Criterion Buildings Ltd v McKinsey and Co Inc  EWHC 216 (Ch)
Stephen Jourdan Q.C. and Philip Sissons, instructed by CMS Cameron McKenna Nabarro Olswang LLP, appeared for the Defendant tenant in this recent case which concerned the proper approach to the calculation of service charges in relation to commercial premises. The judge considered the provisions in the lease relating to, amongst other matters, the proper apportionment of costs between tenants and the operation of a reserve/sinking fund.
The Claimant was the landlord and the Defendant was the tenant pursuant to a series of leases of office premises at 1 Jermyn Street, near Piccadilly Circus, London. The leases entitled the landlord to recover from the Defendant and the other occupiers of parts of the building a contribution towards the costs of providing various services, such as the repair and maintenance of the structure of the building and plant and machinery as well as other services.
The Defendant contended that it had been overcharged by the Claimant in various respects and withheld payment of part of the sums which had been demanded. The Claimant issued proceedings for the balance and, by the time of the trial, the sum in dispute was approximately £2.2 million.
The court decided various questions bearing on the extent of the Defendant’s liability but the two main issues in terms of value were:
Whether the Claimant had demanded a due proportion of the total costs of the services it provided from the Defendant. The Defendant’s obligation was to pay a due proportion of the total cost and the leases defined that term to mean a fair proportion to be determined by the landlord taking into account the use made of and the benefit received from the services. The Defendant argued that the Claimant had failed to make a proper determination of a due proportion because it had purported to do so based on the respective floor areas of the demised parts of the building, but had failed to ensure the measurements used were accurate. Alternatively, the apportionment involved a substantial discount in favour of another tenant, The Criterion Theatre, which was not justified based on the consumption or benefit derived from the services supplied.
Whether the Claimant was entitled to recover sums which had been demanded from the Defendant as a contribution to a sinking/reserve fund. The Defendant contended that whilst the Claimant was entitled to establish such a fund, in order to do so it was obliged to follow the contractual machinery for calculating and demanding the Defendant’s contribution, which it had failed to do. Rather than identify a sum which was necessary to build up and maintain a fund to defray future expenditure, the Claimant had adopted a practice of demanding a contribution to monies it intended to spend in either the current or the next service charge year and, when that sum was not in fact spent, treating the sum as an accrual to a reserve fund rather than applying a credit.
The judge, His Honour Judge Paul Matthews, upheld the Claimant’s claim in full. In relation to the two issues identified above the learned judge held that:
The Defendant, as tenant, had the burden of establishing that the apportionment adopted by the landlord was unfair or otherwise did not amount to a due proportion as defined by the leases. On a true construction of the relevant provisions, the Claimant as landlord was entitled to decide what was a fair proportion and this conferred a subjective discretion, as opposed to creating a requirement of objective fairness. However, even if the landlord’s apportionment was subject to an objective standard, the Defendant had not identified any objective wrongness because the landlord’s apportionment was based on the nature of the space occupied by the Theatre which was a legitimate consideration.
The sinking fund had been operated in accordance with the contractual machinery since there was nothing in the lease which expressly or impliedly prevented the landlord from making demands for a contribution to the sinking/reserve fund in respect of expenditure which it intended to incur in full in the same year in which the demand was made. In any case, on a proper analysis of the service charge accounts the landlord had only made demands for advance payments for sums which it intended to spend in subsequent years.
The Judgment can be viewed here.
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