Lease terms wide enough to allow recovery of landlord’s legal costs through tenant’s service charge

In Bretby Hall Management Co Ltd v Pratt [2017] UKUT 70 (LC), the Upper Tribunal concluded that a lease between the parties containing the words, ‘any legal or other costs reasonably and properly incurred by the Manager and otherwise not recovered in taking or defending proceedings’ was wide enough to cover legal costs arising from the tenant’s threatened proceedings against the landlord and subsequently could be recovered through the tenant’s service charge.

Background to the facts

The appellant property management company managed 30 apartments in a country house with its only source of income being the service charges imposed on the tenants. The respondent, a Mr Christopher Pratt, leased Apartment 17 under a lease dated 11 April 2003 for a term of 125 years at a ground rent of £150 p/a. Both parties had sustained a long history of dispute on various different issues one of which was the recoverability of the appellant’s legal fees in dealing with the dispute in the sum of £11,000 as a service charge item.

Although the respondent had never taken the appellant to court, the appellant sought to include the legal costs it incurred in dealing with the dispute by way of service charge under the lease. The respondent challenged the recoverability of the costs. Firstly he argued that legal costs should be disallowed by virtue of s20C of the Landlord and Tenant Act 1985 (s20C LTA 1985) which precluded a landlord from recovering costs in connection of proceedings by way of service charge and secondly that the sums claimed were unreasonable.

Decision at the First-Tier Tribunal

The First-Tier Tribunal disallowed the appellant’s claim for £11,000 in its entirety.

Decision in the Upper Tribunal

The appeal was allowed. The Upper Tribunal examined

1. Whether the £11,000 was recoverable by way of service charge under the lease; and,

2. Whether the First-Tier Tribunal could have disallowed these costs under s20C of the LTA 1985

The Upper Tribunal held that the service charge provisions were wide enough to cover the costs of intended proceedings and stated it was contemplated by the parties that costs of managing the development would be recoverable under the service charge. Judge Behrens held that the costs of defending threatened proceedings by the tenant fell squarely within the definition.

S20C LTA 1985 provides that a tenant may make an application for an order that all or any of the costs incurred by the landlord in connection with the proceedings are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant. Such an application shall be made if the Tribunal considers it just and equitable in the circumstances.

It was held, S20C LTA 1985 had no application to the costs incurred by the appellant because the tenant’s threatened proceedings did not materialise and thus jurisdiction under s20C LTA 1985 did not arise. As the appellant had incurred substantial costs in this appeal through instructing solicitors and counsel, and had no other source of funds other than the service charge, it was held that it would be just and equitable in these circumstances to award the appellant its appeal.

This decision imposes liability on a tenant notwithstanding the generality of the service charge clause because it was contemplated by both parties that the legal costs would be recovered through the form of service charges as it was the appellant’s only source of income.

For further information, please contact the Real Estate Disputes Team at Hamlins.