This case will be of real interest to tenants and landlords on the question of costs following a determination by the Leasehold Valuation Tribunal as to the amount of service charges payable by the tenants. In effect the dispute was as to two distinct clauses in a lease.
The property had been converted into 6 flats of which 5 have been let on 99 year leases commencing in July 1985.
The leases contained the usual standard clauses for the tenant to pay
1. By way of further or additional rent such sum or sums to be assessed as shall be a just and fair proportion of the amount which the Landlord may from time to time expend and as may reasonably be required on account of anticipated expenditure
(i) in performing the Landlord’s obligations as to repair maintenance and insurance
(ii) in payment of the proper fees of the surveyor or agent appointed by the Landlord in connection with the carrying out or prospective carrying out of any repairs and maintenance and the apportionment of the cost of such repairs maintenance and collection and to reimburse the Landlord (" the costs clause")
2. All expenses including solicitors’ costs and surveyors’ fees incurred by the Landlord incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925. (“the incidental costs clause")
3. To keep in good and substantial repair and in clean and proper order and condition those parts of the Building which are not included in this demise or in a demise of any part of the Building.
In 2005 substantial water penetration necessitated repairs to parts of the Building not subject to any of the six leases. The obligation to carry out the repairs rested on the Freeholders. The repairs were completed at a total cost of £19,031.36. The tenants in common with the other tenants were liable to reimburse the Freeholders. Their share was calculated in accordance with the lease. The liability fell within the definition of ‘service charge’ contained in s.18 Landlord and Tenant Act 1985 http://www.legislation.gov.uk/ukpga/1985/70/contents.
A dispute arose as to the sum payable. The matter was referred to the Leasehold Valuation Tribunal who held that the sum recoverable from the tenants in proportion to their relative rateable values was £17,691.36. The Tribunal made no order for costs given Sch.12 para 10 Commonhold and Leasehold Reform Act 2002 i.e. costs can be payable if in the opinion of the tribunal, a party has acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the proceedings.
In default of payment by the tenants the Freeholders commenced proceedings seeking payment of that sum and other amounts. the claims were resisted by the tenants on the grounds, that the Tribunal’s decision should be enforced as a judgment under CPR Part 70 and not by separate action, the LVT decision was unenforceable until the rateable values of the flats had been determined and that the Freeholders were not entitled to recover their costs incurred before the Tribunal because no award had been made in their favour. The matter was, by consent, allocated to the fast track.
At first instance the court awarded judgment for the Freeholders. The District Judge held that under the terms of the lease as noted the freeholders were entitled to their costs of dealing with these proceedings, both before the LVT and before the court, in relation to solicitors’ costs.
The tenants appealed. They argued the District Judge was wrong to have concluded that the amounts claimed fell within the incidental costs clause. Further that some only became due after the proceedings had been commenced and that the District Judge should have assessed the costs on the basis of a small claim not a fast track claim.
The Freeholders then served on the tenants a notice under s.146 LPA 1925. The notice asserted that the respective leases contained a covenant by the lessee to pay rent and additional rent by way of service charge that the Lessees had failed to do so with the consequence that the judgment of the District Judge was given against them. Thus it alleged a breach of the lease.
On appeal the court held:
1. The District Judge had concluded the costs before the tribunal should fall under the incidental costs clause. It must be the case that in deciding that the District Judge was taking the view that the costs fell incidental to, or in contemplation of the preparation and service of proceedings under section 146 or 147 of the Law of Property Act 1925.
2. The District Judge was not wrong in coming to the decision given it was not challenged that they were costs the tenants could incur.
Accordingly the Appeal was dismissed. The tenants appealed to the Court of Appeal.
The Court of Appeal considered the relevant legislation namely s.146 Law of Property Act 1925, the Landlord and Tenant Act 1985, The Housing Act 1996
Section 18 Landlord and Tenant Act 1985 defines "service charge" as:
“an amount payable by a tenant of a dwelling as part of or in addition to the rent–
(a) which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management, and
(b) the whole or part of which varies or may vary according to the relevant costs.
