Leonora Investment Company Ltd v Mott Macdonald Ltd

Where a commercial lease makes service charge payable in accordance with a specified schedule, the landlord must follow that contractual route before payment can be demanded. An end-of-year statement of actual service costs and service charge is not merely administrative. It informs the tenant of the amount and its apportionment and triggers liability for the amount due. The regime applies whether or not advance payments have been made; the lease should not be read as creating a separate, unstated regime. Unless the lease clearly provides otherwise, the landlord may issue a revised statement. The contractual procedure therefore does not give the landlord only one opportunity to state the charge correctly.

The landlord let four floors of an office block to the tenant under materially identical leases. The leases defined service charge by reference to a schedule requiring advance estimates where used and an end-of-year statement of actual service costs and service charge. After works to the common parts, the landlord issued a separate invoice for £263,117.21 without following the statement procedure. The tenant refused payment.

On a preliminary issue, His Honour Judge Seymour Q.C., sitting as a High Court judge, held that the tenant was liable to pay service charge only where the contractual procedure had been followed, and that the invoice was ineffective: [2008] EWHC 136 (Q.B.). The landlord appealed, arguing that the schedule was not exclusive and that provision of the statement was not a precondition to payment. The central issue was the proper construction of the service charge provisions.

The Court of Appeal dismissed the appeal. Lord Justice Tuckey gave the judgment, with Lord Justice Wilson and the President of the Family Division agreeing.

1. The leases had to be construed according to their own terms. General classifications of lease provisions as conditions precedent, substantive procedural provisions or mere mechanics were of limited assistance.
2. Clause 2.3 made service charge payable in accordance with Part 2 of the schedule. Paragraph 1 dealt with calculation. Paragraph 2 provided the route for quarterly advance payments where the landlord elected to use it. Paragraph 3 prescribed what had to happen at the end of the service charge year.
3. Paragraph 3 required the landlord to provide a statement of actual service costs and service charge. Where advance payments had been made, any balance due could not be claimed before that statement had been sent. The statement triggered the obligation to pay and showed the tenant how the amount had been calculated and apportioned.
4. The same regime applied where the tenant had made no advance payments. The reference to the balance due covered any amount due from the tenant, whether or not advance payments had been made. It would make no commercial sense for the lease to provide a procedure for tenants who paid in advance but none for other tenants.
5. The separate invoice did not comply with paragraph 3 and did not entitle the landlord to payment. The court rejected the argument that service charge could be demanded outside the contractual regime, since that would allow demands in any form for service costs extending over several years.

The provisions were not treated as a technical obstacle course. The judge’s view that a revised statement could be issued was not challenged, and the Court of Appeal accepted that the clause did not give the landlord only one opportunity to state the charge correctly.

1. Court of Appeal (Civil Division): dismissed the landlord’s appeal and upheld the decision on the preliminary issue.
2. Queen’s Bench Division: His Honour Judge Seymour Q.C., sitting as a High Court judge, held that the tenant was not liable on the invoice because the contractual service-charge statement procedure had not been followed: [2008] EWHC 136 (Q.B.).