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Section 47

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Legal costs

Recoverability of legal costs

Construction of the lease

Sinclair Gardens Investments (Kensington) Limited v Avon Estates (London) Limited
[2016] UKUT 317 (LC)

Summary

The proper construction of a lease which permitted the landlord to recover its costs and expenses incurred in ‘managing the estate and block of flats’ did not permit it to recover its solicitor’s costs and counsel’s fees incurred in proceedings under section 27A of the Landlord and Tenant Act 1985.

Facts

One of the tenants of a flat (which was one of three flats) contained in an end-of-terrace house had applied for a determination under s.27A of the Landlord and Tenant Act 1985 as to whether service charges demanded by their landlord, the freehold owner of the house, were reasonable and payable. The landlord was seeking to recover his legal fees incurred in earlier proceedings in 2010 and 2011 which had also been brought under s.27A. Since October 2013 the management of the building had been taken over by a Right to Manage (‘RTM’) company. The clauses in the lease relating to the payment of service charges provided that relevant fees had to be incurred “in connection with or for the purposes of or in relation to the estate and the Block of any part thereof”.

First instance

The FTT initially found that the service charge clause in the leases was broad enough to allow the landlord to recover the legal costs it had incurred as a result of the s.27A proceedings brought by the tenants. However, following an application by the tenants for permission to appeal, the FTT notified the parties that it would review its previous decision in the light of the case of Union Pension Trustees Limited v Slavin [2015] UKUT 103 (LC), which had been reported after the date of its own decision. The FTT was also concerned that it had erred in not providing adequate reasons in the original decision.

On this review the FTT reversed its first decision on the basis that it had not previously given adequate consideration to the construction of the lease as a whole. Having now done so, the natural wording of the clause (above) could not be “stretched” to enable recovery of the landlord’s costs of litigation under s.27A LTA 1985. The landlord appealed to the Upper Tribunal.

Decision on appeal

The Upper Tribunal dismissed the appeal. The Tribunal gave an overview of the principles relevant to the interpretation of service charge clauses in leases, including those summarised in the Supreme Court case of Arnold v Britton [2015] UKSC 36. The Tribunal pointed out that such clauses were not subject to any special rule of contractual interpretation, but that a tribunal should consider what a reasonable person having all the background knowledge of the parties would have understood the language used in the lease to mean. Further, although legal costs may be recovered under a general service charge clause, there must be language apt to demonstrate a clear intention that such expenditure is recoverable (Union Pension Trustees Limited v Slavin [2015] UKUT 103 (LC).

The Tribunal concluded that here solicitor’s charges could be recovered only where they were employed for the purposes of the management of the estate. Those solicitors acting in response to earlier proceedings had not been so employed, and the landlord’s appeal was thereby dismissed. The FTT had correctly concluded in its review of its own first decision that the landlord’s legal costs were not recoverable under the service charge clause.


Cannon v 38 Lambs Conduit LLP
[2016] UKUT 371 (LC)

Summary

The legal costs could not be recovered through the service charge under the specific terms of the lease in question.

Facts

A landlord (L) had let premises to T under a long lease. T had issued proceedings in the FTT relating to the apportionment of the service charges in the block. By the time of the hearing that issue had been resolved and the FTT were only considering matters relating to the various legal and other costs of the proceedings. L had incurred legal fees of £16,000 in the course of the proceedings. The relevant clause of the lease permitted the landlord to recover, under the service charge, the following sums:
    “all reasonable costs and expenses incurred by the lessor for the purpose of complying with or in connection with the fulfillment of its obligations under the terms of [the lessor’s covenants]”

    “the cost of management of the building including (without prejudice to the generality of the foregoing) all accountancy management agents’ surveyors’ and audit costs and the establishment of such reserved funds as the lessor’s managing agents shall consider reasonably desirable”
The FTT held. inter alia, that certain sums including contributions to the landlord’s legal costs were payable by T. T appealed to the Upper Tribunal.

Decision

The Upper Tribunal noted that the value of previous decisions in this area was limited, given the diversity of lease terms considered by the Tribunal in each case. The Tribunal noted the approach to construction laid down by the Supreme Court in Arnold v Britton [2015] UKSC 36 and also the dicta set out in cases such as McHale v Earl Cadogan [2010] EWCA Civ 14 and Sella House v Mears [1989] 1 EGLR 65, which states that clear terms are required before legal costs will be held to be recoverable. The Tribunal also considered the case of Assethold v Watts [2014] UKUT 0537 in which it was held that the failure to specifically refer to legal costs in the lease did not of itself preclude recovery of those costs if the clause was drafted widely enough.

On the facts of this case, the Tribunal held that legal costs were not recoverable under the clause in question. It was the Tribunal’s duty to consider the lease as a whole, and whilst legal costs were referred to in some clauses of the lease, they were omitted from this clause. Whilst the fact that legal costs were not expressly mentioned in the clause was not fatal, it was a consideration that the Tribunal must take into account. Further, it would have been a considerable departure from the ordinary meaning of the terms of the lease to hold that the legal costs of dealing with proceedings relating to apportionment fell within the costs of complying with the lessor’s obligations or managing the block.

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