Honda HC-18 cylinder mower

yes  you should be able to adjust the knife to the rotating blade so that it just rubs and stays sharp.

I have one of these fine machines and I keep threatening to give it a lawn which can show it to its full potential.

Only problem I have with it is keeping it sharp and set properly to give a nice finish.   The local ironmonger charges £60(!!) to sharpen / set it & it seems to need it every year.

Am I being ripped off

beleive me, £60 is dirt cheap to sharpen a cylinder mower providing, of course, it's being done properly. ( i have been in the trade for quite a few years now ) we are looking to buy a new cylinder grinder for the workshop, the cost of which would be about twenty two thousand, so you can imagine that its not something that is fitted onto a black and decker drill.  
the revolving cylinder should, as bbf says, just kiss the bottom blade. i always set them up so that they cut paper like scissors, and that can only be done if they have been presision ground.