First Property Services Ltd v Ahmet [2017]:

The Upper Tribunal uses Arnold v Britton in service charge interpretation

The background

A residential development site was split between Laing Homes Ltd and Mr and Mrs Faulkner in 1998. Each held freehold interests in their respective parcels of land; Laing under title number SGL605484 and the Faulkners under SGL605938. The parties agreed to establish a management company with responsibility for maintenance of the common areas of the estate, with each party to contribute according to their share of dwellings on the site. The Faulkners’ share was stated to be 6.8% of the cost.

A further agreement was reached by Laing with FirstPort Property Services Limited (then OM Management Services Limited) whereby FirstPort would assume management responsibilities for internal and external common parts over the whole estate, including both Laing and the Faulkners’ sites.

The Respondent took a long lease of a flat in Laing’s section of the development on the understanding that her contribution towards the service charge costs of the estate was proportionate to the total number of dwellings on the site. However, the agreement between Laing and the Faulkners to share the estate costs was not concluded, leaving Laing 6.8% short of the total sum required and their tenants overcharged.

The Respondent argued in her application for determination of her liability to pay the service charge sum and its reasonableness that it was unfair for the tenants of the Faulkners’ part of the estate to have made no contribution towards the costs of maintenance of common areas.

The law

Lease interpretation was critical to this case. Under the lease, the tenant covenanted “to pay the Part A Proportion” of the “Estate Costs”, defining the Part A Proportion as:

“The percentage figure calculated by reference to the formula:

(1/x x y ) where x = the total number of transfers and leases of Dwellings legally completed by the Transferor up to the end of the relevant Rentcharge Year and y = all the expenses reasonably and properly incurred within the relevant Rentcharge Year by the Manager in connection with the matters comprising the Variable Rentcharge Costs SAVE THAT the finally crystallized Transferee’s Proportion may be subject to variation from time to time in accordance with the provisions of this Lease.”

Definitions of ‘Transferor’, ‘Rentcharge Year’, ‘Variable Rentcharge Costs’ and ‘Transferee’s Proportion’ were all missing from the lease. Further definitions, in particular that of ‘Development’ were unclear and inaccurate, with a missing title number and no specific reference to the Faulkners’ site.

At First-tier Tribunal, the court concluded that there was an absence of defined terms and incorrect plans and found in favour of the Respondent.

The Appellant, FirstPort, appealed on the basis that the FTT had not considered that, when the lease was entered into, the Faulkner site did not form part of the Laing title and neither the Faulkner site nor its title number was expressly referred to. The basis of FirstPort’s argument considered interpretation of the parties’ intentions at the time and the lack of any agreement between them to jointly manage the estate.

The decision

The Upper Tribunal allowed the appeal, citing in particular Arnold v Britton’s seven-part test in lease interpretation.

The undefined terms in the lease related to freehold transactions rather than leasehold transactions, and reference to ‘Transferor’ was erroneous, interpreting this as ‘Lessor’ (Laing). The ‘Development’ did not encompass the Faulkners’ part of the site and the service charge calculation formula was judged to relate only to the Laing portion of the site, save where any costs were associated only with the Faulkners’ site.

JB Leitch’s Phil Parkinson comments on the decision:

“Arnold v Britton was a leading Supreme Court authority in lease interpretation and its seven-part test is reinforced by cases such as this. The Supreme Court stated in its judgment in that case that courts should identify the parties’ intentions by referencing ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’ by looking at the wording in documentary, factual and commercial contexts. It was clear to the Upper Tribunal in First Property Services that the parties had not reached agreement on the joint management of the estate by the time the lease was concluded and therefore the decision must be that service charges related only to the Laing part of the estate. The case serves as a useful warning to parties to ensure that leases are completed only after thorough drafting of the document.”