Court of Appeal clarifies test for a "qualifying long term agreement"

Landlords are required to consult with their tenants before entering into any contract for the provision of services where a tenant is required to contribute £100 per annum and the term is more than 12 months. In the case of Corvan v Abel Mahmoud, the Court of Appeal had to consider whether this would apply to an agreement where the term was "for a period of one year" and "will continue thereafter until terminated upon three months’ notice by either party."

The court looked at the construction of the clause and the approach to the statute, finding that the particular term was for a period of more than 12 months. The decision is an important reminder for both landlords and tenants to consider carefully how to approach the wording around the intended term of an agreement.

The background

The appellant was the landlord of a block of flats, one of which was occupied by the respondent tenant under a long lease. The lease contained conventionally drafted service charge provisions requiring the tenant to contribute towards the cost of services provided by landlord.

The landlord initially sought recovery of unpaid service charges in the First Tier Tribunal (Property Chamber) (FTT). The FTT disallowed part of the charges, holding that the management agreement was a qualifying long term agreement (QLTA) to which the consultation requirements of section 20ZA(2) of the Landlord and Tenant Act 1985 (the 1985 Act) applied but had not been observed.

The Upper Tribunal upheld the decision of the FTT and the Landlord appealed to the Court of Appeal.

The issue

The crux of the issue before the Court of Appeal was whether the agreement between the landlord and its property management company constituted an agreement for more than twelve months. If it did, it would fall within the meaning of a 'qualifying long term agreement' under section 20ZA(2) of the 1985 Act and the landlord had been required to consult its leaseholders.

On the construction of the clause, the issue was whether the wording of the clause as drafted meant that:

• the contract could be terminated at the end of 12 months, having previously given 3 months' notice; or if
• notice could only be given after 12 months - if so, the minimum term was effectively 15 months.

On the interpretation of the statute, the court had to decide whether what mattered was:

• the minimum term of the contract (in other words, that it was a contract for 12 months or more); or
• the maximum term of the contract (in other words, that it was a contract that was capable of running for more than 12 months).

The decision

The Court of Appeal unanimously found in favour of the tenant and held on the construction issue that the agreement was for a term of more than 12 months. The Court's finding on the construction point was sufficient to decide the case whichever statutory interpretation was correct. Nevertheless, the Court went on to also express its view on the correct interpretation of the statute.

Construction of the clause

The judges adopted Lord Neuberger's guidance in Arnold v Britton so as to look at the clause's natural and ordinary meaning, its overall purpose and the facts and circumstances of the parties when the document was executed. The Court held that the word 'will' in the relevant clause, given its ordinary and natural meaning, introduced a mandatory requirement that the contract would continue beyond the initial twelve months, without specifying a precise end date. Notice of termination could be given before the end of the 12 months, but would not have effect until after the 12 month period had ended.

The landlord had argued that the words "unless terminated" could be implied into the clause and the word "until" should be read as "unless". The court disagreed, finding that as words would need to be implied or changed, it was indicative that the natural meaning of the words on their own did not therefore support this interpretation.

Statutory interpretation

As the Court had found that the minimum term of this agreement was more than 12 months, though, the judge's findings on the correct statutory interpretation did not affect the outcome of the case.

Nevertheless, the court did express a view on the interpretation of the statute, finding in the landlord's favour on this point. In determining whether an agreement is for a term longer than a year, the judge held that the deciding factor is the minimum length of the commitment, rather than the maximum potential length of the contract. This followed the reasoning of Lewison J. in Paddington Basin Developments Ltd v West End Quarry Estate Management Ltd [2010] EWHC 833 (Ch).

Comment

The Court of Appeal's decision clarifies that an agreement will be considered a QLTA under section 20ZA of the 1985 Act where there is a minimum commitment to a term of twelve months or more..

The case emphasises that landlords and tenants should be careful when agreeing the wording of agreement term clauses, making their intentions clear as to whether or not they wish the agreements to be QLTAs under section 20ZA, and making sure those intentions are reflected in the wording of the agreement.

The decision also confirms recent judicial emphasis on looking the literal meaning of contract, which can at times be at the expense of business common sense. Term clauses will be interpreted on their natural and ordinary meaning and by taking into account the wider commercial context. Words will not be implied or changed lightly and the clause will where possible be read as originally constructed.

This article was prepared with the assistance of William Pullan, trainee solicitor at Osborne Clarke LLP.