The recovery of a lessor’s legal costs
11th February 2019
In Chaplair Ltd v Kumari  EWCA Civ 798;  L. & T.R. 1, the Court of Appeal decided that a lessor with an apparent contractual entitlement to the recovery of his legal costs, incurred in proceedings for the recovery of unpaid service charges, was entitled to have such costs assessed on the indemnity basis under CPR 44.5 even though the proceedings had been allocated to the small-claims track. I had previously wondered whether had the case been argued differently, the Court of Appeal might have decided that the lessor was not entitled to his legal costs from the proceedings as he could not establish that his contractual entitlement to such costs had crystallised where no demand for their payment had been served on the lessee.
Avon Ground Rents Ltd v Child
In Avon Ground Rents Ltd v Child  UKUT 204 (LC), Holgate J (Chamber President) and HH Judge Hodge QC—sitting both as judges of the Upper Tribunal and County Court—were faced with the question of whether the FTT had jurisdiction to determine if legal costs, incurred by the lessor in proceedings in the County Court and FTT for unpaid service and administration charges, were payable. In answering that question, the Upper Tribunal grappled with some of the problems raised by Chaplair and made a number of helpful suggestions as to how the FTT and County Court ought to approach the assessment of a lessor’s legal costs where he appears to have a contractual right to their payment under the lease.
In Child, the lessor had issued a money claim in the County Court for the payment of service and administration charges. The County Court ordered that that the claim be “sent to the First-tier Tribunal for determination” under s.176A. The lessor incurred a further sum of £4,425 in legal costs litigating the dispute. Such costs were not demanded formally from the lessee but sent to the FTT in the form of a cost schedule (the First-tier Tribunal having indicated that it would sit as the County Court at the end of the proceedings). The FTT decided that it had jurisdiction to determine whether the sum of £4,425 was payable on the basis that those costs were an*L. & T. Review 167 administration charge, i.e an amount payable by a tenant of a dwelling as part of or in addition to the rent which is payable, directly or indirectly, in connection with a breach (or alleged breach) of a covenant or condition in his lease: Sch.11 para.1(1)(d). Moreover, as the sum claimed was unreasonable it had jurisdiction to determine whether a lesser sum was payable: Sch.11 para.2.
On appeal, the lessor argued successfully that the FTT did not have jurisdiction to determine this question because the pleaded case in the County Court had only been for an order for costs under s.51 of the Senior Courts Act 1981; the legal costs had not formed part of the claim and, in any event, no demand for the payment of such costs under the lease had ever been served on the lessee. It, therefore, followed that the sum was not yet “payable” by the lessee and hence was not an administration charge. Accordingly, The FTT lacked jurisdiction to determine whether the amount of the legal costs was reasonable under Sch.11 para.2; only the County Court could make an assessment and order for costs under s.51 of the Senior Courts Act 1981.
Assessment of costs
The Upper Tribunal, in reaching its decision, identified two practical problems that were likely to arise from its decision. First, a landlord could avoid his post-issue legal costs from ever being subject to regulation under Sch.11 para.2, by always seeking an order for their payment at the conclusion of County Court proceedings when the County Court assessed the amount of costs that are payable (as is now frequently common and as occurred in Chaplair). Secondly, if such costs were not assessed by the County Court, the landlord would be forced to serve a demand for their payment after the proceedings. If the lessee wished to challenge the amount of such costs, this would require the lessee to make an application to the FTT or to defend County Court proceedings on the basis that such sum, now an administration charge, was unreasonable in amount. As this would involve the incurring of yet further costs, the process could carry on ad infinitum.
The Upper Tribunal suggested, therefore, three solutions to each problem. First, the lessee should make an application under Sch.11 para.5A, for an order reducing or extinguishing the lessee’s liability to pay an administration charge in respect of litigation costs. On such an application, the County Court or FTT would have jurisdiction to determine whether to reduce or extinguish any litigation costs that might be incurred if it was just and equitable to do so. Unlike under Sch.11 para.1, there is no requirement for such costs to have become payable. On such an application, it would also be open to the County Court or FTT to determine that it would be just and equitable to reduce a lessee’s liability to pay legal costs that were disproportionate to the sums in dispute, the issues involved and the level of representation appropriate to deal with those matters. In short, the County Court would have the power to consider proportionality and not be limited to assessing such costs on the indemnity basis (where only costs that are unreasonably incurred can be disallowed).
