McHale v Cadogan

Service-charge provisions are construed restrictively. General wording will not normally make tenants liable for a charge unless the lease clearly includes it. However, where a service-charge clause expressly includes loss of rack rent for accommodation provided to a housekeeper or caretaker, that wording covers the rental value of a caretaker’s flat which the headlease requires to be occupied rent-free. The compulsory rent-free licence is the reason for the loss of rack rent; it does not prevent that loss from being recovered through the service charge.

The case concerned collective enfranchisement of a six-flat building under the Leasehold Reform, Housing and Urban Development Act 1993. The appellant was the intermediate headlessee and was obliged to provide a full-time caretaker with a rent-free caretaker’s flat. The long underleases reserved service charges which expressly included loss of rack rent for housekeeper accommodation.

The Leasehold Valuation Tribunal fixed the enfranchisement price at £770,940. The Lands Tribunal dismissed the appellant’s appeal but corrected a mathematical error, producing a price of £780,405. The appellant appealed to the Court of Appeal on whether the caretaker’s flat generated a recoverable service-charge loss and thus affected the valuation of the headlease and marriage value. A separate issue concerning the valuation assumptions was adjourned.

1. The appeal was allowed on the caretaker’s-flat issue. The remaining issue concerning the valuation assumptions was adjourned. The headlease had to be valued on the footing that the headlessee could recover, through the service charge, the lost rack rent for the caretaker’s flat.

2. Rix LJ, with whom Rimer and Patten LJJ agreed, accepted that service-charge clauses are construed restrictively. A charge will not be brought within general words unless it clearly falls within them. That principle did not assist the freeholder because the relevant underlease did not use general language alone. It expressly included, as part of the cost of housekeeper accommodation, loss of rack rent.

3. The obligation in the headlease to provide the flat rent-free did not mean that no loss was incurred. It was precisely because the flat had to be made available rent-free to the caretaker that its rack-rental value was lost. Construing the service-charge clause otherwise would deprive the express reference to loss of rack rent of practical meaning.

4. The court applied the earlier Lands Tribunal observation in Cadogan v 44/46 Lower Sloane Street and McHale (LRA/29/2003 and LRA/30/2003) that identical wording could recover the rental value. Its ultimate result in that case had depended on a separate possible distinction between a caretaker’s flat and housekeeper accommodation. That point was not pursued in the present appeal and did not govern it.

5. Jollybird Ltd v Fairzone Ltd ([1990] 2 EGLR 55 (CA)) and Gilje v Charlgrove Securities Ltd ([2002] 1 EGLR 41 (CA)) did not require a different result. Their restrictive approach turned on materially different service-charge wording, including a reference only to monies expended.

• Court of Appeal (Civil Division) — allowed the appeal on the caretaker’s-flat issue and adjourned the remaining valuation issue: [2010] EWCA Civ 14.
• Lands Tribunal — dismissed the appeal from the Leasehold Valuation Tribunal on 30 October 2008, but corrected a mathematical error in the enfranchisement price to £780,405: LRA/44/2007.
• Leasehold Valuation Tribunal — determined the enfranchisement price at £770,940 on 17 January 2007 and granted permission to appeal on 23 February 2007.