It has been 15 years since the Court of Appeal decision in Morshead Mansions Ltd v. Leon Di Marco but it is helpful to revisit the case as a refresher.

The case looked at the difference between charges demanded of a leaseholder via the service charge (defined by Section 18 of the Landlord and Tenant Act 1985 (“S.18”)) and which are subject to the protections afforded to leaseholders under section 18 - 30 of the same Act, and charges which can be recovered pursuant to the Articles of Association (“Articles”) applicable to the Landlord/management company.

The Facts

Morshead Mansions Ltd (“Morshead”) was the freehold owner of a residential property which comprised 104 flats. Each flat owner was a member of the freehold company and held one share, which (as is common) had to be passed to the new owner of the lease on any sale of any flat. Mr Di Marco was, like all other flat owners, a member of the freehold company. His lease contained the usual provisions for payment of service charges.

The history of Morshead Mansions is one filled with litigation, and to the extent that the management of the property had suffered, at one point a Tribunal appointed manager had been brought in. Leading up to this case Morshead sought to take control of the future management of the Company and the Block as a whole. Those controlling Moreshead looked to the Articles of the Company to seek to avoid a continuation of past disputes.

The Articles of Association Morshead included the following (and unusual) provision at Article 16:-

"The Directors may 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, and 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."

The Directors, relying upon the above, proposed and saw passed at an AGM in October 2006 resolutions enabling them to:-

• Establish a reserve fund to be used to pay the costs of the company in connection with its obligations towards the building; and

• Where a member defaults in paying their contribution toward that reserve, the imposition of interest at a rate identical to that set out with the leases (4% above the base rate from time to time of Barclays Bank plc compounded with quarterly rests).

It compelled all members of the company to make total payments of £4,000 towards this fund.

The Dispute

Mr Di Marco declined to pay this sum, contending that the demand amounted to a demand for service charges no matter that it was framed as a demand under the Articles as distinct from the lease. He relied upon the definition of “service charges” set out in S.18.

Morshead brought proceedings first in the County Court seeking an order that Mr Di Marco pay £4,000 plus interest. The matter travelled on a wave of appeals and counter appeals to the Court of Appeal.

The issue before the Court of appeal was a simple one - whether Morshead was entitled under Article 16 of the Articles of Association and pursuant to the resolutions of October 2006 to be paid the money which it claims from Mr Di Marco as a member of the company. If the answer to that question was in the positive then Mr Di Marco fails and the issues of whether the charge was a service charge and if S18 applies also disappear.

The submissions for Morshead were framed in a form that directly mirrored the provisions as set out in S.18 as to what would constitute a service charge. The manner of the submission therefore helpfully explains why that section was found not to assist the leaseholder/shareholder in this matter.

1. The charges demanded under Article 16 were not payable by Mr Di Marco in his capacity as leaseholder but instead in his capacity as a shareholder;

2. The charges were therefore payable under the company/member relationship and not under the landlord/tenant relationship;

3. The money was not chargeable for services, repairs, maintenance etc but could be used by Morshead to pay costs or expenses of the company, including legal fees; and

4. The costs did not vary according to the landlord’s costs of performing certain tasks, but were set by resolution of the company in a general meeting (in October 2006).

The Decision of the Court of Appeal

The Court of Appeal concluded that :

“two kinds of legal relationship can co-exist between the same parties, but they are different relationships incurred in different capacities and they give rise to different enforceable legal obligations. A defence to one of the claims is not necessarily available as a defence to the other legally separate claim.”

The charges demanded of Mr Di Marco were charges sought by the Company of its shareholder and thus had no bearing on the lease or, importantly, any of the legislative protections afforded to leaseholders liable to pay service charges.

Given that finding, the definition of a service charge in S.18 was not a defence to the claim because the relationship between the company and its shareholder was a different relationship from the one between the company (as landlord) and its tenant, even if the tenant and the shareholder were the same person. Morshead was bound by the Articles of Association and by resolutions passed in accordance with them. It was therefore immaterial whether or not S.18 might provide a defence if the action had been one between the company as landlord and Mr Di Marco as tenant. The legal relationships were different and separate. As between shareholder and company, Mr Di Marco was bound to pay the sum demanded and S.18 had no application in that outcome.

This meant that Morshead was not required to comply with the statutory requirements for the issuing of service charge demands, the charges subject to the statutory test of reasonableness in S.19 and Morshead was not obliged to undertake statutory consultation under S.20.

Conclusion

The case highlights the important difference between charges payable as a leaseholder’s service charge and as a member’s contribution under the Articles of Association, and a need to understand which legal relationship is being relied upon in any action.

However, it is a helpful decision to assist landlord companies or RMCs seeking from leaseholders costs which may not be covered by the service charge expenses payable under the lease, where the Articles of Association make such provision. Any landlord company or RMC should seek specialist advice from a company law advisors as to the content and nature of its own Articles of Association and thus whether it is able to utilise those to assist in such instances and avoiding disputes.

For more information, please feel free to contact a member of the team on 01435 897297 or info@kdllaw.com.

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