Morshead Mansions Ltd v Di Marco

The Court of Appeal considered whether contributions demanded under a company's articles (Article 16) to a Recovery Fund were a 'service charge' within the meaning of section 18 of the Landlord and Tenant Act 1985. The court confirmed that Article 16 and the resolutions made under it were valid and enforceable as obligations of the member in his capacity as a company member. It held that the recorder was wrong to treat those contributions as service charges for the purposes of section 18 and so to dismiss Morshead's claim; the two legal relationships (tenant under a lease and member of the freehold-owning company) are distinct and give rise to separate liabilities. The recorder's dismissal of the claimant's action on the ground that section 18 provided a defence was reversed.

Background and parties: The appellant, Morshead M ansions Limited, is a private company holding the freehold of a block of flats; all leaseholders are members. The respondent, Mr Leon Di Marco, is a leaseholder and a one-share member. Article 16 of the company's articles authorised establishment of capital reserves and member contributions; at an AGM two resolutions created a '2007 Recovery Fund' of £400,000 and authorised interest on late payments. Mr Di Marco failed to pay two instalments of £2,000 and Morshead sued for the sums and interest under Article 16.

Nature of the claim: Payment of £4,000 plus interest as contributions demanded under the company's Article 16 resolutions.

Procedural posture: The recorder (Central London Civil Justice Centre, Mr Recorder Mitchell QC) held Article 16 valid but found the sums were service charges within section 18 of the Landlord and Tenant Act 1985 and dismissed Morshead's claim; permission to appeal was granted. The recorder also dismissed the respondent's counterclaim for breach of repairing obligation; that decision was not appealed.

Issues before the Court of Appeal:

• Whether sums demanded under Article 16 are 'service charges' within the meaning of section 18 of the 1985 Act;
• Whether the company's claim under Article 16 is enforceable notwithstanding the statutory scheme regulating service charges.

Court's reasoning: The court emphasised the legal distinction between liabilities incurred by a person in his capacity as tenant under a lease and liabilities incurred in his capacity as a member of a company. The definition of 'service charge' in section 18 applies to amounts payable by a tenant as part of or in addition to rent for services, repairs, maintenance, insurance or management costs that vary according to relevant costs. Contributions demanded under Article 16 were obligations arising under the company constitution as member contributions to a reserve and were payable in that capacity; they were therefore not, on the facts of this claim, service charges recoverable under the 1985 Act. The recorder had erred in applying section 18 to defeat the company's contract claim under Article 16. The court allowed the appeal and restored the company's contractual claim for the sums (including interest) claimed under the resolutions.

Subsidiary points: The court noted it did not decide whether identical or similar demands might amount to service charges if brought under the lease or whether monies raised might be used in particular ways; those are separate questions not before the court. The recorder's finding of validity of Article 16 and the dismissal of the counterclaim were not challenged on appeal.

Appeal allowed. The Court of Appeal held that the recorder was correct to uphold the validity and enforceability of Article 16 but wrong to treat the sums demanded under the Article 16 resolutions as 'service charges' within section 18 of the Landlord and Tenant Act 1985. The sums were recoverable as member contributions under the company articles and the action should not have been dismissed on the basis of section 18.

Appeal from the Central London Civil Justice Centre (Mr Recorder Mitchell QC, CHY07423). The recorder gave two rulings: Article 16 valid and enforceable; but the sums were service charges under section 18 and the claim was dismissed. Permission to appeal was granted and the Court of Appeal ([2008] EWCA Civ 1371) allowed the appeal.