the costs of running the Estate in any particular proportion (or even at all).

The appellants argued before the FTT that the proper inference from the use of specified percentages in the leases was that the parties assumed that the percentage contributions would add up to 100 percent of the Commissioners’ expenditure and that if that assumption were later to be falsified by the development of new areas, then a term should be implied that each lessee should pay a fair proportion.

The leaseholders’ pleaded case before the FTT was that the following term should therefore be implied into each of their leases:

“Should further flats or commercial premises be developed in the Water Gardens, then instead of the stated proportion of insurance and service charge, the tenant should pay a fair proportion taking into account the new flats or commercial premises, whether the new premises are let on long leases or short leases”

The evidence before the FTT dealt with the tenure of the 250 flats on the Estate as it was in November 2024 when the evidence was prepared. At that time, in summary, 240 flats were let on long leases and 10 flats were not. Of those 10 flats, seven were occupied under regulated tenancies protected by the Rent Act 1977, one was occupied under an assured tenancy and two flats were vacant. It appears that a greater number of flats had formerly been occupied under regulated tenancies or by employees. At least one had fallen vacant on the death of the regulated tenant in 2021 and had then been relet on a long lease, and three flats previously occupied by porters or other staff members had become vacant and been sold on long leases.

Additionally, one new flat, referred to as “the Pod”, had been created in 2019 by the conversion and extension of a former storeroom. Former commercial premises at 1 Sussex Gardens which had become vacant in 2018 are also currently undergoing conversion to create an additional flat.

No evidence was provided showing the pattern of tenure on the Estate at any other time. The earliest of the Type 1 leases was granted in 1966, and others at various times in the 1960s and 1970s. The lease of Flat 18, the earliest in date of those held by the appellants, was granted in November 1988. It is not known how many of the flats on the Estate were occupied at any particular time under long leases and how many under regulated or assured tenancies. It seems reasonable to assume that when long leases first began to be granted, in the 1960s, flats on the estate were typically occupied under regulated tenancies or other short term forms of tenure.

In support of their case that the suggested term should be implied into their leases (and I assume into the other Type 1 and Type 2 leases) the leaseholders referred to the decision of Morgan J in H Waites Ltd v Hambledon Court Ltd [2014] EWHC 651 (Ch). In that case12 flats and garages in a newly constructed block were let on a standard form of lease which required each leaseholder to contribute one twelfth of the cost of services provided by the lessor. It was proposed by the lessor that further flats be developed on the roof of the garage block and the leaseholders sought to prevent that development by arguing that it would breach an implied term that there would never be more than 12 flats. That implied term was said to follow from the fixed proportions in which the leaseholders were required to contribute to the cost of services. Morgan J rejected the suggested implied term in favour of a different implied term which he explained as follows, at paragraph [65]:

“I consider that the clear assumption made by the parties to the flat and garage leases when initially entered into was that the Estate would not comprise more than 12 flats and 12 garages. On that basis, it was agreed that each lessee of a flat and garage would pay 1/12 of the relevant costs. If that assumption were later to be falsified (save where an original flat was sub-divided), I consider that it would be open to a court to imply that the consequential agreement as to a 1/12 apportionment would no longer be applicable. In such a case, I consider that it would be obvious that what should replace the reference to 1/12 should be a reference to "a fair proportion".

Morgan J’s reasoning in Waites was adopted by this Tribunal (Judge Cooke and Mrs Martin) in Vectis Property Co Ltd v Cambrai Court Management Co Ltd [2022] UKUT 42 (LC) at paragraph [65] as a reason for rejecting the suggestion that the leases of all nine flats in a self-contained building constructed in 1969 contained an implied term that no further flats could be built on the roof of the building. If additional flats were built, the Tribunal reasoned, the leaseholders’ obligation to contribute one ninth of the cost of services would be varied by the operation of an implied term requiring each leaseholder to make an equal contribution.

