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The final word on the recovery of a landlord’s legal costs?

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11th November 2022

Probably the most common reason for litigation between landlords and tenants in residential long-leasehold property arises from the non-payment of service charges. Given the modest sums involved, it is unfortunate that questions surrounding the ability of a landlord to recover costs incurred litigating such disputes have persisted despite the issue coming before the higher courts on a number of occasions. This is now the third article I have written on the subject in less than seven years (see [2016] L. & T.R. 27 and [2018] L. & T.R. 166). Hopefully it can be the last.

Khan v Tower Hamlets LBC

The case of Khan v Tower Hamlets LBC [2022] EWCA Civ 831 was a paradigm example of such a claim. Mr Khan failed to pay his service charge. Tower Hamlets brought a debt claim in the county court. Mr Khan defended the claim arguing that the sum was not payable. The county court transferred the claim to the First-tier Tribunal (Property Chamber) (FTT) and the FTT decided that the service charge was payable. Tower Hamlets applied to the county court for an order requiring Mr Khan to pay the legal costs Tower Hamlets had incurred litigating the dispute in both the county court and the FTT. It contended that the order for costs should be made on the indemnity basis given Mr Khan’s lease (like most) required the tenant to indemnify the landlord for all costs, charges and expenses incurred by the landlord that were incidental to the preparation and service of a notice under s.146 of the Law of Property Act 1925. The clause also entitled the landlord to costs incurred “in or in contemplation of any proceedings under sections 146 and 147 of the Law of Property Act 1925” but that part of the clause was not relied upon by Tower Hamlets. A district judge found that the costs in both the FTT and county court were incidental to the preparation and service of a s.146 notice and ordered Mr Khan to pay Tower Hamlets £20,000. Mr Khan appealed.

The appeal required the determination of two issues: (1) could costs be incidental to the preparation of a s.146 notice if no such notice had ever been prepared; and, if not, (2) did the county court have jurisdiction under s.51(1) of the Senior Courts Act 1981 to order Mr Khan to pay the costs incurred by Tower Hamlets before the FTT?

Were the costs incidental to the preparation of a s.146 notice?

Newey LJ did not accept that it was possible for costs to be “incidental” to the preparation and service of a notice if no notice was ever prepared. The words “incidental to” suggested something subordinate to the principal purpose. Incidental to, therefore, meant something different to “in  contemplation of” and the cases which had decided that costs incurred before the FTT were recoverable because the landlord had contemplated forfeiture by having an intention to serve a s.146 notice (No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119; [2022] L. & T.R. 10, Kensquare Ltd v Boakye [2021] EWCA Civ 1725; [2022] L. & T.R. 18 and Barrett v Robinson [2014] UKUT 322 (LC); [2015] L. & T.R. 1) were of no assistance to Tower Hamlets. Even if a notice had existed, the costs before the FTT were too remote to be incurred in the preparation of it.

Tower Hamlets may have had more success had it relied on the first part of the clause (“in contemplation of”) in the county court. However, that was not how it had presented its case and the county court had, therefore, not heard or invited evidence on whether forfeiture was actually contemplated. It was also not appropriate for the point to be raised for the first time in the Court of Appeal.

Section 51 of the Senior Courts Act 1981

Section 51(1) of the Senior Courts Act 1981 provides that “the costs of and incidental to all proceedings in … the county court, shall be in the discretion of the court”.

In John Romans Park Homes Ltd v Hancock, unreported, 17 October 2019, Martin Rodger QC (sitting as a circuit judge) decided that, where a claim issued in the county court had been transferred to the FTT, the county court lacked jurisdiction to order a party to pay costs that the other party to the litigation had incurred in the FTT because such costs were not incidental to the county court proceedings. He decided not to follow the decision of Holgate J and HHJ Hodge QC in Avon Ground Rents Ltd v Child [2018] UKUT 204 (LC); [2018] H.L.R. 44, (also sitting as judges in the county court) in which the opposite had been decided.

In Khan, Newey LJ held that Martin Rodger QC’s “reasoning and conclusions [were] convincing” and concluded that:

“I agree with him that, where part of proceedings has been transferred from the County Court to the FTT (in the present case, under s.176A of the [Commonhold and Leasehold Reform Act 2002], the County Court has no jurisdiction to make any order for costs in respect of the FTT proceedings. It follows that the District Judge had no power to order Mr Khan to pay the Council’s costs of the FTT stage of this litigation.”

