Criterion Buildings Ltd v McKinsey & Company Inc (UK) & Anor

A landlord claiming service charges under a lease bears the legal burden of proving liability, but the tenant bears the evidential burden of raising a prima facie case that the sums demanded exceed the contractual due proportion. Where the lease entrusts apportionment or reserve-fund decisions to the landlord, the decision is subjective, subject to rationality and any applicable Braganza constraint. A lease may permit contributions to sinking or reserve funds for future expenditure, including expenditure in later years, and may make those contributions immediately payable and held on trust. Once properly demanded, later expenditure from the fund is not a further service-charge item. A contractual requirement for a receipted invoice ordinarily requires acknowledgement of payment by the invoicing contractor. A landlord’s consent is not a condition of reimbursement unless the lease so provides.

The claimant, the owner of the landlord’s reversion in offices at the Criterion Building, claimed more than £2.2 million from the defendants under an underlease and related documents. The claim principally concerned service-charge apportionment, contributions to sinking and reserve funds, costs associated with goods-lift refurbishment, and alleged rent and service-charge set-off.

The defendants challenged the fairness of the apportionment, the contractual basis and administration of the funds, the timing and necessity of goods-lift expenditure, and reimbursement claims under a deed of variation. The court determined the construction and application of the relevant lease provisions and the defendants’ set-off case.

1. Outcome. The defendants failed on every pleaded defence and the claim succeeded.
2. Apportionment. The landlord bore the legal burden of proving the sums claimed, but the defendants first had to establish a prima facie case that the charges exceeded the contractual due proportion. The landlord’s determination of a fair proportion, taking account of use and benefit, was subjective rather than an objective standard, but remained subject to rationality and, where pleaded, the Braganza implied term. The defendants established no prima facie case of irrationality or unfairness.
3. Sinking and reserve funds. The lease permitted the landlord to include amounts reasonably determined to be appropriate to build and maintain the relevant funds. The certificates sufficiently identified the sums as sinking-fund or reserve-fund contributions; they did not need to explain how the amounts had been calculated. Contributions could be demanded in advance for future expenditure, including expenditure in later years. They became payable when demanded and were held on trust for the contributing tenants, subject to application for the contractual purposes. Paragraph 12 of section 3 added little and was more likely concerned with the costs of establishing and maintaining the funds.
4. Goods lifts. The landlord had a reasonable contractual discretion to build a sinking fund for future lift renewal or replacement. The technical evidence justified its decision to make provision for refurbishment, notwithstanding contrary evidence from the defendants’ experts. Payment from a properly constituted fund did not require separate proof that the expenditure itself fell within the service-charge provisions.
5. Set-off and reimbursement. A “receipted invoice” meant an invoice endorsed by or on behalf of the contractor acknowledging payment. The defendants’ invoices did not satisfy that requirement. Conversely, landlord’s consent was not a condition precedent to reimbursement of every item of Tenant’s Works where the lease did not say so. The alternative invoice nevertheless failed because the defendants had not proved the required consent.