UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2012] UKUT 373 (LC)
UTLC Case Number: LRX/186/2011

	TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charge – preliminary issue – construction of term in lease – LVT holding onus on landlord to establish case on meaning and that meaning uncertain – held that this approach wrong – appeal allowed

	IN THE MATTER OF AN APPEAL AGAINST A DECISION
OF A LEASEHOLD VALUATION TRIBUNAL FOR THE
LONDON RENT ASSESSMENT PANEL

BETWEEN	(1) REDROW REGENERATION (BARKING) LTD	Appellants
	(2) BARKING CENTRAL MANAGEMENT COMPANY (NO 2) LIMITED
	and
	(1) RYAN EDWARDS	Respondents
	(2) ADEWALE ANIBABA
	(3) PLANIMIR KOSTOV PETKOV
	(4) DAVID GILL
Re: Flats 501, 507, 608 & 703
86 Axe Street
Barking
Essex 1G11 7FS

Before: The President

Sitting at 43-45 Bedford Square, London WC1B 3AS
on 11 October 2012
Neil Cadwallader instructed by Mr I Mason, Legal Director/Solicitor, Redrow Homes Ltd for the appellants
The first three respondents in person.  The fourth respondent did not appear.

The following cases are referred to in this decision:

Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896
KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363
Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900
Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101
Daejan Investments Ltd v Benson [2011] EWCA Civ 38
DECISION
1.	The first appellant in this appeal, Redrow Regeneration (Barking) Ltd, is the lessor under four leases of flats in a building known as 87 Axe Street, Barking.  This building, together with nearby buildings, was included in a scheme for the regeneration of Barking Town Centre.  The respondents are the lessees of the flats.  The second appellant, Barking Central Management Company (No 2) Ltd, is a party to each lease and is subject to management obligations imposed by the lease.  Each lessee is liable under the terms of his lease to pay to the management company a service charge, referred to in the lease as “the Material Charges Percentage”.
2.	The respondents applied under section 27A(1) of the Landlord and Tenant Act 1985 in respect of the service charges that the management company had demanded of them for the years 2008/9, 2009/10 and 2010/11.  The costs on which the service charges were based were the overall costs incurred by the management company in respect of 87 Axe Street and two other buildings, The Lemonade Building and Bath House.  In the case of each of the lessees the Material Charges Percentage was applied to this overall cost, and it was to this that the demand related.  Following a pre-trial review the respondents produced a schedule setting out in relation to each item of the costs that they contended was unreasonable the reasons for their contention.  Their principal contention was that the service charges were unreasonable and disproportionate having regard to the services provided in respect of 87 Axe Street.
3.	At the hearing before the LVT the tribunal took the view that it was necessary to determine as a preliminary issue whether, under the terms of each lease, it was correct to calculate and demand service charges that were a percentage of the costs incurred in relation to the three buildings, 87 Axe Street, The Lemonade Building and Bath House.  In its decision dated 21 September 2011 it determined that the provisions of the leases that were relevant to this issue were uncertain and that the appellants had accordingly failed to show that the service charges had been calculated in accordance with the leases.  I granted permission to appeal against the decision.
4.	There is no agreed statement of facts, and the LVT made no specific findings of fact.  The decision, however, recorded by way of introduction the following statement from the response of the respondents to the application (the appellants in the present appeal), and there appears to be no dispute about what was said:
“Redrow Regeneration (Barking) Ltd is engaged in the redevelopment and regeneration of Barking Town Centre.  Phase 2 of the project is known as Barking Town Centre Square and comprises of 87 Axe Street, Lemonade Building, the Bath House and the Bike Shed, and that the Piano Works which contains commercial units that are separately managed.  There are 272 units within Phase 2 including 18 Housing Association Units.  87 Axe Street contains 22 Private and 18 Affordable Units.  Bath House contains 96 units and The Lemonade Building contains 136 units.”
