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Legal Case 7: Fluor Daniel Properties Ltd and others v Shortlands Investments Ltd (2001)

01 Aug 2017

In our seventh instalment of legal cases that relate to service charges we look at Fluor Daniel Properties Ltd and others v Shortlands Investments Ltd (2001). The case focuses on a modern office building in Hammersmith, West London where the tenants (the claimants) occupied various parts of the building. The building benefited from an extensive VAV air-conditioning system which at the time of installation, 1980, was apparently the largest of its kind! In the autumn of 1998 the landlord wrote to the lessees announcing their intention to spend circa £2m on work described as air-conditioning and structural repairs. The sum was to be recovered in three ways:

a contribution of £500,000 from the existing reserve fund
an additional reserve fund contribution of £750,000;
a £750,000 provision in the service charge for the year ending April 1998
The lessees challenged the recoverability of the two amounts of £750,000 as they maintained the works were unnecessary. As far as the leases were concerned, under Clause 6(1) the landlord covenanted: “to uphold maintain repair amend renew cleanse and decorate and otherwise keep in good and substantial condition… the structure of the Building… and all apparatus equipment plant and machinery situate in and serving the Building including… the heating and hot water systems [and] the air conditioning system”. Under Clause 6(2) the leases further required the landlord to provide a supply of conditioned air throughout the year so as to maintain a reasonable temperature. The associated proviso was that the landlord, “acting reasonably”, was permitted to withhold, add to or vary the rendering of such services “for the more convenient or efficient conduct and management of the Building”. The lessees under Clause 7(2)(e) were required to pay a duly apportioned service charge in respect of various expenses borne by the landlord, including the cost of performing the landlord’s covenants and “the reasonable cost of carrying out other work or services of any kind whatsoever which the Landlords may reasonably consider desirable for the purpose of maintaining or improving services in the Building”. Interestingly in the same clause as above, the landlord covenanted to use its best endeavours to maintain the service charge at the lowest reasonable figure although the relevant proviso was that no objection could be made solely upon the ground that the service could have been provided at a lower cost. At the conclusion of the hearing, the judge found as a fact that the system was in good working order, having been carefully maintained in accordance with a detailed maintenance schedule. It was held that the amounts claimed by the landlord were largely irrecoverable. Specifically the court held that:

The landlord obligations contained in Clause 6(1) presupposed some malfunctioning such that repair, amendment or renewal was reasonably necessary.
The planned works could not be carried out under the proviso of Clause 6(2) as the “service” was the treated air, electricity or hot water that the landlord had covenanted to provide not the renewing or improving plant that was capable of delivering such a service.
Although a form of sweeper clause in that it was widely drawn, clause 7(2)(e) did not entitle the landlord to incur expense on plant where it was in proper working order and capable of rendering the relevant service. The proposed works were not reasonably required to maintain the service and would not improve it.
The judge further pointed out that, on the issue of reasonableness, the standard of the landlord’s services had to be such as the tenants, given the lengths of their leases, could fairly be expected to pay for.
Using the expected “industry-recognised lifespan” to be found in various professional tables as a reason for claiming plant can be “reasonably” replaced was not upheld. These could serve as a starting point but only that, the relevant maintenance records, showing that the plant was not experiencing breakdowns and was not subject to an increase in maintenance costs, were the test as to whether the work should be carried out.
In summary

Repair or renewal must be preceded by disrepair
A “sweeper” clause – depending on its exact drafting – may not for the basis for recovery.
Recoverability of works may need to take into account the length of a tenant’s lease.
Industry standard lifespans can only form a starting point when considering works, maintenance history and fault logs need to back rationale for repair or replacement.

Please be aware the above article is in no way to be construed as expert legal advice.