Reminder to Landlords – no presumption of 100% service charge recovery

The recent Court of Appeal case of Campbell v Daejan Properties Limited [2012] EWCA Civ 1503 has served as an important reminder to landlords that there is not a presumption that they should receive full recovery of their maintenance and repair costs from a tenant through the service charge.

The facts of the case

• Mrs Campbell had a lease of the third and fourth floor maisonette within a house in Upper Wimpole Street, London W1. The maisonette comprised 29.2% of the size of the overall house.
• The lease of the maisonette (“the premises”) contained an obligation on the landlord to repair and maintain the outside walls and roof of the premises and an obligation for Mrs Campbell to pay 40% of the landlord’s costs incurred in doing so.
• Mrs Campbell was charged 40% of the repair costs for the whole house by the landlord in 2005-2006, which she refused to pay. A dispute ensued in relation to the construction of the service charge clause in the lease and the intention for the definition of “premises” in the context.
• Mrs Campbell claimed that “premises” were defined as the maisonette and so her contribution should be towards the 40% of the costs of repairs to the maisonette and nothing further.
• The landlord stated that an error had been made in the drafting of the clause and “premises” should have been read as “house” – being the whole building – and that Mrs Campbell should pay 40% of his entire repair costs.
• High Court judgment – the High Court followed the landlord’s argument and ruled that there had been an error in the interpretation of the clause. Mrs Campbell was to pay service charge costs of 40% of the costs of repairing the entire house and so she lodged an appeal.
• Court of Appeal judgment – the Court of Appeal overturned the High Court’s judgment with all three judges agreeing that there was no obvious error in the drafting of the lease which required correction and there was no presumption that the landlord should be entitled to recover all of its costs. Further it was held that the parties had used clear wording in the lease and so the Court’s interpretation should not be substituted for it.

The outcome of this case is clearly based on its own individual facts, including the persuasive reality that Mrs Campbell would have had to pay for costs relating to 40% of the entire house when being in occupation of less than 30% had the landlord’s argument won out, but some general conclusions can be drawn.

Conclusions for landlords

Landlords should take note of the warning that they do not have an automatic entitlement to reclaim all of their costs via the service charge and care should be taken when drafting service charge provisions within their leases. They should also be aware that the Court is unlikely to step in to rectify any supposed drafting errors just on the basis that they do not support the landlord’s commercial position in relation to expenditure.

Conclusions for tenants

Whilst Mrs Campbell was successful in her case, it is worth noting that she was left with a landlord that had no obligation under the lease to repair or maintain the rest of the house other than the maisonette, despite the fact that the rest of the house was required for the support of the maisonette. Tenants should also watch out for drafting errors in their service charge provisions to ensure that the wording in the lease reflects a fair and accurate commercial agreement between the parties.