The FTT rejected the leaseholders’ argument for the inclusion of an implied term in their leases. It considered Waites to be a case turning on its own facts and pointed out that there was no evidence that the original parties to the leases at the Water Gardens proceeded on any assumptions as to the future composition of the estate or any part of it. Nor did the FTT think it could undertake a re-apportionment of all the flats on the estate, as suggested by the appellants, as not all leaseholders were parties to these proceedings.

Neither Waites nor Vectis establishes any point of principle of general application. They are both simply examples of the application of well-established criteria for the implication of terms into contracts. In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72 Lord Neuberger of Abbotsbury PSC explained, at [15], that there are two types of contractual implied term. The first is a term which is implied into a particular contract, in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made. The second type of implied term arises because the law effectively imposes certain terms into certain classes of relationship (such as the relationship of landlord and tenant, and the implied covenant for quiet enjoyment in every lease which lacks one as an express term). The term proposed by the appellants in this case is of the former kind; it is a bespoke term said to be implied into the Type 1 and Type 2 leases. For such a term to be implied it must be reasonable and equitable, it must be necessary to give business efficacy to the contract, it must be so obvious that it goes without saying, it must be capable of clear expression, and it must not contradict any express term of the contract. This formulation of the relevant requirements was provided by Lord Simon in the Privy Council case of BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 52 ALJR 20, [1977] UKPC 13, 26, and was restated by Lord Neuberger, with some refinements, in Marks and Spencer at [18]-[32]. Lord Simon’s summary is more than sufficient for the purpose of this appeal.

Mr Fieldsend submitted that the FTT had been correct to distinguish Waites and Vectis since the circumstances of those cases were very different. At the Water Gardens there was no justification for an assumption, when the leases were granted, that there would be no further development or that the number of flats would remain constant. In Waites that assumption was fundamental to the apportionment of service charge contributions, with twelve leaseholders each paying one twelfth of the outgoings and covering the total cost. Nor, at the Water Gardens, could there have been any expectation that the service charge contributions collected from leaseholders would cover all of the lessors’ expenditure; they could not possibly do so while only a proportion of the flats on the estate was let on long leases which included a service charge. Moreover, the parties had clearly had in mind at least the possibility of further development during the term as demonstrated by the reservation of a right in favour of the Commissioners to build upon adjoining or neighbouring land and to interfere with the access of light or air to the demised premises in doing so (paragraph b of Schedule 1, Part III).

At the Water Gardens the basis on which each leaseholder’s fixed contributions was determined is unclear, but it was certainly not a simple division by reference to the number of units on the estate; nor does it appear to have been related to floor area, as flats of similar size make very different contributions. The apportionments might have been based on rateable value but there is no evidence of that nor is it known, if relative rateable value was the touchstone, which units were taken into account in arriving at the apportionment. Were commercial premises included, or units occupied by the lessor’s staff, or spaces which remained in the occupation of the Commissioners (such as the storeroom which later became the Pod)? In 1966, when the earliest of the leases was granted, the greater part of the estate is likely to have been occupied under regulated tenancies, paying no service charge. How were those flats taken into account? Mr Rainey submitted that the basis of the original apportionment was irrelevant, but without a reliable understanding of the principles, if any, which guided the agreement of the express terms of the leases, it is impossible to be sure what the parties may be taken to have intended in the event that additional units were added. This is a complex estate which has undergone significant change, both physically and in terms of tenure, since long leases began to be granted. The circumstances in which the original parties reached agreement are important in the identification of implied terms in any contract, but it cannot be assumed that all of the leases in this appeal were granted against the same factual background. That is a significant point of distinction between these leases and those considered in Waites and Vectis.

Nor have the appellants found it easy to formulate their proposed term clearly. As it was pleaded in their statement of case before the FTT the proposed change from a fixed proportion to a “fair proportion” was to be triggered by the development of further flats or commercial premises. In oral argument Mr Rainey changed tack and suggested that the implied term should only refer to the development of new flats, and not commercial units. Moreover, “development” should be understood to include the grant of a new long lease of a flat which had previously been let on a short-term tenancy or as a term of the tenant’s employment. These changes to a term which must be so obvious that it goes without saying, inevitably undermine the suggestion that the parties must be taken to have intended that the basis of apportionment of service charges might change with the evolution of the estate. However the original apportionments were arrived at, they provide the parties with certainty and simplicity, and it is far from obvious that they would willingly have exchanged those advantages for a more flexible scheme, and less obvious still what event they would have intended to be the trigger for that change.

