In this week's bulletin, we look to recent cases concerning a landlord's recovery of insurance charges in the Upper Tribunal and, in the High Court, a breach of quiet enjoyment with questions of contractual interpretation. Alongside these you'll find our usual dose of positive news and insights from around the firm.
A Thorny Service Charge Problem
In December, the Upper Tribunal (Lands Chambers) (UT) gave judgment in English Rose Estates v Menon & others [2022]. This was the landlord's appeal of a First Tier Tribunal (FTT) decision in which it was held that the landlord was not permitted to recover insurance charges from leaseholders.
The problem was that the schedule to the lease which dealt with the service charge did not refer to the landlord's insuring obligation. Although the leaseholders had challenged the reasonableness of the premiums, the particular issue regarding the wording of the lease had only been raised for the first time on the morning of the FTT hearing. In the appeal, the UT considered the fairness of the proceedings in the FTT as well as the correctness of its conclusion on the insurance issue.
The leaseholders had been acting in person until shortly before the FTT hearing when they instructed Counsel who raised the point about construction in his skeleton argument. The FTT declined the landlord's request to adjourn the hearing and instead invited written submissions.
In the landlord's submissions, it conceded that the lease did not contain an express provision, but argued that one should be implied, or alternatively that an estoppel by convention had arisen over the years, prohibiting the leaseholders from disputing their liability to pay. It also argued that the procedure adopted by the FTT was unfair.
On the issue of procedural unfairness, the UT found that whilst the FTT's decision to allow the new point to be argued was a "robust one", it was not outside the range of decisions available to it.
At the hearing of the appeal, the landlord's Counsel accepted that the FTT reached the correct conclusion on the basis of the arguments raised and did not suggest that the outcome would have been different if further evidence had been allowed. Therefore the point was capable of being determined on legal argument alone and the approach taken by the FTT was not unfair.
A new point regarding interpretation of the lease was raised by the landlord in the appeal; the failure to include a provision for the recovery of insurance costs was a clear mistake and that the lease should be rectified. This was rejected by the UT as being beyond the scope of rectification in the equitable sense. Although the drafting meant the landlord could not recover its insurance costs, which was a surprising and unusual outcome, it was not an entirely irrational one. The suggested mistake was not amenable to a corrective construction because it would involve reallocating responsibilities rather than correcting a linguistic or arithmetic slip in the drafting.
The appeal was accordingly dismissed, although the UT recognised this was not a particularly satisfactory conclusion for either party. The parties were encouraged to reach agreement over past and future insurance obligations, with the assistance of mediation if necessary.
Contractual interpretation: commercial construction preferred over artificial arguments
In confirming the first instance decision, the High Court in Dunward Properties Ltd v Isaac [2022] has provided some reassurance to landlords and tenants as to the interpretation of commonly used drafting techniques in the form of exceptions and reservations.
Mr Isaac purchased the long lease of a first-floor flat in Balham in 2015. The ground floor of the premises was, at the time, let commercially being used as an estate agency.
In 2016, the commercial premises was vacated and a change of use approved to develop the unit into a bar and restaurant with late-night opening hours. When this subsequently opened in 2017, Mr Isaac said that the resulting noise and fumes amounted to a nuisance, breach of quiet enjoyment and a derogation from grant, as well as breaching the landlord's development rights contained in his lease. He sold the lease in 2020 for £470,000, but argued that had the ground floor not been redeveloped into a restaurant it would have sold for £575,000. Mr Isaac claimed the difference of £105,000.
Dunward, the landlord, had reserved a right to develop other parts of the building in Mr Isaac's lease, "provided that such works do not lead to a diminution in value of [Mr Isaac's] flat". One of the questions before the court was whether this reservation of a right could in fact be breached giving rise to a cause of action. The landlord arguing that the proper interpretation of such a proviso was as a "declaratory" right setting out a range of permitted activities but which did not prevent the landlord from undertaking works outside the remit of the proviso, with the leaseholder able to claim under the general law (relating to nuisance, negligence or trespass).
The appeal judge agreed with the first instance decision dismissing the landlord's submission that a reservation of rights was only declaratory, and its breach could not give rise to a cause of action, as "quite artificial". He noted it was “entirely natural to construe the provisos as contractual promises not to exercise [the landlord’s] existing rights in the circumstances set out i.e. if the result would be a diminution in the value of [Mr Isaac's] flat”. Mr Isaac was therefore entitled to recover £105,000 from the landlord on the basis works had been undertaken which, on the expert evidence, had caused a reduction in the value of his flat. However, Mr Isaac's claims for nuisance, breach of quiet enjoyment and derogation from grant failed on the basis these were "unsustainable" against the landlord who did not authorise nor permit the nuisance caused.
The decision makes commercial sense and recognises that the reference to development in the reservation included both the works undertaken to the building and the resulting change in use, as these together caused the impact which resulted in the diminution in value. It demonstrates a practical approach from the Court to the interpretation of leases and resistance to more abstract interpretations.