The liability of the tenants under the lease though recoverable as rent was a service charge for the purpose of the Housing Act 1996. Thus by section 81
"A landlord may not, in relation to premises let as a dwelling, exercise a right of re-entry or forfeiture for failure by a tenant to pay a service charge…unless
(a) it is finally determined by (or on appeal from) a leasehold valuation tribunal…that the amount of the service charge…is payable by him, or
(b) the tenant has admitted that it is so payable."
The tenants accepted a liability to pay and had paid the rateable proportion of the Freeholders costs. Thus they accepted a liability under the costs clause but not under the incidental costs clause. The dispute was limited to the amount by which half of those costs exceed their respective rateable proportion.
The tenants submitted:
1. They accept the costs clause and the incidental costs clause were separate and distinct
2. The incidental costs clause could not apply because (1) the service charge was recoverable as rent so that s.146 was not in point; (2) the Freeholders costs incurred in the Tribunal were not incidental either to (a) the preparation and service of a s.146 notice or (b) to the service of notices and schedules relating to repair; (3) no claim to that effect was pleaded.
The Freeholders submitted all the costs against the tenants under the incidental costs clause are costs incidental and preparatory to the service of the s.146 notice relating to repair and not just their rateable proportion on the basis that they are service charges.
The Court of Appeal favoured the Freeholders. Thus
1. The Freeholders incurred costs in the repair of the common parts of the Building in performance of their obligation
2. That, in turn, created a liability on the tenants, including these tenants for those costs under the costs clause. The amount of that liability came within the definition of service charge in s.18 Landlord and Tenant Act 1985 but could not be enforced except in accordance with the terms of s.81 Housing Act 1996.
3. The amount of the tenant’s liability was to be finally determined by the Leasehold Valuation Tribunal.
4. The various sections requires or recognises that even when so determined the enforcement of that liability is subject to the provisions of s.146 even if the lease treats it as an additional rent recoverable as such.
5. The enforcement of the liability of the tenants under the costs clause required first the determination of the Tribunal and second a s.146 Notice.
The court had no doubt the incidental costs clause was separate and independent of the costs clause. However it did not follow that if the Freeholders’ cost of the repairs was only recoverable under the costs clause its costs of the proceedings before the Tribunal were only so recoverable.
In fact the Freeholders’ costs of the proceedings before the Tribunal were held not to come within the terms of the costs clause. They were not incurred in performing the landlord’s obligation to repair, the apportionment of such costs or the collection of such costs.
Therefore the district Judge was right to consider that the incidental costs clause extended to a section 146 notice and thus all legal costs.
Given that the determination of the Tribunal and a s.146 notice are cumulative conditions precedent to enforcement of the tenants liability for the Freeholders’ costs of repair as a service charge it was held , that the Freeholders’ costs before the Tribunal fall within the terms of the incidental costs clause.
If any of those costs had not been strictly costs of the proceedings they appear to have been incidental to the preparation of the requisite notices.
The court noted the proceedings before the Tribunal were necessitated by the refusal of two out of the six tenants of the Building, to pay anything in respect of the Freeholders’ costs of the repairs. If, as the tenants contended, the costs of the proceedings were only recoverable by the Freeholders under the costs clause then such proportion of the costs as was in excess of the tenants rateable proportion would have been payable by the other four tenants who had paid their due share of the cost of the repairs and were not concerned in the proceedings before the Tribunal.
This is a difficult decision to grasp on first reading. In effect the Freeholders were entitled to their costs of a determination and proceedings arising from repairs to the common parts of the building. The real issue was how that liability arose under lease. There was clearly a distinction between the costs clause and the incidental costs clause.
The Court of Appeal found that the costs of the proceedings before the tribunal in fact fell within the incidental costs clause on the basis that a determination of the tribunal was required to enforce a liability which was cumulative with service of a sec 146 notice.
It will be noted in this case a sec 146 notice was only served when the tenant appealed. Thus the wide catch all provision of the incidental costs clause extended to cover the costs. This case may come as a surprise to many not least tenants.
A reminder that even standard clauses in legal documents need to be given careful thought at all times.