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Recovering legal costs from a tenant or from all the tenants?

Mark Warwick QC considers the principles to be taken from two recent cases for landlords who are looking to recover legal costs from an individual tenant, or from all the tenants via service charges.

The problem

Since 1996 it has not been possible for a landlord of premises let as a dwelling to forfeit a lease for non-payment of service charges without the tenant’s liability being either admitted by the tenant or established in a Tribunal Court or arbitral proceedings. The Tribunal presently involved is the First Tier Tribunal (“FTT”). Furthermore, there are only limited circumstances in which the FTT can make a costs order in respect of proceedings before it. Rule 13 of the Tribunal Procedure (First-Tier Tribunal) (Property Chamber) Rules 2013 allows the FTT to order a party to such proceedings to pay costs only if the person “has acted unreasonably in bringing defending or conducting proceedings”.

The combination of the above two features means that a landlord will often incur legal costs in its management of a building, during FTT proceedings, which costs are not the subject of any FTT order. That landlord, being otherwise out of pocket, will then wish to recover its costs, either from a particular tenant, or from all of the tenants of the building in which the particular tenant has his flat. The problem is particularly acute where the lease(s) predates 1996 and therefore the drafter of that lease could not have envisaged costs being incurred before a Tribunal.

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There have been many cases where the FTT, the Upper Tribunal and the Court of Appeal have sought to grapple with the above problem.

In recent months the Court of Appeal have considered the problem twice, and have spelt out the proper approach thereto. The two cases are Kensquare Limited v Boakye [2021] EWCA Civ 1725 (“Kensquare”) and The London Borough of Tower Hamlets v Khan 2022] EWCA Civ 831 (“Khan”). In both cases the lead judgment was delivered by Newey LJ. This article seeks to extract from the two cases some principles to be applied in two separate situations:

  • recovery of the costs from the individual tenant;
  • the inclusion of the costs within service charges levied against all the tenants.

Recovery from the individual tenant

In Kensquare the relevant lease provision obliged the tenant to “pay all costs charges and expenses (including solicitors costs and surveyors fees) incurred by the lessor for the purpose of ….. the preparation and service of a Notice under Section 146 of the Law of Property Act 1925”. Counsel for the tenant stressed two matters:

  • unlike the clauses in other cases, the Kensquare lease wording did not feature the word “proceedings”;
  • the legislative framework had changed since the Kensquare lease was granted in 1982.

Newey LJ however accepted the landlord’s submissions, and stated that:

  • Comparison with leases which featured in other cases did not provide a reliable guide as to how the Kensquare lease was to be construed. He cited with approval the observation of Judge Bridge, sitting in the Upper Tribunal, that “Each case is fact-specific, in the sense that what must be construed is the particular clause in the particular lease of a particular property, and conclusions arrived at by previous courts or tribunals in relation to other clauses in other leases of other property are unlikely to be of much assistance”.
  • Read naturally the words in the Kensquare lease “are quite wide enough to apply to the costs of the FTT proceedings which Kensquare had no choice but to bring if it wished to serve the Section 146 Notice” (Kensquare paragraph 43).

In Khan the relevant lease provision referred to “incidental to the preparation and service” of the Section 146 Notice. For the reasons set out at paragraph 49 of his judgment Newey LJ was not persuaded that the landlord’s costs of FTT proceedings were recoverable from the tenant. In particular “the words “incidental to” tend to suggest something subordinate”.

Recovery of litigation costs as part of service charges

The above issue arose as a “fall back” in the Kensquare. The leases in that case enabled service charges to “include the cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building”.

Counsel for the landlord stressed two matters:

  • “Management of the building” could be expected to involve the collection of service charges and potentially, enforcement action.
  • “Professional advisers” must include lawyers, and the paragraph extended to costs incurred “in connection with” management of the building, not just, say, costs “for” for such management.

However Newey LJ was not persuaded. Although he found the construction of the lease words “difficult”, at paragraph 54 he said:

“Read naturally, paragraph 5 does not extend to litigation costs.  While the reference to “professional advisers” is apt to apply to lawyers, they are not mentioned specifically and nothing is said about legal proceedings. As in No. 1 West India Quay, the focus is on management services rather than litigation and, to adapt words of Rix LJ which Lord Neuberger quoted in Arnold v Britton, a decision in favour of Kensquare would involve “bringing within the general words of a service charge clause” something “which does not clearly belong there”.”

Conclusions

When a landlord is looking to recover legal costs from an individual tenant, or from all the tenants via service charges, the following points emerge:

  • the legislative history at the time the lease was granted does not assist;
  • comparison with the words used in other cases does not assist, save perhaps when the wording is identical;
  • the focus must be upon the “natural meaning” of the particular words used in the particular lease. It is these words that must be closely scrutinised. The parties must avoid citing a litany of earlier cases. This is a process that is likely to be a distraction, rather than an assistance.

Mark Warwick QC is a barrister at Selborne Chambers.

 

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