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Morshead Mansions Limited v Mactra Properties Limited (2013)

Summary

The court construed a lease in order to determine the extent of the landlord's obligation to provide its tenants with an account in relation to the service charge payable for each accounting year.

Facts

The appellant landlord (M) appealed against a decision granting the respondent tenant (P) summary judgment on its claim for an order for specific performance.

P was the leaseholder of several flats in a block of flats owned by M. It brought proceedings against M seeking provision of an "account of the Expenses and the Service Charge" which M was obliged to provide under the lease, and damages for breach of that obligation. Schedule 4 para.4 of the lease provided that: "As soon as practicable after the end of each Accounting Year the Landlord [should] furnish to the Tenant an account of the Expenses and the Service Charge payable for that Accounting Year such account to be certified by the Landlord's auditors and to contain a summary of the expenses incurred during the Accounting Year to which it [related] and the relevant details and figures forming the basis of the Service Charge". In 2000, a manager had been appointed to manage the block of flats. However, he failed to discharge his obligations competently and his appointment was suspended in 2003. It was M's case that it faced significant difficulties in producing service charge accounts for the years 2003 to 2007 because of the consequences of the manager's failure to produce reliable accounts. The parties were in disagreement about what the lease, on its true construction, required M to provide. It was M's case that the lease required it to provide full accounts, whereas P argued that something less sophisticated was required, namely a list of the expenses falling within the definition of "Expenses" in the lease. The judge preferred P's construction of the lease, and duly ordered M to perform its obligation under Sch.4 para.4.

Held

(1) In relation to the phrase "actually paid or incurred...during the year in question" in Sch.4 para.1(b), a cost would be "incurred" when the obligation to pay actually arose. M would be able to recover from its tenants, by way of service charge for a year, an amount equal to that which it had had to expend in that year. Prima facie, an amount which had actually been paid or had become due for payment in an accounting year was an "expense" of the year in question. M was also entitled to receive money on account of expenses and outgoings which had neither been paid nor incurred but which were of a periodically recurring nature. "Expenses" could include "a sum or sums by way of reasonable provision for anticipated expenditure". The wording of the definition of "the Expenses" in Sch.4 para.4 gave M and its accountants and managing agents a discretion to effect an allocation of a reasonable proportion of expenses of a periodically recurring nature to a particular accounting year. If the expense was not of a periodically recurring nature, the discretion to allocate the expense to a particular year did not apply. Such expense therefore fell to be taken into account in the accounting year in which it was "actually paid or incurred", save to the extent that it had already been the subject of a contribution to the reserve fund. Once M or its accountants had decided how to exercise the discretion to allocate expenses and outgoings given by the definition of "Expenses", an account of the expenses and the service charge payable was to be prepared. There was nothing in Sch.4 para.4 or para.5 which led to the conclusion that anything more was required. In particular, the account required was not the "full accounts" for which M contended (see paras 62-83 of judgment). (2) The difficulties in producing a balance sheet and an income and expenditure account for the reserve fund did not provide a defence to the provision of an account of the "Expenses". It was entirely unnecessary to know the balance of the reserve fund in order to prepare an account of the "Expenses". In relation to Sch.4, there was sufficient doubt about the position in relation to 2003 to provide M with an arguable defence to summary judgment in relation to that year. However, there was no similar defence in relation to 2004-2006. By mid-2003, M was back in control of the management of the flats. In relation to the accounts for 2007, as the claim form was issued in February 2008, that did not allow for a reasonable time in which to expect the accounts to be prepared. M had a strong case for saying that it was not in breach of the requirements of Sch.4 para.4 so that summary judgment should not have been ordered in relation to that year. P was entitled to an order for the furnishing of accounts for the years 2004-2006 inclusive (paras 118-143).

Judgment accordingly

Chancery Division
Warren J
Judgment date
15 February 2013
References

LTL 20/2/2013 : [2013] EWHC 224 (Ch)

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