Property Law ReportsLandlord and tenant: Service chargesCommercial block with extensive air conditioning system - leases requiring landlord to maintain equipment and to provide air conditioning and other services - system well maintained and in good working order - landlord making 2 million demand under service charge provisions to recover intended expenditure on upgrading system - landlord relying on extended wording of repairing covenant and express power to make reasonable additions and variations to services - tenants' objections largely upheldFluor Daniel Properties Ltd and others v Shortlands Investments Ltd: Chancery Division:Blackburne J: 12 January 2001The claimants (the lessees) occupied, under their respective leases, various parts of a modern office building known as 3 Shortlands in Hammersmith, west London, of which the defendant was the landlord.

The building was equipped with an extensive air conditioning system operating on a variable air-volume principle, which was said to be the largest of its kind when installed in 1980.The system included four air-handling units, located on the roof, that drew water from heating and chilling installations located in the basement.In each lease, the landlord covenanted, by clause 6(1), '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'.Clause 6(2) of the leases required the landlord to provide a supply of conditioned air throughout the year so as to maintain a reasonable temperature, with a proviso that it might, so long as 'acting reasonably', withhold, add to or vary the rendering of such services 'for the more convenient or efficient conduct and management of the Building'.Clause 7 required the lessees, by para 2(e), to pay a service charge (duly apportioned) 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'.

By para 3 of the same clause, the landlord covenanted to use its best endeavours to maintain the service charge at the lowest reasonable figure, subject to the proviso that no objection could be made solely upon the ground that the service could have been provided at a lower cost.In September 1998 the defendant wrote to the lessees announcing its intention to expend an estimated 2 million on work described as air conditioning and structural repairs, such sum to be recovered by: (i) an additional reserve fund contribution of 750,000; (ii) a 750,000 (retrospective) provision in the service charge for the year ending April 1998; and (iii) a contribution of 500,000 from the reserve fund (over and above the 750,000 additional contribution).The lessees brought proceedings, challenging, among other things, the recoverability of the two amounts of 750,000.

The challenge was largely directed at allegedly unnecessary works intended to be done to the air conditioning system.

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.Held: The amounts claimed by the landlord were largely irrecoverable.

1.

While the words employed in clause 6(1) did extend to the doing of works going beyond repair strictly so called (see the similarly-worded provision considered in Credit Suisse v Beegas Nominees Ltd [1994] 1 EGLR 76), the lessees had correctly submitted that, in the case of plant, the obligations contained in the clause presupposed some malfunctioning such that repair, amendment or renewal was reasonably necessary, having regard to what was reasonably acceptable to an office tenant of the kind likely to take a lease of the building.2.

The intended works could not be carried out under the proviso to clause 6(2), as the relevant service was the treated air, electricity or hot water that the landlord had covenanted to provide.

The landlord did not provide a service by renewing or improving plant that was capable of delivering such a service.3.

Although 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 to the standard required by the landlord's obligations, and where the proposed works were not reasonably required to maintain the service and would not improve it.

It was otherwise where a service, although supplied to the standard applicable at the date of the lease, had ceased to conform to the reasonable requirements of the tenants of the building.4.

The fact that the lessees were paying for works that the landlord was required to carry out did not displace the normal rule that it was for the landlord covenantor, provided that he acted reasonably, to choose the mode of performance: Plough Investments Ltd v Manchester City Council [1989] 1 EGLR 244 considered.

However, on the issue of reasonableness, the standard had to be such as the tenants, given the lengths of their leases, could fairly be expected to pay for.

The landlord could not reasonably overlook the relatively limited interest of the paying tenants: see Holding & Management Ltd v Property Holding & Investment Trust plc [1990] 1 EGLR 65.5.

The intended works could not be said to be reasonable merely because the plant had operated over the expected 'industry-recognised lifespan' to be found in various professional tables.

These could only serve as a starting point.

Strong contrary indications were to be found in the relevant maintenance records, which did not show an increase in the frequency of breakdowns or a rise in the cost of maintenance.6.

Upon the evidence before the court, the lessees' objections succeeded in so far as they related to replacement work intended to be carried out to: the sumps, humidifiers and cooling blocks; the chillers and cooling towers; the motors driving the fans; the operation of the boilers, and; the removal of two redundant oil tanks.

The landlord was, however, entitled to claim for the replacement of the roofs of three external air-handling units and for an upgrading of the electricity supply to the air conditioning system.Nicholas Dowding QC and Jonathan Karas (instructed by Beachcroft Wansbroughs) for the claimants; Jonathan Brock QC and Timothy Fancourt (instructed by Lawrence Graham) for the defendant.