On the Eighth day of Christmas...

...Today Nadia Khan from Irwin Mitchell’s Real Estate Disputes team analyses the issue of non-payment of service charges by examining Khan v Tower Hamlets LBC [2022] EWCA Civ 831

Mr Khan (the ‘Defendant’) occupied a flat pursuant to a long lease (the ‘Lease’) granted by Tower Hamlets Council. The Council was the Landlord throughout the course of the Lease. The Lease contained a provision that payment of services would be ‘recoverable in default as rent in arrears’ (clause 4(4)), thus permitting the Council to forfeit the Lease in an event of non-payment of rent or breach of covenants (clause 6).

Clause 3.9 of the Lease contains provisions pertaining to the tenant’s covenants; ‘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 the Council’s service charge, therefore falling into arrears. The Council issued County Court proceedings for rent arrears in the sum of £4,917.07. The claim was transferred to the First-tier Tribunal (the ‘FTT’) for them to ‘decide upon the reasonableness of the service charges which are claimed in this claim’ (Section 27A of the Landlord and Tenant Act 1985). The FTT decided that the amount being claimed by the Council was reasonable. As a result, the Council made an application to seek costs pursuant to rule 12 of the First-tier Tribunal Procedure on the grounds that the Defendant’s conduct has been ‘unreasonable’. Unfortunately, that application was unsuccessful. Consequently, the Council made another application to the County Court seeking contractual costs pursuant to clause 3(9) of the Lease, which was successful. As a result, the County Court awarded the Council’s costs (calculated at £20,000.00) for issuing proceedings and the FTT.

Following this, the Defendant applied for permission to appeal and HHJ Roberts, issued 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.

Decision from the Court of Appeal 

On review of the matter, the Court of Appeal identified two issues:

• Was the District Judge right to order the Defendant to pay the Council’s costs pursuant to clause 3 (9) the lease; and
• Whether the Council, under any circumstances, should be awarded costs under the Senior Courts Act 1981, Section 51.

In regards to point 1 above, the Court of Appeal decided that there was no contractual liability to pay costs pursuant to clause 3(9) of the Lease. The Court of Appeal decided that the costs incurred in the FTT were not ‘incidental to the preparation and service’ of a Section 146 notice, as the costs were ‘too remote’ from the ‘preparation and service’ of a Section 146 notice to be considered ‘incidental’.

Regarding the second point, the Council asked the Court of Appeal to consider whether the legal costs incurred in the FTT were incurred in ‘contemplation’ of Section 146 proceedings. The Council was not allowed to bring forward this point on the appeal. The Court of Appeal stated that the Council was well within its right to recover costs of the County Court proceedings subject that it was pursuant to the Senior Courts Act 1981, Section 51. However, as ‘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’. 

Practical implications of this case

Leases commonly contain clauses which allow landlords to recover any legal costs incurred ‘in contemplation of’ or ‘incidental to’ forfeiture proceedings. When landlords seek to recover arrears, it is often before a tribunal, such as FTT, or a Small Claims Track in the County Court, where costs are usually not recoverable. Consequently, landlords become reliant on such clauses within leases to argue that the legal costs are contractually recoverable, as the proceedings seek to cover arrears brought in contemplation or incidental to proceedings.

The Court of Appeal’s decision limits the scope of what can be considered ‘incidental’ to the preparation anda service of forfeiture notices under a lease but lacks guidance on what costs are considered in ‘contemplation’ of forfeiture proceedings. Therefore, a wise observation would be for landlords who do not truly intend to bring forfeiture proceedings, to be more cautious and alert before relying on such clauses.