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CAREY-MORGAN v de WALDEN [2013] UKUT 0134 (LC): Threat To Forfeit Intermediate Landlord Headlease

Summary: The freeholder had threatened to forfeit the intermediate landlord’s headlease if, in breach of covenant, no full time resident caretaker was employed. In the circumstances, it was reasonable to include the cost of a full time resident caretaker in the estimated service charge payable on account notwithstanding the fact that both the headlessee and the tenant agreed that a cleaner would suffice.

Facts: A headlease contained a covenant on the part of the headlessee to employ a full-time caretaker to reside in the basement flat throughout the term.

The underleases contained a covenant by the lessees to contribute towards the costs of the services provided by the landlord. The services included “employing such staff as the landlord may in its absolute discretion deem necessary to provide caretaking services for the Building … including … where accommodation is provided for the use of occupation of such person, a sum equivalent to the market rent of such accommodation”.

Despite these covenants, the basement flat was let to obtain a commercial rent. In 2008 the headlessor (Cadogan) threatened to apply for a declaration that the headlessee was in breach of covenant. As a result, the headlessee decided to employ a full time resident caretaker. The caretaker’s contract of employment required her to live in the basement flat.

The headlessee then sought to recover the cost of doing so and also a sum equivalent to the market rent of the basement flat from the leaseholders. This greatly increased the total estimated service charge from around £8,000 to £56,000 per year.

Issues: The leaseholders contended that they were not liable to pay through the service charge for the costs of the caretaker or for the market rent of the basement flat. The headlessee accepted that, given a free hand, it would not have thought it appropriate to employ a full time resident caretaker.

First Instance: On the issue of the reasonableness of the estimated service charges, the LVT accepted that the headlessee had grounds for concern that the headlessor might try to forfeit the headlease. It concluded that it was prudent (viewed from the headlessee’s perspective) to employ a resident caretaker. It was not, however, necessarily reasonable, within s.19(2), to impose upon the leaseholders the full costs of taking the commercial decision to employ a resident caretaker. The LVT concluded it was reasonable to employ – and therefore to budget for – a cleaner rather than a resident caretaker and that the reasonable estimated costs of employing a cleaner were properly to be included within the estimated on account service charges. Having reached these conclusions, the LVT decided that as the costs of employing a resident caretaker were not properly recoverable there could be no recovery of the notional amount of the market rent of the basement, such that it was not necessary to consider the question of whether this notional rent was capable of being challenged under .s.19.

Decision On Appeal: HHJ Huskinson held that the LVT had fallen into error. The LVT found that the building does not need a resident caretaker and that only a cleaner is required. This, however, was a finding that only a cleaner, rather than a resident caretaker, is required if one is considering the matter on the basis of what is required for the proper day-to-day running of the building rather than considering whether a resident caretaker is required for some other reason.

The leaseholders’ lease must be construed against the factual matrix in which it was executed, which includes (a) that it was an underlease where the immediately superior title was a headlease which contained express covenants by the headlessee to employ a full time resident caretaker and (b) it was an underlease of a unit in a building which, looked at solely as regards physical extent and nature of amenity, was a building where a full time resident caretaker would not be needed for the day-to-day enjoyment of the building.

HHJ Huskinson held that it was reasonable for the headlessee to employ a full time resident caretaker in order to remedy a breach of covenant in the headlease and to avoid the risk of forfeiture proceedings. Accordingly, despite the fact that a full time resident caretaker was not needed for the proper day-to-day enjoyment of the building, those costs would be costs which were reasonably incurred within section 19(1)(a). Therefore an estimated amount for the on account service charges which included an amount for the costs of employing a full time resident caretaker would be in principle a reasonable amount.  The headlessee was not limited to including in the estimated on account service charges only an amount in respect of the costs of employing a cleaner.

The leaseholders accepted that if the LVT’s decision was wrong, such that the costs of employing a full time resident caretaker can reasonably be included in an estimated on account service charge, then so also can there be included a sum in respect of the notional loss of the market rent of the basement flat.

Comment: This case illustrates the landlord’s margin of appreciation on the issue of reasonableness: see Forcelux Limited v Sweetman [2001] 2 EGLR 173.

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