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Kensquare Ltd v Boakye [2021] EWCA Civ 1725

Paul Letman and Toby Boncey 

The Court of Appeal has allowed an appeal against a decision of Judge Cooke in the Upper Tribunal on two of three grounds relating to the service and administration charges recoverable by Ms Boakye’s landlord, Kensquare Ltd.

Newey LJ delivered the lead judgment, with which Stuart-Smith and Andrews LJJ agreed. It was held:

(1) Reversing the Upper Tribunal:

  1. that time was of the essence of clause 4(2)(x) of the Lease, so that the Lessor could only seek to revise the interim service charge if notice was given not less than one month prior to the commencement of the financial year; and
  2. that paragraph 5 of the seventh schedule to the lease did not permit the recovery of the costs of legal proceedings as service charges; but

(2) Upholding the decision of the Upper Tribunal, that Kensquare could recover the costs of proceedings in the FTT brought in 2017 seeking a determination that service charges were due in order to allow notice to be given under s.146 of the Law of Property Act 1925 as an administration charge under paragraph (5) of the fourth schedule.

Time was of the essence of a notice under clause 4(2)(x) increasing service charge

Clause 4 contained, inter alia, tenant covenants during the term to:

“(i) Pay to the Lessor the Agreed Percentage… of the expenditure incurred by the Lessor on the matters specified in the Seventh Schedule hereto and in carrying out its obligations under Clause 5 hereof in respect of the Building (such proportion being hereinafter referred to as ‘the maintenance charge’)

(ii) Pay the Maintenance Contribution specified in Paragraph 9 of the Particulars or such revised sum as shall be calculated in accordance with the provisions of paragraph (x) of this subclause as a contribution towards the maintenance charge such sum to be paid to the Lessor by equal half yearly payments in advance on the 1st day of April and the 1st day of October in each year…

(x) It is further specifically provided that the Lessor may if it thinks fit revise and adjust the Maintenance Contribution for any of the Lessor’s financial years to such amount as it shall deem necessary in light of expenditure reasonably anticipated for that year notice of such revision and adjustment to be served on the Lessee not less than one month prior to the commencement of that financial year and the Maintenance Contribution so revised and adjusted shall be payable by the Lessee in accordance with paragraph (ii) hereof.”

The Maintenance Contribution specified in Paragraph 9 of the Particulars was £360 per annum.

On 15 August 2019, Kensquare had sent Ms Boakye a letter requesting payment of “Half-yearly estimated service charge due in advance” in excess of £360 for three periods: 1 April to 30 September 2018, 1 October 2018 to 31 March 2019 and 1 April to 30 September 2019.

Clearly, the letter of 15 August 2019 was not sent “not less than one month prior to the commencement of the financial year”, since it claimed service charges in excess of £360 per annum for a previous financial year and for a financial year that had already started.

The issue was whether time was of the essence for the purposes of clause 4(2)(x).

Judge Cooke held that it was not, on the basis that “it is well-established that clear words, or a necessary implication”, were required before time was of the essence (citing the rent review case of United Scientific Holdings Ltd v Burnley BC), and the words of the lease went “nowhere near to indicating that time was of the essence”. So, late service of the notice did not matter.

The Court of Appeal disagreed.

As formulated by Lord Diplock in United Scientific Holdings, “the rules of equity… did not regard stipulations in contracts as to the time by which various steps should be taken by the parties as being of the essence of the contract unless the express words of the contract, the nature of its subject matter or the surrounding circumstances made it inequitable not to treat the failure of one party to comply exactly with the stipulation as relieving the other party from the duty to perform his obligations under the contract”.

On the facts of that case, the presumption against time being of the essence was not defeated, in large part informed by the rent review clause being designed to produce a mechanism for review in the interests of both parties, and the serious adverse consequences to the landlord if time were to have been of the essence.

Deciding whether time is of the essence in any particular case is a question of contractual construction. As Peter Gibson LJ put it in Stamark Enterprises Ltd v CPL Distribution Ltd, the Court has to seek to discern “the intention of the parties, viewed objectively, with the aid of the presumption” and “[t]here is nothing to prevent parties agreeing that time should be of the essence, thereby defeating the presumption, provided that that agreement is clearly indicated in the lease.”

