On 20 November 2012, the Court of Appeal re-emphasised that there is no implication in service charge provisions that a landlord can recover 100% of its costs.

In the case of Campbell v Daejan 7, the tenant was able successfully to argue that the lease of her flat only obliged her to pay a fraction of the costs of the building maintenance.

The house, in Upper Wimpole Street, London W1, comprised a basement, ground floor and four upper floors. There were three separate flat roofs over extensions to the rear basement and ground floor levels. Mrs Campbell had a lease of the third and fourth floor maisonette which was some 29.2% of the house in which it was located.

Under the lease terms, the landlord was responsible for repairing and maintaining the outside walls and roof of the “premises” (i.e. the maisonette, but not the rest of the house such as the roofs or the external walls below third floor level). Mrs Campbell’s service charge required her to pay 40% of the landlord’s costs of carrying out its repairing obligations under the lease.

Matters came to a head when Mrs Campbell refused to pay 40% of the costs of repair work carried out to the house as a whole in 2005-2006. It became clear that there was a dispute over the interpretation of the service charge clause:

  1. Mrs Campbell argued that “premises” were defined as the maisonette in the lease, so she should only be obliged to contribute a proportion of the costs of the repairs to the maisonette;
  2. the landlord argued that the words “premises” were used in error and ought to be read as “house” (i.e. the building as a whole).

Initially the matter went to the High Court on 1 November 2011 where Mr. Justice Roth agreed with the landlord and granted a declaration that “premises” be interpreted as “house”.

Mrs Campbell appealed. The Court of Appeal agreed with her and overturned the judgment. The three judges agreed unanimously that:

  • the use of the word “premises” rather than “house” was not an obvious error which needed to be corrected;
  • there is no presumption that a landlord is entitled to recover all of its expenditure; and
  • where the parties have used clear words, in the absence of an obvious error, the court should not substitute its interpretation for that of the parties.

It may be wrong to draw too many conclusions from this judgment. The Court of Appeal was swayed by the fact that if the landlord’s interpretation prevailed, the tenant would have to pay 40% of the cost of repairing the house (when she occupied less than 30% of it) and some of the works affected roofs from which she derived no benefit at all.

Landlords may be dismayed by the Court’s reluctance to apply what the landlord regarded as a commercial approach to interpreting the service charges payable under the lease. The case itself is a rather salutary lesson to landlords to take care when drafting service charge clauses, as the court will not oblige them by filling in the gaps. In this case, the long lease will expire in 2112, so the landlord will face irrecoverable costs for quite some time.

The case is not necessarily a victory for tenants either. Under the interpretation given by the Court of Appeal, the landlord has no obligation to the tenant to repair the house other than the maisonette even though the maintenance of the house was necessary for the support of the tenant’s premises.

It is odd that neither party apparently made a relatively inexpensive application to the Leasehold Valuation Tribunal (LVT) to make a compulsory variation of the lease under the provisions of Part 4 of Section 35 of the Landlord and Tenant Act 1987. The grounds for such a variation include where:

  • the lease has inadequate provisions relating to the repair/maintenance of the flat or building;
  • the lease has inadequate or no provision for the recovery of money from a party to the lease spent on maintaining the building by another party to the lease; and
  • the computation of a service charge detailed in the lease is inadequate.

In this case, the LVT could have compulsorily ordered the variation of the lease to require:

  • the landlord to repair the house as a whole;
  • the tenant to contribute to the costs of repairing the house as a whole; and
  • the tenant’s proportion of those costs to be reduced to an amount which reflected the size of her maisonette within that house.

Without this variation, the tenant may just have attained a Pyrrhic victory, or at least a loss of control over the works that the landlord was required to do.