Phillips v Francis (Secretary of State for Communities and Local Government)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Kitchin,Master of the Rolls,And,and |
| Judgment Date | 31 October 2014 |
| Neutral Citation | [2014] EWCA Civ 1395 |
| Docket Number | Case No: A3/2013/0818 |
| Court | Court of Appeal (Civil Division) |
| Date | 31 October 2014 |
[2014] EWCA Civ 1395
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT, CHANCERY DIVISION
SIR ANDREW MORRITT, CHANCELLOR OF THE HIGH COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
MASTER OF THE ROLLS
CHANCELLOR OF THE HIGH COURT
and
Lord Justice Kitchin
Case No: A3/2013/0818
and
Jonathan Seitler QC & Jonathan Chew (instructed by Enigma) for the Appellants
Chris Stoner QC & Rawdon Crozier (instructed by Fursdon Knapper) for the Respondents
Jonathan Davey (instructed by Treasury Solicitor) for the Intervener
Hearing date: 14 October 2014
Master of the Rolls:
Point Curlew is a 25 acre holiday site ("the Site") at St Merryn, Cornwall which was created in the 1970s on part of a disused WWII airbase. It comprises in excess of 150 chalets which are let on 999 year leases, 11 lodges and a number of other buildings including an amenity centre ("the Amenity Centre"). On 22 April 2008, the freehold of the Site was conveyed by the former owner, St Mervyn Holiday Estate Management Co Ltd, to the defendants ("the lessors"). The last service charge before the sale of the Site to the lessors was £1478 for each chalet. The first after the sale to the lessors was a demand dated 29 December 2008 for £3117.47 for each chalet on account of the year 2009.
On 5 February 2009, the claimants issued these proceedings on behalf of themselves and the lessees of 97 other chalets on the Site ("the lessees"). They sought various declarations as to their liability to pay the service charges claimed by the lessors.
On 22 January 2010, accountants CV Ross & Co Ltd certified the amount recoverable from the lessees by way of service charge for the period 22 April to 31 December 2008 and the 12 months ended 31 December 2009 as £269,933.49 and £583,542.87 respectively. The latter certificate included £95,000 in respect of wages purportedly paid to the lessors by Francis Leisure Limited ("the company") which was the management company wholly owned and controlled by them, and £27,787.76 as a 5% management charge.
The claim came before HH Judge Cotter QC sitting in the Truro County Court. He handed down a very substantial judgment in October 2011 in which he dealt with a number of issues relating to the service charges demanded by the lessors for the years 2008 and 2009. The lessees appealed to the High Court on two main points. The first concerned the true construction of clauses 6 and 8 of schedule 3 of the leases and whether the lessors were entitled to include in the service charges for 2008 and 2009 £95,000 wages for themselves for managing the Site in addition to a management charge of 5%. The second was whether the judge had correctly construed the phrase "qualifying works" in the Landlord and Tenant Act 1985 ("the 1985 Act"). Section 20 of the 1985 Act limits the recovery of the cost of qualifying works by a landlord from residential tenants by means of a service charge unless he complies with a prescribed consultation process or obtains a dispensation from doing so from the appropriate tribunal. The second point is one of considerable general importance.
In a judgment handed down on 21 December 2012, Sir Andrew Morritt C allowed the appeal on both points. There has been considerable adverse criticism of his decision on the second point. Permission to appeal was given by Gloster and Christopher Clarke LJJ. The Secretary of State has intervened in the appeal because the point raises a question of statutory construction of public importance with the potential to affect a large number of residential landlords and tenants throughout the country. The Chancellor has construed the legislation in a way which is at odds with what, it seems, had previously been the general understanding of the position.
The leases
The lessees' covenants are set out in clause 2. So far as relevant sub-clause (q) is in the following terms:
"Pay to the Lessor by way of additional rent the service rent hereinafter defined in Clause 4 within fourteen days of written demand after the accounting date as hereinafter defined in each and every year of the term PROVIDED ALWAYS that the tenant shall pay to the Lessor on each of the accounting dates in every year during the term such sum or sums as the Lessor may reasonably require on account of the said service charge and any such payment to be credited to the tenant against payment of the services as certified to be due from it (as hereinafter provided) by the certificate issued next after the making of such demand and in default of such payment by the Lessee…"
Clause 3 contains the lessors' covenants. By paragraph (b) the lessors covenant:
"To carry out and provide the services as set out and numbered 1–7 in Schedule 3 hereto unless prevented from so doing by…."
Clause 4 contains the obligation to pay the service charge. So far as material it provides:
"The service rent hereinbefore covenanted to be paid by the Lessee shall be a fair and equitable proportion determined from time to time by the Lessor and such sum shall be ascertained by a certificate given by the Lessor or its managing agents and certified by them to be the aggregate of the sums actually expended on the liabilities incurred by the Lessor in any period ending on the thirty first day of December or such other date as the Lessor may in its discretion determine (hereinafter called "the accounting date") during the term hereby created in connection with the management and maintenance of the Estate and the provisions of such services as herein described and in particular without limiting the generality of the foregoing shall include the cost of the matters referred to in the Schedule 3 hereto."
There follows in clause 4 a provision dealing with the binding nature of such a certificate to which are appended three provisos. The third is as follows:
"(iii) As soon as practicable after the accounting date in each year throughout the term the Lessor will submit to the Lessee a statement certified by the Lessor's agent to show the computation of the said sums expended and the liabilities incurred (hereinafter called "the annual service cost") for the preceding year and the Lessee shall be entitled within fourteen days of receipt of such statement to inspect the vouchers and receipts of all items included in such statement."
Schedule 3 not only specifies the subject matter of the lessors' covenant in clause 3(b) but also the costs making up the service charge provided for in clause 4. That schedule provides:
"SCHEDULE 3
"1. To pay all rates and other charges upon the Estate or any part thereof other than those properties specifically demised to third parties.
2. The erection and maintenance of suitable notice boards on the Estate.
3. The maintenance operation and cleaning of soil and drainage pipes and other conducting media conduits and channels and pumps in relation thereto.
4. The provision and maintenance of fire fighting equipment.
5. The cutting and mowing of grass lopping pruning and felling of trees on the Estate.
6. Management of the Estate and its appurtenances including where applicable the charges wages pensions contributions insurance and provision of uniforms and working clothes of any staff employed by the Lessee and the provision of telephones (if any) and also the cost of providing tools appliances cleaning and other materials bins receptacles together with any amounts of fees paid to architects agents surveyors and solicitors employed by the Lessor in regard to the management of the Estate.
7. Repairing renewing rebuilding decorating cleaning and maintaining those parts of the Estate (which include an amenity centre if any) used in common with other lessees including without prejudice to the generality of the foregoing the footpaths roadways and car park on the Estate.
8. A management charge of five per centum (5%) of the total cost of the items referred to in this Schedule."
Sections 18 to 30 of the 1985 Act introduced limits on the recovery of service charges from tenants. It was amended by a number of subsequent statutes, particularly the Commonhold and Leasehold Reform Act 2002.
As amended, section 18 of the 1985 Act provides:
" Meaning of 'service charge' and 'relevant costs'
(1) In the following provisions of this Act, 'service charge' means an amount payable by a tenant of a dwelling as part of or in addition to the rent—
(a) Which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord's costs of management, and
(b) …..
(2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable."
Section 19(1) provides:
" Limitation of service charges: reasonableness
Relevant costs shall be taken into account in determining the amount of a service charge payable for a period—
(a) only to the extent that they are reasonably incurred, and
(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;
and the amount payable shall be limited accordingly."
Section 20 provides:
" Limitation of service charges:...
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