Q&A: Running the rule over cost recovery

Tom Morris and Georgina Muskett on costs incurred prior to service of section 146 proceedings.

Question

I am the managing agent of the freeholder of a block of flats. One of the lessees is refusing to pay his service charge on the basis that he thinks that some of the costs are unreasonably high.

The freeholder wants to sue him for the debt and, if he does not pay it, forfeit his lease. If the matter is transferred to the First-tier Tribunal, and the lessee pays the amount found reasonable after a determination, can the freeholder recover its costs under the lease?

The lease contains one cost-recovery covenant “to pay the lessor all costs and expenses incurred in or in contemplation of proceedings under sections 146 and 147 of the Law of Property Act 1925 and incidental to the preparation and service of a notice under those sections”.

Answer

Yes, provided that: (i) the freeholder has the intention to forfeit the lease; (ii) incurs the costs of FTT proceedings partly for that purpose; and (iii) can prove it in the event of it later issuing a claim for those costs.

Explanation

The clause you have referred to is in similar terms to the clause considered by the Court of Appeal in London Borough of Tower Hamlets v Khan [2022] EWCA Civ 831. The court held that the costs of proceedings in the FTT were not “incidental to the preparation and service” of a notice under section 146, since they were too remote from the preparation and service to be “incidental”.

However, that decision left intact the much-criticised decision in Freeholders of 69 Marina, St Leonards-on-Sea v Oram [2011] EWCA Civ 1258; [2011] PLSCS 263 to the effect that enforcement by forfeiture of a tenant’s obligation to pay a service charge is subject to the provisions of section 146, even if the lease reserves the service charge as rent. Provided that there is evidence that, at the time expenditure on tribunal proceedings is incurred, the landlord has forfeiture proceedings in mind, the costs will fall within the scope of the clause you have quoted.

That is a question of fact, which will need to be proved on a claim to recover the cost of FTT proceedings in the event the tenant pays the service charge and the landlord cannot forfeit.

The landlord should therefore make sure that its decisions are well-documented and that its intention to forfeit is made clear at all times. It is also important to make sure the claim is pleaded properly.

In Khan, the landlord pleaded a claim on the basis that it incurred the costs as incidental to the preparation and service of a notice, but not in contemplation of proceedings. The costs might have been recoverable had it put its case differently, but the Court of Appeal refused to allow that argument to be run since it had not been put in issue below.

Question

I am a director of a landlord company that owns a house that has been converted into flats. The company recently became involved in a boundary dispute with a neighbour.

The leases provide that the landlord can recover the costs of “all matters and things as in the reasonable discretion of the landlord may be considered necessary or advisable for the proper maintenance safety amenity and administration of the building”.

The lessees are arguing that they should not have to pay the costs of the dispute under their service charges. Are they correct?

Answer

On the basis of the current law, it seems unlikely that the clause that you have quoted in the lease would allow the company to recover those costs, but it will depend, among other things, on the other terms of the lease.

Explanation

A lease clause in identical terms to the one quoted was considered by the Upper Tribunal in Dell & Dell v 89 Holland Park (Management) Ltd [2022] UKUT 169 (LC); [2022] PLSCS 113. The landlord had incurred legal fees of £2.7m in objecting to a neighbour’s planning application and litigation relating to a restrictive covenant. On appeal, it was found that the costs were not recoverable.

There was another provision in the lease for the landlord to recover its costs of forfeiture proceedings and enforcing lessees’ covenants to decorate and repair, and if the parties had intended for the lessee to fund the cost of third-party litigation, the judge considered that the parties would have expressly said so.

The purpose of the clause was to fund the landlord’s obligations as landlord, not its wider interests as freeholder. Furthermore, the idea that the parties intended for the landlord to recover that level of costs would be implausible because it would make the leases and freehold unmarketable.

This decision can be contrasted with Assethold Ltd v Watts [2014] UKUT 537 (LC); [2014] PLSCS 359, in which the landlord issued injunction proceedings stopping a neighbour from carrying out works to a party wall until a party wall award was in place.

The sweeper clause was almost identical to the one in Dell but the tribunal held that the costs were recoverable. However, the judge in Dell found that the case could be distinguished in that actual damage was being caused to the party wall.

Therefore, it may be that your case can be distinguished on the facts given that this case involved a boundary dispute. Dell is also currently the subject of an appeal to the Court of Appeal.

Georgina Muskett is a senior associate at Charles Russell Speechlys LLP and Tom Morris is a barrister at Landmark Chambers.

An original version of this article was first published on Estates Gazette.