5.	For the LVT hearing the appellants produced the service charge statements for the relevant years and copies of letters relating to them.  Reference in these throughout was to a service charge based on the costs relating to all three buildings.
6.	There is no dispute that each of the four leases is in terms that are in all respects materially the same for the purposes of the issues with which this appeal is concerned.  Copies of the leases of Mr Edwards (flat 703) and Mr Anibaba (flat 507) were produced.  Mr Edwards’ lease is dated 2 December 2008 and Mr Anibaba’s is dated 5 December 2008.  Each is for a term of 150 years less 3 days from 12 October 2007.  Under clause 3(4)(a) the lessee covenants to pay to the Company (the management company) the Material Charges Percentage in respect of each year of the term.  “The Material Charges Percentage” is defined in the recitals as (in the case of Mr Edwards) “0.51% of the Material Charges relating to the Building and the Development (or such other proportions as may be determined pursuant to clause 6 of the Sixth Schedule)”.  In the case of Mr Anibaba the percentage is 0.38%.  “The Material Charges” are defined as “the aggregate of the charges computed in accordance with the Sixth Schedule and payable under clause 3(4)”.  Paragraph 2 of the Sixth Schedule provides that “The Material Charges shall consist of…(i) the expenditure estimated as likely to be incurred in the year commencing the 1st April by the Company for the purposes mentioned in the Seventh Schedule…”; and paragraph 3 makes provision for adjusting this in the light of the actual expenditure in the relevant year.
7.	Under clause 5(1) the Company covenants with the tenant and the lessor to carry out the repairs and provide the services specified in the Seventh Schedule.  The services include the payment of outgoings, the employment of staff, insurance and other matters.  Particular repairing and service obligations are expressed to relate to “the Building” or “the Development” or “the Common Areas”.  Thus, for example, the covenant to insure relates to the Building; there is a covenant to employ staff “to perform such services as the Company shall think necessary in or about the Development”; and there is a covenant “to cultivate and preserve in good order and condition the Common Areas”.  The recitals define “the Building” to mean “the building erected within the Development and shown edged blue on Plan No: 1”; “the Development” is defined as “the development of the flats within the land”; and “the Common Areas” are defined as “the boundary walls fences gates Service Installations the communal bin stores (if any) all grassed paved flagged and landscaped areas together with all other parts of the Development and the Building not demised by this Lease or any lease of any other flat in the Development”.  Also to be noted is the definition of “Dwellings” as “the residential flats and the Demised Premises forming part of the Development or the Building (as the context permits)…”
8.	Although “the Development” is defined as “the development of the flats within the land”, there is no definition of “the land”, so that the extent of the Development cannot be ascertained from the provisions of the lease itself.  It is this that gave rise to the problem by which the LVT considered itself to be confronted and to the decision that has resulted in this appeal.  It should be noted that the term “the Development” appears about 40 times in the lease.  Some of these instances are in the Second Schedule, which specifies rights of the tenant that are included in the demise – for example, rights of access along roads and paths, and rights of passage for water, sewerage, gas and electricity, all of which are expressed to be along or through the Development.
9.	In its decision the LVT noted that the major substantive issues in respect of the reasonableness of the service charges were set out in a schedule provided to the tribunal in compliance with directions that had been given on 6 April 2011; and that among the concerns expressed by the applicants was the concern that the service charges were unreasonable and disproportionate having regard to the services provided in respect of 87 Axe Street.  It went on:
“8. At the hearing it became apparent to the Tribunal and the parties, that there is a preliminary issue to be determined in respect of the nature and extent of the service charges contractually payable by the Tenants under the leases.
The Preliminary Issue
9. The preliminary issue is whether, in view of the fact that the service charge have been calculated and demanded as a percentage of the costs relating to the Bath House, The Lemonade Building, and 87 Axe Street, the service charges under the applicants’ leases have not yet fallen due.”