It may also be relevant that the leases include a power for the Surveyor to apportion or reduce any item or items forming part of the outgoings when calculating the sums payable by the leaseholders (paragraph 2(e) of the Second Schedule). That power is to be exercised having regard to the extent to which the item in question benefits all the tenants of the residential parts on the one hand and the tenants of the commercial parts on the other. While the proposed implied term may not be inconsistent with this provision, the fact that the parties thought about a form of reapportionment and designed one for use in certain circumstances, at the discretion of the Surveyor, makes it more difficult to assume that they intended a different form of apportionment in other circumstances which they thought it unnecessary to spell out.

The changing legislative context in which the leases were granted must also be kept in mind, as it forms part of the background to the contracts. Shortly before the grant of the lease of Flat 18 in November 1988, Part IV of the Landlord and Tenant Act 1987 came into force. This provided, for the first time, a mechanism for varying leases in certain circumstances, including where the aggregate of the contributions of several leaseholders enables a landlord to collect more than the costs it had incurred in providing the relevant services. The statutory provisions are elaborate and may or may not be applicable in this case, but their existence reduces the likelihood that the parties intended that their leases should include the suggested implied term. A further layer of complexity is uncovered once it is appreciated that some Type 1 leases were granted before these legislative changes were mooted, while others postdate them. Might the implied term be included in the older leases but not in the more recent? If so, none of the appellants’ leases would include it.

In short, it is very far from obvious that an implied term in any of the forms suggested is included in the appellants’ leases. In my judgment the FTT was right to reject the suggestion that it should adjust the fixed proportions in which service charge contributions are payable. The appeal on ground 3 is dismissed.

Before the FTT the appellants disputed their liability to contribute towards expenditure by the Commissioners, originally put at £58,533 but subsequently reduced to £45,747.32, which related to legal charges incurred in pursuing other leaseholders for various alleged breaches of covenants in their individual leases.

The FTT found that the appellants were obliged to contribute towards the disputed legal fees but did so without considering the language of the leases or identifying any particular clause giving rise to the liability. The appellants maintain that the FTT misunderstood their argument and misrepresented their case in its decision.

Paragraph 2 of the Second Schedule to the leases obliges the leaseholder to contribute through the service charge to the Commissioners’ outgoings in connection with the Services defined in the Sixth Schedule and the Additional Matters said to be defined in the Sixth Schedule but which are actually in the Eighth Schedule. In their written case to the FTT the Commissioners maintained that the appellants were liable to contribute to the disputed legal fees either under paragraph 2(c) of the Sixth Schedule, or under one or more of paragraphs 1, 2, 8(b) or 10 of the Eighth Schedule.

Paragraph 2(c) of the Sixth Schedule is a proviso entitling the Commissioners to employ professional advisers, staff and agents in connection with the provision of the Services or in relation to the Additional Matters referred to in the Eighth Schedule.

The paragraphs of the Eighth Schedule on which the Commissioners relied were the following:

The term most directly concerned with the cost of proceedings is paragraph 8(b). When read together with paragraph 2(c) of the Sixth Schedule it would appear to cover the cost of employing professional advisers in relation to claims and proceedings in connection with any part of the Water Gardens or relating to the Services. But the Commissioners’ entitlement to recoup these costs is qualified by the words in brackets at the end of paragraph 8(b), “(for which any tenant is not directly liable).” Costs for which a tenant is “directly liable” are therefore excluded.

