A recent decision from the Court of Appeal provides some much needed clarity in what is currently an area rife with disputes.  Housing Litigation expert Karl Anders explains.

The fight following the fight

Even in the post-Jackson era, where parties aim to resolve their disputes efficiently and cost-effectively, it can still be difficult to avoid costly litigation, particularly in the context of lease forfeiture. Following the resolution of court or tribunal proceedings between the landlord and tenant concerning whether a lease breach has occurred, the question arises as to who should pay the legal costs.

The Proceedings

In Chaplair Ltd v Kumari [1] the claimant landlord and defendant tenant had entered into a lease which contained obligations on the part of the tenant to pay all costs incurred by the landlord in contemplation of proceedings under ss.146 and 147 of the Law of Property Act 1925 and to indemnify the landlord in respect of proceedings arising from any failure by the tenant to perform its obligations under the lease.

The landlord issued County Court proceedings to recover unpaid ground rent and service charge payable under the lease. The rent claim was allocated to the small claims track (SCT). The County Court transferred the issue concerning whether the service charges were payable to the Leasehold Valuation Tribunal (LVT).

The landlord was ultimately successful in the LVT and in the County Court proceedings. However, despite being the winning party and despite the landlord’s clear contractual rights to recover its legal costs, the tenant managed to dispute and avoid paying the landlord’s costs for some time, as a result of lengthy and complicated costs proceedings.

LVT and Costs

So far as the LVT costs were concerned, the LVT had limited powers to award costs but it did have jurisdiction to make a costs award in cases where the tenant had acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably, pursuant to the Commonhold and Leasehold Reform Act 2002 (CLRA) [2]. In an attempt to recover its costs in relation to its service charge claim, the landlord therefore initially asked the LVT to exercise these powers in its favour, but that application failed. In addition, following the tenant’s counter-application pursuant to section 20C of the Housing Act 1985 [3], the landlord conceded within the LVT proceedings that its costs could not be added to the tenant’s service charge.

The County Court and Costs

In relation to the County Court costs, a District Judge ruled that, since the proceedings had been allocated to the SCT, the court could not award more than £200 – i.e. the amount of SCT fixed costs set out in the Civil Procedure Rules (CPR).

The landlord appealed and the District Judge’s decision was overruled. The Judge held that the landlord’s court costs and its LVT costs could be recovered on an indemnity basis in the County Court, which had jurisdiction to make a costs award under the terms of the lease. The Judge held that the SCT limitation on costs did not apply because these were costs that were payable pursuant to a contractual right in the lease – not pursuant to the fixed costs rules in the CPR.

The tenant appealed the Judge’s decision and the costs proceedings reached the Court of Appeal.

Conclusion in the Court of Appeal

The tenant argued, firstly, that the court had no power to make a costs award for the landlord where costs had already been considered in the LVT on the basis that the principle of res judicata prohibits the re-litigation of any other judicial or tribunal's ‘once-and-for-all’ decision.

The Court of Appeal disagreed. To begin with, the decision of the LVT had related to the landlord’s application for costs to be awarded under the limited jurisdiction granted to the LVT by the CLRA and also whether the costs could be added to the tenant’s service charge. By contrast, the matter now in issue was the landlord’s ability to recover legal costs by court order.

The tenant’s second submission was that the landlord was estopped from recovering costs by the rule in Henderson v Henderson [4]. That rule prohibits the bringing of any claim which a party might have had the opportunity to bring on an earlier occasion but which it failed to do. The Court of Appeal noted, however, that the LVT had no jurisdiction in relation to any costs claim brought pursuant to the terms of the lease. It was therefore incorrect to assert that the costs claim that was now before the Court could have been argued in the LVT.

In relation to the SCT costs limit, the Court of Appeal confirmed that the County Court Judge’s approach had been correct. The costs in question were payable pursuant to a contractual right in the lease, which the court has the discretion to assess [5] – they were not limited by the rule which governs SCT fixed costs under CPR 27.14.

WM Comment

This case will be welcomed by landlords as it is an authoritative statement that, even where a claim in respect of lease arrears falls within the SCT, landlords’ reasonable legal costs may be assessed and awarded by the court where the usual contractual entitlement exists. The case also clarifies that, whilst costs recovery may be restricted in the LVT (and also in The First-Tier Tribunal (Property Chamber) which replaces it) this will not, of itself, preclude successful costs recovery by landlords in the wider civil courts. A well advised landlord will now include a claim for recovery of contractual costs in their legal proceedings.

Whilst the decision is landlord-friendly, any clarity on the question of recovery of costs in this context should be welcomed. If parties can understand and apply clear costs rules, the more likely it is that costs settlements will be quickly and cost-effectively achieved. This will apply not only to the parties to the lease but also to lenders who can take these principles into account when they are approached by landlords in this context. All concerned will need to carefully consider the wording of the subject lease to assess the extent of the landlord’s contractual entitlement to recover costs.