Secondly, if no such application is made, the County Court should nonetheless consider whether the instruction of lawyers to litigate disputes concerning the reasonableness of service or administration charges is reasonable under CPR 44.4(3). The Upper Tribunal suggested that, in cases that were limited to whether a service or administration charge is reasonable in amount and did not involve disputes of fact or questions of law, it would be unlikely to be reasonable to have instructed solicitors to undertake the litigation. A professional managing agent familiar with the issues ought to be capable of conducting the litigation without recourse to lawyers.
Finally, and most interestingly, the Upper Tribunal intimated, although without deciding the point, that it would also be possible for the County Court, when assessing the amount of costs that were payable under s.51 of the Senior Courts Act 1981 to apply Sch.11. The Upper Tribunal*L. & T. Review 168 had in mind the question of whether the effect of Sch.11 para.5(6), means that costs are even payable under contract so as to engage CPR 44.5. Schedule 11 para.5(6) renders void a term of a lease that purports to provide for a determination in a particular manner, or on particular evidence of any question which may be the subject matter of an application for a determination as to whether an administration charge is payable. A term of the lease that, in practice, prevents a lessee from challenging the reasonableness of an administration charge because the court will assess costs on the indemnity basis is arguably such a clause. If that is right, the consequence is that any clause of the lease that provides a landlord with an indemnity, which cannot be challenged in the FTT, is arguably void and of no effect. In Child, and any other case allocated to the small-claims track, this would mean that the court lacked the power to award the lessor his costs under CPR 44.5.
However, there is another reason, and a far less complicated legal argument, as to why such sums are not payable under the lease. In Child, it was the lessor’s case that the legal costs were not payable under the lease until they were formally demanded and had complied with s.47 of the Landlord and Tenant Act 1987 and Sch.11 para.4, (i.e. the demand contained the name and address of the lessor and contained a summary of the lessee’s rights and obligations to challenge the charges). The logical consequence of this submission is that, if the sums are not payable under the lease, then they are also “not payable by the paying party to the receiving party under the terms of a contract” so as to engage CPR 44.5. In Chaplair, the Court of Appeal made clear that it was a necessary prerequisite for an assessment under CPR 44.5 for the lessor to have established a contractual entitlement to its costs under the lease. It, therefore, ought to follow that, if the lessor cannot prove that the costs are payable under the lease, then the court, whenever the claim has been allocated to the small-claims track, will lack jurisdiction to award the lessor his costs.
This would mean that the lessor would be forced to demand such costs once the County Court proceedings had concluded and this would potentially give rise to the absurd consequence of litigation continuing ad infinitum. There is, however, no reason why the lessor could not make a demand for payment immediately prior to the assessment of costs at the time when his cost schedule is filed and served. The effect of this would be that the costs would become payable and subject to assessment by the court under CPR 44.5. They would also, however, at that point become administration charges. The County Court would then be required to consider whether they were reasonable in amount and, therefore, also proportionate (see Christoforou v Standard Apartments Ltd  UKUT 586 (LC);  L. & T.R. 12) as an administration charge is only payable if the amount of the charge is reasonable: Sch.11 para.2.
The Upper Tribunal were clear that they were not, in Child, deciding the question of whether an indemnity covenant in a lease is void insofar as it prevents a lessee from being able to challenge the reasonableness of the amount of a lessor’s legal costs. That said, it is clear from the tenor of the judgment and the fact that the point appears to have been raised without being the subject of argument that the Upper Tribunal is keen to close the loophole opened by Chaplair. It, therefore, appears likely that other arguments limiting the effect of a lessor’s indemnity covenant will be heard sympathetically. In the meantime, lessees are well advised to make an application for an order under Sch.11 para.5A, whenever defending claims in the County Court or FTT brought by their lessor as that is the surest way of enabling the court or tribunal to have the widest discretion when it assesses a lessor’s costs.
Published in the Landlord and Tenant Review