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26 May 2017

Recovering legal costs via service charge

Question

My company owns the freehold of a block of flats. We sought a determination from the First-tier Tribunal (FTT) of the reasonableness of service charges demanded from a tenant and incurred legal costs in doing so. The lease provides that we can recover, through the service charge, our “costs of… instructing… solicitors… and any other persons reasonably required in connection with the block”. Does that mean that we can recover our legal costs through the service charge?

Answer

No, it is unlikely you will be able to do so given the wording of that clause. Although it makes express reference to the cost of “instructing… solicitors”, that could mean in non-contentious matters or other types of dispute. The rest of the clause appears too general to give you a clear entitlement to recoup the costs of litigation.

Whether a landlord is entitled to recoup, through the service charge, the legal costs which it has incurred in tribunal proceedings will depend on the true construction of the relevant service charge clause. However, a recent run of decisions has clarified just how exacting judges are likely to be, and how specific they expect the drafting to be, when construing such clauses.

Strictly speaking, it is not necessarily fatal to recovery that the clause fails to make specific reference to the costs of “court or tribunal proceedings”, or to “solicitors and counsel”. On the other hand, a landlord who can only point to general wording is likely to run into problems: see Union Pension Trustees Ltd v Slavin [2015] UKUT 103 (LC); [2015] PLSCS 150 and Sinclair Gardens Investments (Kensington) Ltd v Avon Estates (London) Ltd [2016] UKUT 317 (LT); [2016] PLSCS 227.

The clause in your lease does expressly refer to “solicitors”, which provides some degree of specificity. However, that may not be enough to allow recovery of all types of solicitors’ costs – in particular, costs incurred in tribunal litigation over a tenant’s service charge liability: Sinclair Gardens. When reference was inserted in your lease to the costs of “instructing solicitors”, the original parties may have had something quite different in mind, such as non-contentious costs or other forms of proceedings. Many long leases in existence were granted before the days of the FTT, when service charge disputes would be heard in the County Court, with the winner recovering its costs from the loser. The modern tribunal process therefore risks leaving landlords exposed.

Reliance on general wording will be harder still where the lease contains a conventional section 146 costs indemnity clause: Union v Slavin. In Sinclair Gardens, the judge considered that the words “in connection with… the estate” must simply mean “for the management of the estate”; and that general words like “management” were not sufficiently clear to justify recovery of the costs of tribunal litigation.

Question

We are the landlords of 12 long-lease flats in a conversion of two terraced houses. A number of tenants have raised issues concerning our management of the property. Last year, three applied to the FTT for an order to appoint an independent manager. Their application failed but only after we incurred substantial legal costs opposing it. We issued a service charge demand for the year-end deficit caused by those costs. Four other tenants say we cannot do that. The lease allows recovery of our “proper expenses of instructing managing agents and other qualified advisers in the general administration, supervision and management of the property”. Can we recover our costs under that clause?

Answer

Although the clause does not refer to “solicitors” or “legal proceedings”, and uses general words, in this scenario, the answer is probably yes.

Your case stands in contrast to the question above and shows how important it is to focus on the particular wording of the lease and the factual context of each case.

Let’s start with the wording of the relevant clause. This would obviously have been more clearly in your favour if it had included express reference to “the costs of instructing solicitors and counsel”. Instead, it refers in more general terms to the costs of instructing “managing agents and other qualified advisers”, which the opposing tenants might argue means other advisers of a similar nature only. Likewise, if the clause had included express reference to “legal proceedings” that would have made the matter abundantly clear. Although neither omission is necessarily fatal, these points should be borne in mind by those drafting leases.

It remains important to read the clause as a whole and to link the category of persons mentioned with the type of activity mentioned. The question is whether the legal costs incurred in your particular case fall within what was contemplated by the use of those words.

As set out in Geyfords Ltd v O’Sullivan [2015] UKUT 683 (LC); [2016] EGLR 22, words like “management and running” do not “clearly include… or exclude… the activity of litigating over the collection… of sums required”, but such general words on their own were usually “less clear than is to be expected if the cost of proceedings against defaulting leaseholders had been intended to be recovered…”.

However, the facts of your case are different because your legal costs were incurred not in a dispute about the financial liability of certain defaulting tenants, but in a dispute about who should have overall management of the property. The right to manage issue would have affected all 12 tenants, even if the litigation was only brought by three. On these facts, your legal costs should therefore fall within the scope of what was contemplated by the wording of the clause. A very similar result was reached in Conway v Jam Factory Freehold Ltd [2013] UKUT 0592 (LC); [2014] 1 EGLR 111.


This article was written by Tom Dobson, associate. For more information please contact Tom on +44 (0)20 7203 5092 or tom.dobson@crsblaw.com


This article first appeared in Estates Gazette on Aprill 11th 2017

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