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Fairhold Freeholds No. 2 Limited v Moody [2016] UKUT 311 (LC)

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10th October 2016

Summary

The Upper Tribunal (Lands Chamber) has held that an indemnity given in a lease can be viewed as a promise by the tenant to protect the landlord from the landlord’s liability to a third party. For the tenant to be liable, the tenant’s breach must be the reason for the landlord’s liability to the third party. In this case, the indemnity was not drafted widely enough to render the tenant responsible for the administrative and legal costs incurred by the landlord once the ground rent had been tendered (even though it was tendered late).

Facts

The relevant property was a two bedroom flat in Bristol under a lease granted to the respondent, Mr Moody, in 2006 by the appellant’s predecessor in title. The lease was for a term of 250 years and reserved a yearly ground rent of £100 payable by equal half-yearly instalments in February and August. The appeal turned on the meaning of Clause 4.1 of the lease, by which the lessee covenanted to:

“to observe and perform the obligations on the part of the Lessee set out in Parts I and II of the Eighth Schedule and to observe and perform all covenants and stipulations contained or referred to in the Charges Register (if any) of the Title above referred to so far as the same relate to or effect the Demised Premises and to indemnify the Lessor against all actions proceedings costs claims and demands in respect of any breach non-observance or non- performance thereof.”

Mr Moody did not reside at the subject property and had previously provided a correspondence address to his landlord’s agent. In August 2013, he moved to a new address. He informed the management company (who was responsible for maintaining the building and collecting service charge) of his new address, but he did not inform the appellant or its agent, which is responsible for the collection of the ground rent.

In July 2014 the appellant’s agent sent out a demand for ground rent, which was addressed to Mr Moody’s original address. The demand did not reach him, and he did not pay the ground rent, which fell due on 01.08.2014. Mr Moody was then chased for payment: first, by two letters to the same ‘outdated’ address. The then agents discovered Mr Moody’s current address by searching the title to the subject property at the Land Registry, and sent a “Final Letter Before Action” demanding payment of the rent plus £50 for their administration charges in pursuing the arrears.

Following receipt of that letter, Mr Moody paid the £50 ground rent, but disputed the administration charge, asking the agent to explain how his obligation to pay that charge was said to arise. The agents relied upon Clause 4.1 amongst other provisions, and then returned Mr Moody’s cheque for the ground rent, contending the balance due was £100. Further rent fell due, and Mr Moody tendered payment of it. His cheque was returned on grounds he had not paid the full sum, and a further administration charge of £150 was later added for instructing solicitors to recover the outstanding charges and the solicitors themselves made a charge of £180.

Mr Moody applied to the FTT for a determination under para 5(1) of Part 1 of Sch. 11 to the CLRA 2002 of his liability to pay and the reasonableness of the charges. The sole dispute before the FTT concerned the administration charges as the appellant had accepted the payment of the outstanding ground rent of £100.

First instance

The First-tier Tribunal held that:

• the appellant was not entitled to levy an administration charge for the late payment of rent in reliance on Clause 4.1 because: (a) looking at the lease as a whole, if the landlord had intended to be able to levy an administration charge for late payment of ground rent, it would have included such a provision in the Eighth Schedule; and (b) the words “indemnify the Lessor against all actions proceedings costs claims and demands” in Clause 4.1 had to be construed ejusdem generis and that this clause was designed to protect the lessor from claims made against it, that it was defensive in nature and was not intended to apply to situations where the Lessor took the initiative and instigated action against the Lessee.
• the appellant was ordered to reimburse the fee of £65, which Mr Moody had incurred in making his application.

Issues

The issues on appeal were:

• whether the FTT was right to find Clause 4.1 did not entitle the appellant to recover the administration charges including the £50 charge for sending the final demand letter; and
• whether the appellant was required to reimburse to Mr Moody the application fee of £65.

Decision on appeal

In dismissing the appeal, the Upper Tribunal held:

• The FTT came to the right conclusion and Clause 4.1 does not enable the appellant to levy an administration charge or to recoup the costs of its own solicitors in preparing to enforce the respondent’s obligation to pay ground rent:

“Clause 4.1 is a covenant of indemnity intended to protect the lessor against the adverse consequences of a breach by the lessee of its obligations to the lessor.

…The question in any case where it is sought to rely on such a covenant is whether the lessor has come under an obligation to make a payment to someone else “in respect of” some breach of obligation owed to the lessor by the lessee: has A’s breach given rise to B’s liability to C? If the lessor has come under such an obligation the covenant requires the lessee to indemnify the lessor against the cost it has incurred in meeting that obligation.

…The “actions, proceedings, costs, claims and demands” against which the lessor is entitled to be indemnified are clearly actions, proceedings, claims and demands made against the lessor, and the addition of “costs” to the list does not convert the lessee’s liability into one for any costs which the lessor may incur as a result of taking steps of its own against the lessee. The “costs” in question are of the same type i.e. the costs of a third party as a result of the lessee’s breach, for which the third party is entitled to look to the lessor for reimbursement. A covenant of indemnity is not the same as a covenant to reimburse the lessor’s own costs incurred in taking steps to enforce the lessee’s obligations.”

• The appellant’s second ground of appeal (that it should not have been ordered to reimburse the £65 application fee, because it should have succeeded in the application) must fail as the Upper Tribunal had determined that the FTT reached the correct conclusion on the main issue.

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