The terms of Ms Boakye’s lease suggested, at face value, that the notice must be served at least a month before the beginning of the relevant financial year:

  1. The language of clause 4(2)(x) provided in terms for a notice to be served “not less than one month prior to the commencement of that financial year”;
  2. The language “in light of expenditure reasonably anticipated for that year” suggested that the financial year in question is yet to come, and expenditure could hardly be “reasonably anticipated” once the year was over and the expenditure had been incurred;
  3. Payment is to be “by equal half yearly payments in advance on the 1st day of April and the 1st day of October” and to meet that timetable the amount of Maintenance Contribution for the year must be known before it begins;
  4. The lease did not provide for what would happen if a notice were served after the relevant financial year had started;
  5. No notice needed to be served at all for a Maintenance Contribution of £360 to be payable for the year.

Newey LJ considered that “[o]f themselves, [those matters] might not suffice to displace the presumption against time being of the essence which applies in relation to rent reviews and also, it seems to me, final service charges… However, parties should, I think, more readily be taken to have intended time to be of the essence in the context of interim service charges.”

This was because, in cases such as the present, “there is no question of the landlord being deprived of all ability to levy service charges. The dispute is essentially as to timing. Is the landlord restricted to collecting final service charges (which, under the terms of Ms Boakye's lease, it is supposed to do as soon as practical after the end of the financial year)? Or is it also open to it to require the tenant to pay interim service charges? In such circumstances, it is much more likely that the parties meant the time limits specified in their lease to be strictly complied with.”

It was also considered that time was of the essence for the following reasons:

  1. Having at least one month’s notice before the tenant had to pay the first half of an increased contribution and seven months’ notice before paying the second half had obvious benefits to the leaseholder in setting her personal budget and the tenant is unlikely to have wished to forfeit such advantages.
  2. The tenant was not in a position to assess how far, if at all, the Maintenance Contribution for any year might be increased (which might be contrasted with the position under a rent review where the tenant could get an idea of the market from her own surveyor).
  3. Taking the parties to have intended the lease to operate in the way its terms specify on their face is consistent with the desirability of tenants being “able to work out for themselves whether a sum is due to be paid by reading the lease and comparing the process it describes with the information provided in support of the demand by the landlord, without the involvement of lawyers or other advisers” (as the Deputy President had said in Southwark LBC v Woelke).

Accordingly, the presumption against time being of the essence was displaced by clause 4(2)(x).

Many of the more general considerations relevant in this case will also be relevant to other cases concerned with interim service charge provisions. It may be easier in future cases in light of Newey LJ’s contrast between interim service charge cases and final service charge and rent review cases to establish that time is of the essence in respect of an interim service charge demand (depending of course upon the precise wording and context of the lease in question).  

Costs of proceedings could not be recovered as service charge under paragraph 5 of the seventh schedule

The matters to which clause 4(2)(i) referred in Schedule 7 (in respect of which the maintenance charge was payable) included, by paragraph 5 of that Schedule:

“The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building.”

The FTT had thought the costs were recoverable and that the case was similar to Sella House v Mears, in which the Taylor LJ had referred to the absence in that clause of “any specific mention of lawyers, proceedings or legal costs”, considered that the scope of the clause “is concerned with management” and that if a tenant paying service charge on time would be liable to subsidise the landlord’s legal costs of suing his co-tenants if they were in default “I should require to see a clause in clear and unambiguous terms before being persuaded that that result was intended by the parties.”

Judge Cooke preferred the approach in Iperion Investments v Broadwalk House Residents Ltd, stating: “The purpose in the relevant clause is the management of the building. Of the cases cited by counsel, it comes closest to the one in Iperion, although it is arguably wider because of the words 'in connection with'. I do not think that the different form of the legal action in Iperion, involving a claim for an injunction, makes any difference to the construction of the clause as [counsel for Ms Boakye] argues. I take the view that the landlord's legal costs incurred in the 2017 and 2019 proceedings were incurred in connection with the management of the building and are therefore recoverable as part of the service charge.”

The Court of Appeal concluded, applying Arnold v Britton, that the appropriate test in construing such provisions is that “service charge provisions are not subject to any special rule of interpretation, but the Court should not bring within the general words of a service charge clause anything which does not clearly belong there.”

It was submitted for the landlord that “management of the Building” could be expected to involve the collection of service charges, and, potentially, enforcement action, and that “professional advisers” must include lawyers, and that the paragraph extended to costs “in connection with” the management of the Building, not costs “for” management.