This meant that Tower Hamlets was only entitled to the costs it incurred in the county court assessed on the standard basis (the case not having been allocated to the small claims track before it was transferred to the FTT). It is unfortunate, although understandable given the way the appeal progressed, that Newey LJ did not clarify whether this conclusion would have also prevented a costs order being made in respect of the FTT costs if such costs were payable under the lease. In Khan, it appears to have been the position of both parties—although it is not entirely clear—that, had the FTT costs been payable under the lease, the county court would have had jurisdiction to make an order that they were payable. Anecdotally, this is also the view of some FTT judges in “double-hatting” cases when they sit as district judges at the end of the proceedings. That, however, does not appear to have been the view of Martin Rodger QC in Hancock. Although the point did not arise directly in Hancock (the underlying dispute in Hancock concerned whether the Mobile Homes Act 1983 applied in respect of a claim for possession of a mobile home), Martin Rodger QC did not consider the distinction was relevant when he considered if Child had been decided correctly.

In Child (considered at greater length in the second article of this series, [2018] L. & T.R. 166), the FTT, in a county court claim for unpaid service charges that had been transferred to it,  decided at the conclusion of the hearing that the landlord’s costs incurred before the FTT and the county court were recoverable under the lease and, therefore, payable as an administration charge. The FTT decided that it, therefore, had jurisdiction to determine an amount that was reasonable. The landlord appealed arguing that the FTT had no jurisdiction to do what it did because, until the costs were demanded, they were not an administration charge and the question of costs should have been left for the county court to determine. Holgate J and HHJ Hodge QC—sitting as the Upper Tribunal—agreed and allowed the appeal. They then decided—at the invitation of both parties sitting as county court judges—to make an order for costs under s.51 of the Senior Courts Act 1981. It was at this point in their decisions that they decided: (1) that the costs were payable under the lease and were, therefore, to be assessed on the indemnity basis; and (2) that they had jurisdiction under s.51 of the 1981 to order the tenant to pay the landlord a proportion of the costs incurred in the FTT. They also made clear that a court gives effect to a party’s contractual right to costs through the exercise of its discretion under s.51. The facts of Child were, for all material purposes, identical to those in Khan.

It is true that neither in Hancock nor Khan was the reasoning in Child (that the court gives effect to a party’s contractual right to costs through exercising the discretion under s.51 of the 1981 Ac t) considered. However, there does not appear to be any basis to doubt that it is correct. In both Chaplair Ltd v Kumari [2015] EWCA Civ 798; [2016] L. & T.R. 1 and Church Commissioners for England v Ibrahim [1997] 1 E.G.L.R. 13; [1997] 03 E.G. 136, the Court of Appeal cited with approval Scott LJ’s decision in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No.2) [1993] Ch. 171; [1992] 3 W.L.R. 723 that “an order for the payment of costs of proceedings by one party to another party is always a discretionary order: s.51 of the Act of 1981” and “where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right”. It is also consistent with avoiding the concern expressed by Martin Rodger QC in Hancock (and in the first article of this series, [2016] L. & T.R. 27) that:

“By going first to the County Court a party could obtain the benefits of costs shifting, even if the dispute was eventually determined by the FTT following transfer by the court. The same dispute resolved entirely in the FTT would involve no costs shifting. Parties would be incentivised to start proceedings in their preferred forum as early as they could.”

Conclusion

While each case will always depend on the particular wording of the lease, it is now possible to summarise the law tentatively as follows:

• Where a cost recovery clause solely requires costs to be incidental to the preparation or service of a s.146 notice, costs incurred in the FTT are unlikely to be recoverable (even if a notice is subsequently prepared).
• Where costs must be incurred in contemplation of forfeiture (or incurred for the purpose of preparing a s.146 notice), the landlord must prove that it incurred costs at a time when it had an intention of forfeiting the lease or serving a s.146 notice.
• If a landlord obtains judgment in the county court for unpaid service charges, the court may only order that the tenant pay the costs incurred in the county court. This does not include costs incurred in the FTT even if the costs are recoverable under the lease.
• Any costs incurred in the FTT must be demanded as an administration charge (if the demand is made before the conclusion of the claim, it may be  possible—depending on how the claim was originally pleaded or following an amendment to the particulars—to seek judgment for such sums within the claim otherwise a fresh claim will need to be issued).
• The tenant may apply to the FTT for it to determine if the administration charge is reasonable. The reasonableness of the charge is also a potential defence to a claim in court. In assessing if the costs are reasonable, the FTT (or the court) must undertake the task by “examining closely the work undertaken, the result achieved, and the magnitude and importance of the object to which the work was directed” and be satisfied that the costs incurred are proportionate: Christoforou v Standard Apartments Ltd [2013] UKUT 586 (LC); [2014] L. & T.R. 12.

By Sam Madge-Wyld

This article first appeared in Landlord and Tenant Review (L. & T. Review 2022, 26(5), 179-182)

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