Friends Life Management Services Ltd v A & A Express Building Ltd

Commercial lease service-charge provisions must be applied according to their express structure. Unless the landlord nominates another date, the final Financial Year may continue to the next contractual Calculation Date after the tenancy ends. Costs are included when actually incurred during that Financial Year, while provisions for anticipated future expenditure must be credited against the matching costs when that expenditure is incurred. A provision cannot be retained if the matching expenditure is lower or cannot be incurred during a later period after the lease has ended. Time apportionment is made at the final comparison stage and, absent a special reason, should be calculated day by day. The court will not imply an additional accounting stage where the lease already provides the relevant mechanism.

The claimant tenant occupied commercial premises under a 15-year lease granted in 1998. It exercised a contractual break right and the lease ended on 24 March 2010. During earlier years the landlord had collected service-charge provisions for anticipated major works. The works began after termination, partly in 2010 and partly in 2011.

The parties disputed the correct final Financial Year, the treatment of costs incurred after termination, the crediting of the accumulated provision, the appropriate time apportionment, and the effect of certificates and calculations issued under the lease. The central issue was how the lease machinery operated when the tenancy ended before the contractual Calculation Date.

1. Final Financial Year. The lease defined a Calculation Date as 31 December in every year unless the landlord nominated another date. The final Financial Year was therefore the year ending 31 December 2010, notwithstanding that the tenancy ended on 24 March 2010. The wording concerning a Financial Year ending on or after determination of the Contractual Term supported that conclusion, and no inconsistent implied term was necessary.
2. Costs and provisions. Costs falling within paragraph (a) of the definition of Gross Annual Expenditure were costs actually incurred during the relevant Financial Year. Accordingly, costs of the major works incurred in 2011 could not be included in the 2010 account. The provision charged under paragraph (c) had to be credited against the matching expenditure when that expenditure was incurred. It could not be retained merely because the eventual expenditure was lower than the provision. In the final account the whole £875,000 provision was to be credited.
3. Future expenditure. Once it was certain that the lease had ended, the landlord could not make a paragraph (c) provision in the 2010 account for expenditure expected in 2011, even though 2011 would have fallen within the original Contractual Term had the break right not been exercised.
4. Apportionment. The second stage required apportionment by reference to the premises and car park. Time apportionment was not part of that stage. At the third stage, the Service Charge and provisional sum were compared for the relevant part of the Financial Year. The appropriate time fraction was 83/365, applied on a day-to-day basis.
5. Certificates and final order. The lease did not permit a further implied accounting stage to refund the accumulated provision separately. Both purported certificates were ineffective because the accountant had included 2011 costs in the 2010 account and had therefore departed from the lease instructions. The parties were directed to carry out the correct computations, with any resulting overpayment repaid by the landlord.

First-instance decision. The judgment records no prior appellate decision.