Contractual costs and forfeiture clauses: Mayor and Burgesses of the Tower Hamlets London Borough Council v Khan  EWCA Civ 831
28th June 2022
The Council was the Defendant’s landlord. The Defendant’s lease permitted the Council to recover legal costs that were “incidental to the preparation and service” of forfeiture notices. The Council brought County Court proceedings for arrears of service charge which were transferred to the First-tier Tribunal (Property Chamber) (the “FTT“). The FTT determined that the service charges were reasonable and recoverable and the proceedings were then transferred back to the County Court. The County Court granted the Council its costs of proceedings in the County Court and the FTT pursuant to the aforementioned clause.
The Court of Appeal overturned the decision at first instance and held that (i) the FTT proceedings were too remote to be “incidental” to the “preparation and service” of forfeiture notices; (ii) the County Court had no power to award costs in the FTT including pursuant to s. 51 of the Senior Courts Act 1981 (the “1981 Act”).
What are the practical implications of this case?
Leases commonly contain clauses which permit landlords to recover legal costs incurred “in contemplation of” or “incidental to” forfeiture proceedings. When landlords seek to recover rent and service charge arrears if is often before tribunals where legal costs are not (generally) recoverable such at the FTT and the Small Claims Track in the County Court. Landlords therefore rely on such clauses to argue that the legal costs are contractually recoverable because the proceedings seeking to recover rent/service charge arrears were brought “in contemplation of” or “incidental to” future forfeiture proceedings.
The decision of the Court of Appeal limits the scope of what will be considered “incidental to the preparation and service” of a section 146 notice but provides no guidance on what costs are incurred “in contemplation of” forfeiture proceedings.
It is notable that the Court of Appeal found that there was no inconsistency between Contractreal Ltd v Davies  EWCA Civ 928 and 69 Marina, St Leonards-on-Sea v Oram  EWCA Civ 1258,  L&TR 4 as the relevant clauses in each case “differed significantly”. The wording of individual clauses is crucial; there are no blanket rules or principles.
Landlords who never truly intend to bring forfeiture proceedings should be more wary of relying on such clauses. As Lord Justice Newey observed: “it is, I think, very much open to question whether costs of proceedings can be deemed “incidental” to “the preparation and service of” a section 146 notice when no such “preparation” or “service” has ever taken place.”
What was the background?
The Defendant occupied a flat pursuant to a long lease granted by the Council (the “Lease”). The Council was at all material times the Defendant’s landlord. The Lease contained provision for the payment of service charges which were “to be recoverable in default as rent in arrear“(clause 4(4)) and permitted the Council to forfeit in the event of non-payment of rent or breach of covenant (clause 6).
By clause by clause 3(9) the Defendant covenanted:
“To pay to the Lessors all costs charges and expenses including Solicitors’ Counsels’ and Surveyors’ costs and fees at any time during the said term incurred by the Lessors in or in contemplation of any proceedings in respect of this Lease under Sections 146 and 147 of the Law of Property Act 1925… including in particular all such costs charges and expenses of and incidental to the preparation and service of a notice under the said Sections…”
The Defendant failed to pay his service charge. The Council issued County Court proceedings for arrears of £4,917.07. The claim was transferred to the FTT “to decide upon the reasonableness of the service charges which are claimed in this claim” (s. 27A of the Landlord and Tenant Act 1985).
The FTT determined that the amount claimed by the Council was reasonable. The Council made an application seeking costs pursuant to rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 on the basis that the Defendant’s conduct had been “unreasonable”. That application was not successful.
The Council issued a further application in the County Court seeking contractual costs pursuant to clause 3(9) of the Lease “as the costs in the ‘FTT’ were incidental to the service of a section 146 notice.” Following a hearing, the District Judge ordered the Defendant to pay the arrears of service charge and the Council’s costs of proceedings assessed at £20,000.
The Defendant applied for permission to appeal and His Honour Judge Roberts gave directions for the appeal to proceed to the Court of Appeal.
The Council did not serve a notice under section 146 and instead applied for a charging order over the Lease.
What did the court decide?
The Court of Appeal identified two issues:
- Whether the District Judge was right to order the Defendant to pay the Council’s costs pursuant to clause 3(9) of the Lease; and
- Whether the Council should, in any event, be awarded its costs under s. 51 of the 1981 Act .
In relation to point (i) the Court of Appeal held that there was no contractual liability to pay costs pursuant to clause 3(9) of the Lease:
- The costs incurred in the FTT were not “incidental to the preparation and service” of a section 146 notice. Those costs “were too remote from “the preparation and service” of a section 146 notice… to be considered “incidental” to such “preparation and service”. To regard the sizeable costs of the proceedings as so “incidental” would… be “a case of the tail wagging the dog”.” (para ).
- The Council asked the Court of Appeal to consider whether the costs incurred in the FTT were incurred “in contemplation of” section 146 proceedings. This was not a point advanced by counsel below. For the reasons set out at paragraphs  to , the Council was not permitted to advance the point on appeal.
In relation to point (ii) the Court of Appeal held that the Council was entitled to recover its costs of the County Court proceedings pursuant to s. 51 of the 1981 Act (para ). However, “where part of proceedings has been transferred from the County Court to the FTT… the County Court has no jurisdiction to make any order for costs in respect of the FTT proceedings.” (para ).
Written by Robyn Cunningham
First published by LexisPSL on 27th June 2022
Team: Robyn Cunningham
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