Wilor Investments Ltd v Kenyon-Smith & Ors

Service-charge provisions must be construed as a whole. A clause allowing recovery of costs and expenses incurred in securing specified landlord covenants covers the direct costs of performing those covenants, not the landlord’s general management function. The landlord’s administrative and management entitlement is therefore limited to the agreed percentage of those direct costs. It cannot recover managing-agent fees separately or include them in the base used to calculate that percentage. A manager appointed under a provision concerning servicing, maintenance and cleaning of common parts performs a specific service, not the general management function. The manager’s direct cost may therefore be included among the costs of providing that service and in the calculation of the agreed percentage.

The appeal concerned substantially identical underleases of two light industrial units. The underlessees challenged the landlord’s construction of service-charge provisions in the First Schedule and the provisions concerning additional staff in Part B of the Second Schedule.

The landlord claimed that fees paid to a managing agent were recoverable as costs incurred in securing performance of specified covenants, and that those fees could also form part of the amount on which a further 10 per cent management charge was calculated. The underlessees argued that management costs were confined to the 10 per cent charge and that the cost of an in-house manager was not recoverable.

His Honour Judge Moseley QC, sitting as a High Court judge in the Chancery Division, answered the preliminary construction questions in the landlord’s favour. The central issue on appeal was the proper distinction between direct service costs and the landlord’s general management expenses.

Lord Justice Jonathan Parker delivered the leading judgment. Lord Justice Judge and Mr Justice Bodey agreed, and the decision was unanimous.

1. Construction of the service-charge provisions. The Underleases had to be construed as a whole. The words “costs and expenses” were used substantially interchangeably. The absence of the word “costs” from the phrase referring to the landlord’s management expenses did not establish a meaningful distinction between costs and expenses.
2. Direct costs and general management. The costs and expenses incurred in securing performance of the specified covenants were limited to direct costs, such as insurance premiums, repairs, repainting and the provision of services. They did not include the landlord’s general management function of arranging or procuring performance. The landlord’s entitlement for that function was limited to 10 per cent of the direct costs.
3. Managing-agent fees. A landlord that delegated its general management function to a managing agent could not recover the agent’s fees as direct costs under the first part of paragraph (A) of the definition of Annual Expenditure. Nor could those fees be included in the base for calculating the 10 per cent management entitlement. The construction adopted below would effectively permit recovery of 110 per cent of the managing-agent fee, which the draftsman could not sensibly have intended.
4. Manager under Part B of the Second Schedule. A manager appointed under paragraph 2 of Part B was not equivalent to a managing agent. The manager’s functions were limited to servicing, maintaining and cleaning the common parts. The cost of providing such a manager was a direct cost of securing performance of the covenant in clause 4.8 and could be included in calculating the 10 per cent management entitlement.
5. The appeal was allowed. The relevant parts of the High Court order were set aside and declarations were substituted confirming those conclusions, including that the landlord could not recover the costs of engaging Campus Property Services Ltd as manager.

1. Court of Appeal (Civil Division): [2001] EWCA Civ 1690, 22 October 2001. The appeal was allowed unanimously. The relevant parts of the order below were set aside and declarations were substituted.
2. Chancery Division, Cardiff District Registry: His Honour Judge Moseley QC, sitting as a High Court judge, made an order dated 21 December 2000 reflecting answers to preliminary construction issues. The questions had been answered in favour of the landlord.