A recent case has looked again at the correct approach to contractual interpretation, this time in the context of recovery of a landlord’s legal costs through the service charge or sweeper clause in a lease. Housing Litigation expert Karl Anders explains.

Geyfords v O’Sullivan & Others

In this case [1] the Upper Tribunal (Lands Chamber) (the UT) considered the question of contractual interpretation in light of the recent leading decision in Arnold v Britton [2]. The appellant landlord had incurred legal costs in County Court and Leasehold Valuation Tribunal proceedings against the respondent tenants in respect of the recovery of service charges (both sets of proceedings had been resolved largely in the landlord’s favour). The landlord sought to recover its legal costs through the service charge in the relevant lease, in reliance upon a clause which allowed the landlord to recover “All other expenses (if any) incurred by the [landlord]… in and about the maintenance and proper and convenient management and running of the Development”.

Dismissing the appeal, the UT held that the clause in question was not sufficiently clear to cover costs incurred by the landlord in bringing or responding to legal proceedings over the extent of the tenants’ liability to pay service charge.

Practical points

Many leases contain ‘sweeper’, or ‘catch-all’, provisions, which are designed to bring charges which are not specified but which the landlord might want to recover from time to time into the scope of the service charge clause. Like with any contractual provision, whether such clauses actually operate to ‘catch-all’ depends entirely upon the drafting.

Looking at previous authorities on contractual interpretation; the language of the clause in question; wider lease provisions; and considering the legal context at the time the lease was made, the UT emphasised the following points:

  • Leases are rarely identical in their language and in the circumstances of their creation, but while it is impossible to lay down strict rules of universal application, the proper approach to interpretation of contractual provisions, including service charge provisions, is the same in every case.
  • Reliance on commercial common sense and surrounding circumstances should not undermine the importance of the language used in the particular provision to be construed.
  • The more clear the natural meaning of words, the less likely a court will be to depart from it, whatever the outcome may be.
  • Just because a clause relates to service charges does not mean that any special rules of interpretation apply. In particular, there is no general principle that service charge provisions should be construed restrictively [3].
  • Whilst “management” of premises might sometimes involve obtaining legal and other professional advice, clear and unambiguous terms would be required before the court would be persuaded to imply an onerous payment obligation [4]. (The implication sought by the landlord in this case was viewed by the UT to be onerous as it would result in the imposition of a service charge obligation on a whole body of leaseholders within a development to subsidise the landlord’s legal costs of litigating with a defaulting tenant.)
  • In contrast to the lack of clarity in the sweeper provision relied upon, the lease in this case did contain clear wording elsewhere as to the circumstances in which the landlord’s legal costs would be recoverable (for example when steps were taken to forfeit the lease or in relation to a tenant’s non-compliance with statute).
  • The court should objectively assess the parties’ intention at the time the contract was made. When this lease was entered into in 1978, landlords generally enforced payment of service charges by forfeiture and/or in the courts, where the successful party would recover costs from the losing party. When the lease was made, therefore, the parties would not have contemplated that the landlord might be required to incur expenditure before a statutory tribunal operating in a costs-free jurisdiction. It is therefore unlikely that the parties intended the sweeper provision to include recovery of legal costs through the service charge.

WM Comment

This is the latest in a line of cases highlighting the correct approach to contractual interpretation and, in particular, the courts’ reluctance to depart from the natural, ordinary meaning of wording, or to imply or impose terms. Whilst it is clear from the decision that  that there is no general principle that service charge provisions should be construed restrictively, it is unlikely to be welcomed by landlords for its narrow interpretation of the concept of the management of a development and the fact that it is an example of a sweeper clause failing to ‘catch-all’.

Landlords will no doubt seek to ensure that service charge provisions are widely drawn in new leases to avoid similar difficulties arising in the future. They will also have an opportunity to seek wider terms when negotiating the content of existing leases when the contractual term is being extended, either pursuant to a voluntary process, or when a leaseholder exercises their statutory right to extend by 90 years [5].