Compromise of service charge dispute
 EWCA Civ 492
This case is concerned with a compromise agreement between the parties as landlord and tenant where the landlord then sought to recover the same monies from the tenants as shareholders in the freehold company pursuant to a clause in the articles of association.
The claim concerned a service charge dispute in respect of which there was a long history of disputes. The property was a block of flats, where the shares in the freeholder, were owned by the tenants. One particular tenant, that owed a large number of the leasehold flats, was in constant dispute with the freeholder. At one point a forfeiture claim between the freeholder and that company, as tenant, had been compromised. However, Article 16 of the Articles of Association provided as follows:
- "The directors may insurance establish and maintain capital reserves, management funds and any form of sinking fund in order to pay or contribute towards all fees, costs and other expenses incurred in the implementation of the Company's objects, may require the Members to contribute towards such reserves or funds at such time, in such amounts and in such manner as the Members shall approve by ordinary resolution passed in general meeting, and may invest and deal in and with such monies not immediately required in such manner as they shall from time to time determine."
At some point after the forfeiture proceedings were compromised the freeholder sought to recover sums from the shareholders to make up for the shortfall that it had suffered as landlord. Indeed, that was the purpose of Article 16. As the judge at first instance stated:
- "The rationale [of Article 16] is clear .. The Claimants have no assets but the reversions and the right to claim service charges and ground rents. To the extent that these assets are unrealisable or offset by unusual liabilities, e.g. as in the present case, the costs of litigation, the Claimants risk insolvency. But the tenants need a landlord to manage the building; the major works needed have been very substantial. Their options are limited. Bailing the Claimants out to the extent of the funds required is the object of the series of recovery funds and was the option approved by the shareholders in each case. This device successfully bypassed the absence of liability to pay the sums qua tenants and has had the effect of putting the Claimants on a relatively sound basis, to the benefit of all tenants and shareholders."
The defendants objected to paying the sums demanded under Article 16, arguing that recovery of these sums was precluded by the compromise of the forfeiture proceedings.
As a matter of construction, the compromise only related to the matters in dispute between the parties in their relationship of landlord and tenant. It did not prevent the freeholder from claiming as a company against its shareholders. The earlier proceedings were between landlord and tenant and not between company and member. Lloyd LJ at para 25:
- "I cannot accept Mr Higginson's submission that there is no difference between the relationship of landlord and tenant and that of company and shareholder. Clearly there is an overlap in relation to a single purpose management company, but there is a real difference which is illustrated by Article 16 itself, introduced in 1994 at the first stage of troubles in the management. Correspondingly, I do not accept that the consent order, and in particular the annexe, deal with both aspects of the relationship. In my judgment the judge was right .. to speak of the consent order as settling the account between the parties as landlord and tenant. There is no mention in the consent order, expressly or by implication, of any sums payable or already paid under Article 16 except for the reference in the first of the two paragraphs numbered 5 to the right to inspect the material relating to the recovery fund ..."
On the face of it the case is about the effect of a particular compromise agreement. However, it does demonstrate, in this particular context of service charge disputes, the importance of ensuring not only that all matters are covered in a compromise agreement but also that the parties in all their capacities are included (if that is what is intended). It also is an example of a way in which leases and articles of management companies can be drafted so as to ensure that such companies do not face insolvency if a shortfall arises as a result of the failure to make full recovery under the leases.