Background

The dispute concerned a property in Holland park, owned by 89 Holland Park (Management) Limited (a tenant run management company), and let to a number of tenants, including Mr and Mrs Dell.

The lease contained various obligations on the landlord to repair and maintain the property, and a corresponding right to recover money from tenants under the service charge.

The landlord and tenants at 89 Holland Park were concerned about the impact of plans by celebrity architect, Sophie Hicks, to build a novel underground development on neighbouring land, with a “glowing glass box” entrance hall.

With the support of the tenants, the landlord resisted the grant of planning permission, and brought proceedings to enforce a restrictive covenant in respect of the neighbouring land. However, by 2014, Mr and Mrs Dell had moved abroad and, as the proposed development would not be visible from their flat, informed the landlord that they no longer supported the litigation.

The landlord eventually won its claim, but didn’t recover all of its costs in the litigation so claimed the rest  - totalling around £2.7 million - from the tenants through the service charge, billing Mr and Mrs Dell over £430,000.

Mr and Mrs Dell brought proceedings in the First Tier Tribunal (FTT), arguing that litigation costs were not recoverable under the lease, and that the amounts claimed were not reasonable.

The FTT found in favour of the landlord, but this was overturned by the Upper Tribunal, who agreed with the Dells that these costs fell outside the scope of the service charge provisions in the lease. The landlord appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal found in the Dells’ favour.

The starting point for interpreting the service charge provisions was the 2015 case Arnold v Britton in which the Supreme Court confirmed that a contract should be read with regard to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean” with commercial common sense providing a “useful cross-check”.

The key words in the two service charge clauses were that expenditure had to be “for the proper maintenance safety and administration of the building” and, in almost identical terms, “for the proper maintenance safety amenity and administration of the building”. The Court of Appeal decided this meant the costs of maintaining and running the building and keeping it safe only. The word “amenity” meant the amenity of the building itself, not the attractiveness of views from it.

In pursuing the litigation, the landlord’s primary concern was to stop the development because of its appearance, not to maintain the building or keep it safe, so its costs fell outside the service charge provisions.

A landlord can only recover costs through the service charge where it is itself under an obligation to carry out the relevant service. Given the vague wording of the clause, it would be just as unfair to impose a “substantial…long-term” obligation on the landlord to pursue this kind of litigation as it would be to expose tenants to the risk of open-ended litigation costs. This meant that, while the landlord could recover the costs of litigation arising from its responsibilities under the lease – for example, claiming against a contractor for poor workmanship on a repair, or pursuing an insurer for failure to pay out – it could not claim the costs of a planning and restrictive covenant dispute in relation to neighbouring land.

Other parts of the lease specifically allowed the landlord to recover the costs of litigation (in relation to re-entry for repair, and forfeiture). The fact that these circumstances were dealt with separately and specifically indicated that the costs of disputes are “the sort of exceptional expenditure which might generally be expected to be explicitly provided for where it is intended to be covered”.

The Court of Appeal also noted that, when the leases were entered into, the parties would have been aware of the potential of a dispute over the neighbouring land, which had been sold for development purposes, and was subject to restrictive covenants which required the landlord, as freeholder, to consent to any development. Under the lease, the right to deal with neighbouring land was reserved to the landlord, which indicated this was an issue for the freeholder, rather than a landlord and tenant issue.

As well as the service charge provisions themselves, the landlord raised a new issue at the Court of Appeal, arguing that the definition of “expenditure” in the lease, which allowed it to recover costs incurred in carrying out its obligations under the service charge “and any other costs and expenses reasonably and properly incurred in connection with the Building including without prejudice to the generality of the foregoing…” allowed it to recover its litigation costs.

The Court of Appeal decided that this clause also required any expenditure to relate to the “Building”, not to neighbouring land, and as the definition referred back to the service charge clause itself, the same analysis applied.

It was also “inherently unlikely that the parties would have intended to include an obligation to fund uncertain but potentially significant costs of a planning-related  dispute with a neighbour within general wording in a definition” where the service charge provisions specifically set out other costs which could be incurred in a detailed list.  

On that basis, the landlord could not recover its litigation costs from the Dells.

How far can a sweeper clause stretch?

This case is a good reminder to landlords and tenants to be specific. If the tenant expects the landlord to pursue litigation in respect of a neighbouring site, the lease will need to contain an express obligation to that effect. The corollary is that a landlord can only recover costs arising from the obligations which are expressly provided for in the lease. A sweeper clause can only sweep up so much, and this case is a good reminder of its limits.