Agricullo Ltd v Yorkshire Housing Ltd (2010) was a case in which a landlord was ultimately punished for resolving a dispute through negotiations rather than continuing with litigation. We are fairly certain, this would not have been the message the Court would have wanted to send out, but it was the result in this case due to the wording of the costs recovery clause in the lease.

Facts

The case concerned a dispute (not long after the grant of the lease) between the landlord, Agricullo, and its tenant, YHL, regarding repair of the premises and in particular the roof. The lease contained a standard tenants repairing covenant and Agricullo served notice under the Law of Property Act 1925 (the “LPA”) threatening forfeiture should YHL not remedy a number of items of disrepair. The notice contained the requisite wording, stating that YHL was entitled to claim the benefit of the Leasehold Property (Repairs) Act 1938 (the “1938 Act”), and YHL subsequently served a counter-notice under the 1938 Act such that Agricullo would have required leave of the Court to continue with the threatened forfeiture.

Agricullo did not apply to the Court for leave but rather entered into discussions with YHL which resulted in YHL undertaking works of repair just over two years later. After completion of the works, Agricullo commenced proceedings for the recovery of around £30k made up of a claim for solicitors’ and surveyors’ costs. There was also a claim for damages which Agricullo dropped because it conceded that leave under the 1938 Act would have been required to pursue that part.

The issue at trial was whether the solicitors’ and surveyors’ costs were recoverable under Clause 9.3 of the lease which was as follows: The tenant shall pay to the landlord, on demand, and on an indemnity basis, the fees, costs and expenses charged, incurred or payable by the landlord, and its advisors or bailiffs in connection with any steps taken in or in contemplation of, or in relation to, any proceedings under section 146 or 147 of the Law of Property Act 1925 or in the Leasehold Property (Repairs) Act 1938, including the preparation and service of all notices, and even if forfeiture is avoided (unless it is avoided by relief granted by the Court).

YHL argued that the clause did not extend to costs incurred after the service of their 1938 Act counter-notice because that had had the effect of preventing any further action by way of forfeiture or a claim for damages without leave of the court and no such leave was either sought or obtained. Accordingly, there were no proceedings under S.146 or 147 of the LPA to which the costs could relate. Agricullo contended that it had never abandoned reliance on the S.146 notice which remained in place until the repairs had been completed and the clause was drafted widely enough to allow Agricullo to recover without the restriction.

Decision

The judge accepted that the costs incurred all related to the carrying out of the defendant’s obligations under the lease following service of the S.146 notice. He described the arguments as “finely balanced” but found in favour of YHL saying “where, as here, a landlord decides to pursue methods of securing compliance with the repairing obligations of a tenant by means other than proceedings for forfeiture or damages, the costs of adopting that method are simply outside the words of clause 9.3”.

In its appeal, Agricullo argued that the words “in connection with” should be given a wide meaning such as “associated with” and that the words “in contemplation of, or in relation to” did not limit it to steps taken in proceedings, but rather should be interpreted in a commercial way to include all of the costs which the landlord incurred from the time it decided to serve a s.146 notice to the time when that process ended. Unfortunately for Agricullo, the Court of Appeal did not agree. Patten LJ pointed to the fact that the clause was drafted by lawyers on both sides and so the words had been chosen with care. The important words were simply “any steps taken in or in contemplation of, or in relation to, any proceedings under s.146”. It was common ground that no such proceedings were ever started because they couldn’t have been without leave of the Court and accordingly, no steps (as defined) could have been taken.

The work that had been done by the solicitors and surveyors included persuading YHL to carry out repairs to the building and ensuring that the works were being done properly. There were several meetings between the parties when they tried to agree what had to be done; the specification of the works, and how they should be supervised. However, the process was ultimately consensual albeit assisted by the pressure of negotiations being set against the backdrop of a S.146 notice having been served. This was not enough to bring the work within the wording of the clause.

Whilst it did not form part of the decision, the Court of Appeal expressed the opinion that Agricullo would probably have got leave of the Court to bring proceedings for forfeiture or damages on the ground that the immediate remedying of the breach was requisite for preventing substantial fall in the value of reversion. It also considered that Agricullo could have exercised the self-help remedy under the Jervis and Harris provision in the lease which would have allowed it to do the works itself and then recover the costs incurred as a debt (outside the remit of the 1938 Act). In both those alternative strategies, the legal and surveyors’ costs would have been recoverable.

The Right Result? The Correct Strategy?

The Court of Appeal did not question the apparent unfairness to Agricullo of this outcome, perhaps because they considered the issue simply one of construction of a freely negotiated arm’s length contract. Nevertheless, the writer does not consider the construction point a straightforward one. Is it really the case that s.146 proceedings must be actually commenced for steps to be taken in contemplation of them? Perhaps Agricullo had a point and was more than just trying its luck.

Would Agricullo have been better advised to proceed with litigation or pursue self-help Jervis v Harris style? It is rarely good advice these days (“post-Woolf” in particular) to recommend litigation when negotiation might result in an amicable settlement. Indeed, many judges have gone to great lengths to point the finger at parties who commence litigation without giving proper consideration to the alternatives (seen as cheaper, quicker, more certain, less hostile etc). The problem here was partly that the negotiations went on for so long and that professionals were involved extensively during that period, incurring considerable costs.

Jervis v Harris self-help often sounds like a commercial solution but is not without considerable risks itself. Landlords can be accused of trespass or breach of the quiet enjoyment covenant if they don’t act sensitively when undertaking works. This strategy also means that a landlord has to put his hand in his pocket for all the costs of the works before he can try to recover them from the tenant. Although this becomes a debt claim (and so outside the statutory limitations), it is only valuable if the tenant is good for the money – something landlords can’t take for granted in the current climate.

It would be interesting to know whether, and if so how, Agricullo had been advised about its liability for the costs it was incurring. Perhaps uncertainty over that liability was still a worthwhile risk overall, combined with the benefits of achieving a settlement with the tenant.

Fault lay in the covenant

Patten LJ pointed out in his judgment that Clause 9.3 could have been worded by reference instead to the enforcement of the tenant’s repairing covenants and he referred by example to the covenant used in Riverside Property Investments Ltd v Blackhawk Automotive (2005). In that case, the covenant was “to pay all costs and expenses incurred by the lessor in or in connection with the enforcement of any of the lessee’s covenants …. “. It is a clear lesson from the case that a landlord should insist (if he can) on seeing that wider form of wording being included in the lease. If Agricullo had been protected by those words, it should have been able to recover for at least a significant portion of the professional fees incurred during the lengthy period of negotiation.