In Skilleter v Charles (1991) 24 HLR 421, to which the FTT was referred by the appellants, the Court of Appeal considered the effect of a clause entitling a landlord to recover the costs of proceedings to enforce covenants “in so far as the costs of enforcement are not recovered from the Lessee in breach …”. Parker LJ (with whom McGowan LJ agreed) considered, at 425, that the effect of this qualification of the tenants’ obligation to contribute was that the landlord was under a corresponding duty to try to recover the relevant costs from the defaulting tenant and could not add the costs to the service charge until it had done so. As the facts were unclear, the Court of Appeal did not consider the practical consequences of this duty. Implicitly, however, until the landlord had attempted to recover the costs from the individual against whom the relevant action had been taken, it could not recover them from the general body of the tenants through the service charge.

In this case there was evidence before the FTT that the policy of the Commissioners is to pursue defaulting leaseholders for costs incurred in proceedings. In practice professional fees are treated as service charge items but sums recovered from the responsible leaseholder are credited back to the service charge account. The result is that any shortfall between the costs incurred and the sum recovered would be met through the service charge account. The only exception would be in the case of the small number of leases which do not include an indemnity covenant, and in those cases the Commissioners would meet any unrecovered costs of proceedings.

The FTT interpreted paragraph 8(b) as entitling the Commissioners to recoup the costs of proceedings against defaulting leaseholders through the service charge, subject to crediting back any sums actually recovered: “unless and until those costs are recovered and credited back, the respondent is entitled to recover their costs through the service charge”.

The costs which are excluded from the service charge are costs for which any tenant is “directly liable”. The reference to a “direct” liability is presumably intended to exclude sums for which any tenant might be liable indirectly (through the service charge). But the critical word is “liable”. Costs for which any tenant is “liable” may not be recouped through the service charge. What did the parties mean by “liable”? For the Commissioners, Mr Fieldsend submitted that only costs for which a court or tribunal has found a tenant liable are within the exception in paragraph 8(b). The costs of a dispute which is continuing, and which might never be the subject of an order for payment by the tenant, cannot be said to be costs for which the tenant “is directly liable”. The alternative view, advanced on behalf of the appellants by Mr Rainey, is that liability does not depend on a finding of liability. The restriction on recoverability of legal costs as a service charge depends solely on whether the tenant was liable for the costs under the lease, not whether they were actually recovered (or whether the landlord had endeavored to recover).

The lease includes a comprehensive indemnity covenant by the leaseholder at paragraph 12 of the Fifth Schedule. This renders the leaseholder responsible for indemnifying the Commissioners against all “damage damages losses costs expenses actions proceedings claims demands and liabilities suffered or incurred“ by them and arising directly or indirectly out of any act, omission or negligence of the leaseholder or any breach of any provision of the lease. The effect of that indemnity is that each leaseholder is under an immediate contractual liability to reimburse any expense which the Commissioners have incurred where it arises directly or indirectly out of their own act, omission or breach. It is necessary to bear the individual indemnity covenant in mind when interpreting paragraph 8(b). The defaulting tenant is directly liable under the terms of the lease as soon as the Commissioners incur a relevant expense or experience a relevant loss. That liability does not depend on a third party determination, nor on the ability of the defaulter to comply with the indemnity.

The practice under which the Commissioners fund the cost of debt collection, enforcement and legal proceedings through the service charge fund, while reimbursing the fund once recovery has been made, is not sanctioned by paragraph 8(b). There is nothing in that paragraph to suggest that it was intended to assist the Commissioners in managing cash flow. In my judgment costs for which any leaseholder is liable, whether under the contractual indemnity or as a result of a court or tribunal order, do not fall within paragraph 8(b). That exclusion depends on the purpose for which the relevant costs have been incurred, not on whether they have yet been the subject of a determination or have been recovered from the defaulter.

The evidence before the FTT showed that more than half of the invoices rendered by the Commissioners’ solicitors which were included in the disputed total of £45,747.32 related to the non-payment of ground rent, service charges or administration charges. The remainder related to breaches of covenant, with the most common breach being of covenants against subletting or parting with possession. All of these matters are within the scope of the individual leaseholders’ indemnity covenants. None of them is capable of being recouped through the service charge in reliance on paragraph 8(b).