10.	The decision went on to refer to the statutory provisions and the provisions in the leases.  It noted at paragraph 27 that “The central problem in respect of identifying the extent of the applicant’s liability to pay service charges under the lease is that ‘the Development’ is not properly defined in the lease.”  It then referred to passages from a written statement by James Collingwood of Labyrinth Properties that had been provided to it by the appellants.  Mr Collingwood said that Labyrinth Properties was a trading name of Countryside Managing Agents, who had been managing agents for the appellants since 1 April 2010.  He had attached to his statement a copy of a document called “The Development Plan”.  The decision (at paragraph 31) described this as comprising “a plan prepared by Ashford Hall Monaghan Morris Architects LLP of the Barking Town Centre Phase 2, Proposed First Floor Plan” with a key “linked to coloured areas on the plan consisting of ‘Core’, ‘Residential’, ‘Office’, and ‘Cycle Store’.”  It said that on a further copy of the Development Plan the areas coloured yellow for “Residential” were labelled in handwriting as Axe Street, Bath House, and The Lemonade Building.
11.	The decision then went on to record submissions made to the LVT at the hearing by Mrs Sophie Wisdom, who appeared before it on behalf of the present appellants.  A statement filed by Mrs Wisdom in the present proceedings says that the LVT wrongly recorded her submissions in two respects – firstly by stating in paragraph 34 that she had submitted that the terms “the Building” and “the Development” were interchangeable and secondly by stating in paragraph 42 that she accepted that the Development Plan as exhibited to Mr Collingwood’s statement had no legal significance so far as the lease was concerned.  The tribunal went on in paragraph 44 to say that it did not consider that the terms the Development and the Building were interchangeable; and they manifestly are not.  Nothing turns, therefore, on whether the LVT had in this respect misunderstood Mrs Wisdom’s submissions.  The second submission attributed to her seems to me, as expressed in the decision, to be equivocal, and it is in any event of no assistance in resolving the issues that arise in the appeal.
12.	The LVT’s conclusions and reasoning are to be found in the following paragraphs of its decision:
“40. If, as the respondents’ claim (as shown by the basis of charge in the service charge accounts), the Development comprises Bath House, The Lemonade Building and 87 Axe Street, then the costs of ‘the Concierge and security services – salaries £80,000.00’ as shown on the 2009 service charge statement, would form part of the relevant service charge costs, notwithstanding that there is a limited Concierge service at 87 Axe Street as compared to Bath House.
41. The applicants have raised a prima facie case that the meaning of ‘the Development’ in the leases is unclear.  The evidential burden of proof transferred to the respondents to show that under the leases the service charges can be calculated on the basis charged i.e. that ‘the Development’ comprises Bath House, The Lemonade Building, and 87 Axe Street…
42. The Tribunal did not find that The Development Plan, referred to by Mr Collingwood, assisted other than as a matter of general background.  It is not a document referred to in the lease.  In the Development plan, Phase 2 appears to comprise a number of buildings, of different sizes within an undefined area.  In particular it was unclear whether unmarked areas, areas marked garden, or trees were included in Phase2…
44. The Tribunal considers that the use of the terms the Development and the Building are not interchangeable…
46. As currently drafted (and in the absence of rectification (if appropriate) or variation of the leases) the meaning of ‘the Development’ in the lease is uncertain.
47. The respondents have not shown on the balance of probabilities that the totality sums demanded for service charges have been calculated in accordance with the lease.
48. The Tribunal finds that in view of the fact that the service charge have been calculated and demanded as a percentage of the costs relating to Bath House, The Lemonade Building, and 87 Axe Street, the service charge payable under the applicant’s leases as currently calculated and demanded have not yet fallen due.”
13.	Expressed in these terms the conclusion of the LVT, if correct, is a rather alarming one for the appellants.  It appears to mean that no service charges would be payable by any tenant with a lease in this form unless and until the lease is rectified; or, if not rectified (and the LVT thought that rectification might not be appropriate), unless and until it is varied – and then, presumably, only from the time that the variation takes effect.  For the tenants it would similarly mean that, until rectification or variation, they have no rights of passage for themselves or in respect of services across any land outside the Building.  
