Service charges Recoverability of landlord’s legal costs from tenants

Summary

The proper construction of a lease which permitted the landlord to recover its costs and expenses incurred in ‘managing the estate and block of flats’ did not permit it to recover its solicitor’s costs and counsel’s fees incurred in proceedings under section 27A of the Landlord and Tenant Act 1985.

Facts

The tenants of 3 flats contained in an end-of-terrace house had applied for a determination under s.27A of the Landlord and Tenant Act 1985 as to whether service charges demanded by their landlord, the freehold owner of the house, were reasonable and payable. The landlord was seeking to recover his legal fees incurred in earlier proceedings in 2010 and 2011 which had also been brought under s.27A. Since October 2013 the management of the building had been taken over by a Right to Manage (‘RTM’) company.

Issues

At first instance, the FTT considered the issue of whether the relevant term in the tenants’ leases was sufficiently broad to enable the landlord to recover its solicitors’ costs and counsel’s fees incurred in the course of tribunal proceedings. The clauses in the lease relating to the payment of service charges provided that relevant fees had to be incurred “in connection with or for the purposes of or in relation to the estate and the Block of any part thereof”.

On appeal by the landlord, the tenants cross-appealed on a second issue of whether the landlord should be precluded from recovering any costs incurred subsequent to the acquisition of the landlord’s right to manage by an RTM company.

First instance

The FTT had initially found that the service charge clause in the leases was broad enough to allow the landlord to recover the legal costs it had incurred as a result of the s.27A proceedings brought by the tenants.

However, following an application by the tenants for permission to appeal, the FTT notified the parties that it would review its previous decision in the light of the case of Union Pension Trustees Limited v Slavin [2015] UKUT 103 (LC), which had been reported after the date of its own decision. The FTT was also concerned that it had erred in not providing adequate reasons in the original decision.

On this review the FTT reversed its first decision on the basis that it had not previously given adequate consideration to the construction of the lease as a whole. Having now done so, the natural wording of clause 6A could not be stretched to recover the landlord’s costs of litigation under s.27A LTA85.

Decision on appeal

On the first issue:

The Upper Tribunal gave an overview of the principles relevant to the interpretation of service charge clauses in leases, including those summarised in the recent Supreme Court case of Arnold v Britton [2015] UKSC 36. HHJ Richards observed that such clauses were not subject to any special rule of contractual interpretation, but that a tribunal should consider what a reasonable person having all the background knowledge of the parties would have understood the language used in the lease to mean. Per Lord Neuberger in Arnold v Britton, the meaning of such words should be assessed in the light of:

  1. The natural and ordinary meaning of the words
  2. Any other relevant provisions of the lease
  3. The overall purpose of the clause and the lease
  4. The facts and circumstances known or assumed by the parties at the time that the document was executed
  5. Commercial common sense; and
  6. Whilst disregarding parties’ subjective intentions.

Further, although legal costs may be recovered under a general service charge clause, there must be language apt to demonstrate a clear intention that such expenditure is recoverable (Union Pension Trustees Limited v Slavin [2015] UKUT 0103 (LC)[23].

Having considered these points as well as the parties’ legal arguments, the Tribunal concluded that a mere reference to ‘solicitors’ in the lease term did not give landlords carte blanche to instruct them for any purpose and thereafter recover their costs under the service charge. In the context of this lease, solicitors charges could be recovered only where they were employed for the purposes of the management of the estate. Those solicitors acting in response to earlier proceedings had not been so employed, and the landlord’s appeal was thereby dismissed. The FTT had correctly concluded in its review of its own first decision that the landlord’s legal costs were not recoverable under the service charge clause.

On the second issue:

The Tribunal did not need to consider the cross-appeal having found for the tenants on the first issue.

Comment

This decision touches on the type of litigation costs which could be incurred in the course of managing a building, with one example given by counsel being the legal costs of defending an application by tenants to appoint a manager under s.24 of the Landlord and Tenant Act 1987. Another example cited was that of seeking a court ruling as to whether landlord or tenants are responsible for repairing a building’s windows according to their lease terms. HHJ Richards noted that this latter type of ruling would be one affecting every leaseholder in the building concerned, suggesting that this might be a factor relevant to determining the issue of whether litigation related to a building’s management.

 Aside from this comment, it is submitted that it remains unclear precisely why the landlord’s previous legal proceedings, few facts or details of which are examined in this case, were ultimately found not to relate to the management of the building.