Those submissions were rejected. Read naturally, paragraph 5 did not extend to litigation costs. The reference to “professional advisers” was apt to apply to lawyers, but they were not specifically mentioned and nothing was said about legal proceedings. The focus, like in the clauses considered in No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd (which had been decided after Judge Cooke’s decision), was on management services rather than litigation. A decision that it covered litigation costs would be a decision that would involve “bring[ing] within the general words of a service charge clause” something “which does not clearly belong there”.

Costs of proceedings to determine a breach had occurred were recoverable under paragraph (5) of the fourth schedule as an administration charge

Paragraph (5) contained a tenant covenant “To pay all costs charges and expenses (including Solicitors’ costs and Surveyors’ fees) incurred by the Lessor for the purpose of or incidental to the preparation and service of a Notice under Section 146 of the Law of Property Act 1925 notwithstanding forfeiture may be avoided otherwise than by relief granted by the Court and to pay all expenses incurred by the Lessor…”.

Proceedings for a determination that a breach had occurred in respect of a failure to pay service or administration charges were a necessary precursor to giving a s.146 notice to Ms Boakye because of s.81 of the Housing Act 1996 and s168 of the Commonhold and Leasehold Reform Act 2002. Kensquare brought such proceedings in 2017 due to a failure by Ms Boakye to pay earlier interim service charges. The FTT determined that the interim service charges were payable and a s.146 notice was duly given.

It was argued for the tenant that the costs of the 2017 proceedings were not incurred “for the purpose of… the preparation and service of” a s.146 notice nor were they “incidental to” the preparation and service of such a notice. This was said to be because there was no reference to “proceedings” (unlike clauses permitting recovery of the costs of proceedings in other cases) and because the legislative framework had changed since the date of the lease (1982), in that the 1996 and 2002 Acts had come into force requiring a determination of breach, which would not have been contemplated by the original parties to the lease.

The Court of Appeal, upholding Judge Cooke, disagreed. Here, the Court considered that the wording “costs… incurred by the Lessor for the purpose of… the preparation and service of a” s.146 notice was wide enough to apply to the costs of the FTT proceedings, which Kensquare had no choice but to bring if it wished to serve a s.146 notice. It did not matter that at the date of the lease the landlord did not need to make such an application: “The parties to the lease agreed that the tenant should bear costs incurred for the purpose of the service of a section 146 notice, and the costs which Kensquare incurred in the 2017 FTT proceedings fit that description.”

Each Case is Fact Specific

Each of the issues for the Court of Appeal were matters of construction of Ms Boakye’s lease. As Newey LJ explained:

“… comparison with leases which have featured in other cases does not provide a reliable guide to how Ms Boakye's lease is to be construed. As Judge Bridge, sitting in the Upper Tribunal, said in Sinclair Gardens Investments (Kensington) Ltd v Avon Estates (London) Ltd …, "Each case is fact-specific, in the sense that what must be construed is the particular clause in the particular lease of the particular property, and conclusions arrived at by previous courts or tribunals in relation to other clauses in other leases of other property are unlikely to be of much assistance". In a similar vein, Sir Stephen Sedley noted in Rees v Peters…, that, "despite the usefulness of standard phraseology in conveyancing, the instrument which contains it must still be read and understood as a unique text directed to a specific transaction with its own parties and purposes" and, rather longer ago, Sir George Jessel MR observed in Aspden v Seddon… , that "it is the duty of a Judge to ascertain the construction of the instrument before him, and not to refer to the construction put by another Judge upon an instrument, perhaps similar, but not the same".

Obviously, therefore, when construing any given lease care should be taken before seeking to rely upon the conclusions in other cases. But that it not to say the decided cases are not instructive in seeking to deal with similar arguments on future occasions, indicating as they do the matters the Court will regard as relevant in reaching a conclusion.

Key Points

This decision is hugely significant in terms of the operation of interim service charge provisions. It might be said that the egregious departures from the timetable envisaged by the interim provisions in this case, with interim demands many months out of time, have driven the result. Plainly more difficult will be those cases where the time limits are only just missed. Certainly, we can expect to see many like challenges to the validity of interim demands, as well as the development of arguments based on waiver and estoppel to rescue them.

So far as costs are concerned, as in No1 West India Quay, the decision here that the legal costs were not recoverable as service charges represents another victory for the approach to construction in Sella House v Mears, albeit qualified always by the specific terms and property to which the lease relates. This appears clearly now to be the prevailing approach.

The decision to allow the costs of proceedings as administration charges under the s.146 costs provision is plainly supportable on the facts and usefully confirms the approach in 69 Marina and Barrett v Robinson, given the ensuing service of notice.

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