14.	It should be noted that the issue that the LVT had decided that it should determine was whether the Development included Bath House and The Lemonade Building as well as 87 Axe Street since it was in relation to the costs of all three buildings that the service charges had been calculated and demanded.  The issue as stated did not require that the precise physical extent of the Development be determined (cf paragraph 42 of its decision, quoted above), nor is there anything to suggest that such determination was needed in order that the application might be determined.
15.	It is the case for the appellants, as set out in the submissions Mr Neil Cadwallader, that the LVT was in error in concluding that there was an onus on the appellants to show that “the Development” included Bath House and The Lemonade Building and that, in the absence of rectification or variation, the meaning of the term was uncertain.  He says that the meaning of a term in a lease is a matter of law, and no question of onus arises in relation to it; that in construing a term, the meaning of which cannot be derived from the instrument itself, it is proper to have regard to extrinsic facts and also to the commercial purpose of the provisions in question; and that, had the LVT had regard to the factual material before it and the commercial purpose of the provisions, it ought to have concluded that “the Development” included Bath House and The Lemonade Building.  He refers to Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363, Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, and Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101.
16.	Mr Anibaba told me that, as far as he was concerned, when he was buying his flat, the development related to 87 Axe Street.  There was no reason why the tenants of that building should pay for the heating of The Lemonade Building.  At no time when he was buying his property was it said that he would be paying for the heating of The Lemonade Building or the concierge there.  Mr Edwards said that the plan attached to his lease, Plan No 1 showed 87 Axe Street and not the other two buildings.  What he bought was a flat in that building, together with use of the children’s play area.  The reservation form for the flat, provided by the landlord’s agents, Savills, was headed “Redrow Regeneration (Barking) Ltd” and stated “Development: 87 Axe Street, Barking.”  
17.	It does not appear that it had been any part of the tenants’ case prior to the LVT hearing that “the Development” in the lease should be construed as excluding Bath House and The Lemonade Building.  Nevertheless the LVT decided that this was an issue and that it should be determined as a preliminary issue.  Its conclusions upon it, however, were, in my judgment, incorrect and the means of reaching them were erroneous.
18.	The LVT held that there was an evidential burden of proof on the appellants to show that the Development included Bath House and The Lemonade Building.  That was incorrect.  The construction of a term in a lease is a matter of law, and there is no evidential burden on either party.  In any event for a tribunal to resort to the burden of proof as the first, and only, way of resolving a dispute is wrong.  It is important these days to bear in mind the words of Sedley LJ in Daejan Investments Ltd v Benson [2011] EWCA Civ 38 at paragraph 86:
“Lastly I would add a word to what Lord Justice Gross says in §76(ii) about the burden of proof.  It is common for advocates to resort to this when the factual case is finely balanced; but it is increasingly rare in modern litigation for the burden of proof to be critical.  Much more commonly the task of the tribunal of fact begins and ends with its evaluation of as much of the evidence, whatever its source, as helps to answer the material questions of law.  In nine cases out of ten this is sufficient to resolve the contest.  It is only rarely that the tribunal will need to resort to the adversarial notion of the burden of proof in order to decide whether an argument has been made out, and tribunals ought in my view not to be astute to do so: the burden of proof is a last, not a first, resort.”
19.	The LVT said that “As currently drafted (and in the absence of rectification (if appropriate) or variation of the leases) the meaning of ‘the Development’ in the lease is uncertain”.  That, as a conclusion on construction, is saying that the meaning is incapable of ascertainment.  In reaching it the LVT confined itself to a consideration of the lease itself.  There is no question that the meaning cannot be derived from the lease alone, although certain things can be derived from the terms of the lease: that the Development extends to a greater area than the Building (as the LVT recognised in paragraph 44 of its decision) and that it contains flats additional to those in the Building.  It is, however, not right to confine the exercise of construction to the terms of the lease alone.  
