Landlords of long leasehold residential properties need to be aware of changes affecting how they recover litigation costs. Section 131 Housing and Planning Act 2016 will have the effect of allowing courts and tribunals to restrict a landlord's ability to recover the costs of proceedings through indemnity clauses in the lease.
Some leases allow a landlord to treat litigation costs as relevant costs to be recovered from lessees through a service charge. However by s.20C Landlord and Tenant Act 1985 courts and tribunals were given the power to order that any costs incurred in connection with proceedings before a court or tribunal are not to be regarded as relevant costs in determining the amount of any service charge. Therefore even where the lease allows the landlord to recover the litigation costs through the service charge and where those costs are reasonable, a court or tribunal can still order that the costs are not recoverable where it considers it just and equitable in the circumstances.
The position in relation to recovering litigation costs through the service charge is not changing and landlords can still seek to recover these costs where the lease allows and subject to any s.20C application.
Administration Charges - the new law
As landlords will be aware, as well as seeking recovery of legal costs from lessees through the service charge, some long leases also provide for the recovery of litigation costs from an individual lessee directly through a costs indemnity clause. It is often seen as fairer to recover litigation costs against the individual lessee against whom enforcement action has been taken. Therefore if a landlord issued proceedings against a lessee in respect of a breach of the lease, often they would be able to seek to recover their costs from that particular lessee by way of a costs indemnity clause contained in the lease.
The change in the law will mean that courts and tribunals have the same power to order that litigation costs are not recoverable through a costs indemnity clause as they have where costs are recovered through a service charge. A lessee will be able to make an application to the relevant court or tribunal for an order reducing or completely extinguishing their liability to pay administration charges in respect of litigation costs where it considers it just and equitable.
These changes will apply to any proceedings issued on or after 6 April 2017. It is to be hoped that in circumstances where proceedings are brought against a lessee who is in breach of a lease and who is found to be so in breach by a court or tribunal, the same court or tribunal will not penalise the landlord on costs as a result of this section. The key will be to keep a record of all attempts, prior to proceedings being issued, to persuade the lessee to comply with the lease.
Lessees will be given some comfort that landlords will think twice before issuing proceedings based on spurious claims and it is likely that it will give them protection against legal costs where the landlord’s claim is unsuccessful. As always careful management of the litigation process will be required.