Mr Fieldsend submitted that the cost of proceedings or making claims could be recovered through the service charge in reliance on paragraph 1 of the Eighth Schedule, but I do not agree. Where a particular category of expenditure is the subject of specific treatment under which some part of that expenditure is excluded, it would be inconsistent with the parties’ clearly stated intention for the expenditure which has been excluded then to be brought within the scope of recovery by some much more general language found elsewhere. Paragraph 8(b) is widely expressed and includes costs which relate to “any function duty or matter referred to in this Schedule” but subject to the exclusion of costs for which any tenant is directly liable. The matters within paragraph 1(a)(ii) (the assessment collection and verification of rents), fall within the same schedule and the two provisions must be read side by side and consistently. Paragraph 1(a)(ii) cannot be allowed to nullify the express exclusion of costs for which an individual tenant is directly liable, which is the effect of Mr Fieldsend’s argument. That can be achieved by reading paragraph 1(a)(ii) as referring to the collection of rent and other sums in the ordinary course of the parties’ relationship, while paragraph 8(b) can be understood as referring to the exceptional case of default.

Mr Fieldsend submitted that there needed to be certainty about what costs could be recovered through the service charge and that only a determination of liability by a court or tribunal could provide the required certainty. I agree with Mr Fieldsend’s premise but not with his conclusion. It is important that the parties know whether a cost can be recovered through the service charge or not, but Mr Fieldsend’s solution treats the same expenditure as initially falling within the charging provision but later as falling within the exception. It would leave the cost of proceedings recoverable through the service charge until liability was confirmed by a judgment or tribunal determination but would render it irrecoverable and liable to be reimbursed once payment was received. That would no doubt be convenient from the point of view of managing the estate but it does not seem to me to be a coherent approach, nor one which can be reconciled with the language of the lease.

Mr Rainey’s interpretation does not seem to me to be surprising or improbable. The Commissioners have the benefit of the contractual indemnity and the security of the right to forfeit for breach of covenant if the indemnity is not met. In the absence of any obligation on the Commissioners to take action against defaulters, including pursuing them for the recovery of costs incurred, both parties’ interests are better protected if the Commissioners cannot have recourse to the service charge fund as an alternative to enforcing their rights directly against individual leaseholders.

For these reasons I allow the appeal on issue 4 and substitute a determination that the disputed sum of £45,747.32 was not payable in the 2021 service charge year.

The FTT found that the Commissioners were entitled to retain for their own benefit the balance of a commission they received from the insurer of the estate, after paying their brokers and agents for services they provided in arranging and managing the insurance of the estate. Both parties now agree that that conclusion was not justified and that if the FTT believed the net sum remaining out of the commission was referable to services which the Commissioners provided, it was mistaken. Although permission to appeal had been granted to enable the appellants to challenge the FTT’s conclusion, the appeal on that issue was resolved by agreement.

Initially the parties did not agree whether the FTT’s determination on this issue should be set aside. The impression may have been given that the Commissioners wished to be able to resurrect their argument on some future occasion. That impression may be wrong, but it is better for everyone to know where they stand. Mr Fieldsend was happy to confirm on instructions that there had been no justification for the Commissioners retaining the net commission. On that basis I set aside the FTT’s determination to the opposite effect. The sum involved is now agreed to be modest and having established the principle the appellants are content and do not wish further expenditure to be incurred in quantifying the amount or restating accounts.

For these reasons the appeal is allowed on issues 2 (change of year end) and 4 (legal costs) and dismissed on issues 1 (the Surveyor) and 3 (implied term). The parties should agree a form of order reflecting my conclusions and recording those of the FTT which survive.

There remain applications by the appellants and by other leaseholders for costs protection under section 20C, Landlord and Tenant Act 1985 relating to the costs of the appeal to this Tribunal. Similar applications are pending before the FTT in relation to the costs of the proceedings before it. The parties may be able to agree these but if not the appellants and other leaseholders may make submissions within one month of the date of this decision on the applications before me. The Commissioners may then respond within a further two weeks.