20.	The principles on which contractual documents are to be construed were summarised by Lord Hoffman in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 912F-913G.  The first two principles are of particular relevance in the present case (and the third needs quoting in part for completeness):
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception mentioned next, it includes anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.  They are admissible only in an action for rectification…”
21.	Since the issue of the meaning of the Development had not been raised before the hearing, it was improbable that the LVT would have had available to it “the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the [lease]”.  It did have available to it the documents appended to Mr Collingwood’s statement, but this, as one reads it, was not written for the purpose of providing the extrinsic material needed to establish that, as a matter of construction, the Development included Bath House and The Lemonade Building.  Material had not been needed for this purpose because the applicants had not raised any point about the meaning of the lease in this respect.  What Mr Collingwood evidently sought to do, in answer to the contentions in the schedule that it was unreasonable for the tenants of 87 Axe Street to have to pay charges that were not a pro rata reflection of the costs attributable to their building, was to emphasise that it was the scheme of the lease provisions that costs should be charged across the development as a whole.
22.	The position was that the parties had not searched for the background material relevant to the point of construction by which, at the hearing, the LVT saw itself as confronted.  Nevertheless it should have been clear to the tribunal that such material as it had on the question “Does ‘the Development’ include Bath House and The Lemonade Building?” was effectively all one way.  Thus, as the tribunal recognised, as a matter of construction of the lease “the Development” clearly extended beyond 87 Axe Street itself.  It included flats additional to those in 87 Axe Street.  The Management Charge Percentages (0.51% in the case of Mr Edwards, 0.38% in the case of Mr Anibaba) were consistent only with the Development comprising much more than the 40 units in 87 Axe Street.  The accounts had throughout been prepared for all three buildings together, and service charge accounts had been rendered on this basis.  The schedule that the tenants had prepared for the hearing did, if anything, imply that all three buildings were included within the Development.  Thus, under the heading “Unreasonable ‘reasons why’”, in relation to “Boiler maintenance” it said: “An informal residents association has been set up for another part of the development, the lemonade building because of ongoing hot water problems.”  And in relation to “Concierge” it said: “Whereas, Labyrinth is charging leaseholders for a 24 hour concierge service based in another part of the development, ‘Bath House’ (this cost should be pro-rata).”  Mr Collingwood had produced a copy of a document called “The Development Plan” showing Barking Town Centre Phase 2, which labelled in manuscript each of the three buildings that had been identified as residential.  Not all these things, of course, formed part of the factual matrix existing at the time that the leases were granted, but the significance of them, as Mr Cadwallader submits, was that they were all consistent with “the Development” including all three buildings.  
23.	Mr Edwards in the hearing before me relied on two documents.  The first was the plan attached to the lease, which showed 87 Axe Street and no other buildings.  The second was the estate agents’ reservation form that said “Development: 87 Axe Street”.  The tenants’ case, based on these documents, was that they should be liable for the costs relating to 87 Axe Street alone.  But, as I have said, and the LVT recognised, under the lease “the Development” clearly extends to more than “the Building” itself.  In view of this, neither of these documents does anything to suggest that, as used in the lease, the term “the Development”, encompassing as it does more than 87 Axe Street, does not include Bath House and The Lemonade Building.
24.	Thus the material before the LVT was essentially all one way, and there was nothing that could reasonably have suggested to it that “the Development” was or might be some entity that excluded Bath House and The Lemonade Building. 
25.	The appeal must accordingly be allowed.  It is not the case, to use the terms of the preliminary issue, that, in view of the fact that the service charges have been calculated and demanded as percentages of the costs relating to Bath House, The Lemonade Building and 87 Axe Street, those charges have not yet fallen due.  The LVT should proceed to deal with the matters raised by the tenants in their schedule on the basis that the relevant costs in respect of the Development for the purpose of calculating the percentages payable are those relating to all three buildings.
					Dated 22 October 2012

					George Bartlett QC, President