Feature: Common Challenges and Disputes
A Clear Understanding on Cost Recovery
Written by Phil Parkinson, Legal Director, & Lauren Walker, Trainee Solicitor of JB Leitch Solicitors
Legal Director Phil Parkinson and Trainee Solicitor Lauren Walker of specialist property law firm JB Leitch, provide comment on the topic of legal cost recovery, drawing on a recent and notable Court of Appeal matter to highlight the importance of clear wording in the construction of leases…
Recovery of legal costs is a consideration made by all landlords, residential or commercial, when issuing proceedings. Whether or not costs may be recovered, will be subject to the terms of the lease.
Providing clarity on the machinery relating to the recovery of service charges and a landlord’s ability to recover costs, the judgment in Kensquare Ltd v Boakye  EWCA Civ 1725 has recently been handed down in the Court of Appeal.
The Kensquare case is significant as it has practical implications for both residential and commercial service charge recovery. Importantly, the case has emphasised the necessity to construe each lease upon its own terms.
To provide context and background, in 2017, Kensquare brought proceedings in the First-tier Tribunal (FTT) to determine the reasonableness of service charges. The FTT determined that the service charges were reasonable and payable and following non-payment, a section 146 notice was issued.
Kensquare then served an interim demand for charges relating to the 2018 financial year (which had ended) and the 2019 financial year (in August 2019). Kensquare also sought payment of their legal costs associated with the FTT application in 2017.
Kensquare brought FTT proceedings in 2019 in respect of the reasonableness and payability of the interim service charges and the legal costs (which were sought by Kensquare as an administration charge or a service charge).
Specifically, in order to seek recovery of its costs as an administration charge, Kensquare sought to rely upon what is known as a section 146 costs clause which was present in the lease and included wording to allow the recovery of costs “for the purpose of or incidental to the preparation and service” of a section 146 notice.
Alternatively, Kensquare relied upon the following clause in the lease when seeking to recover its costs through the service charge:
Included within the service charge was “the cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building.”
The FTT found in favour of Ms Boakye, however, the Upper Tribunal reversed that decision and held that time was not of the essence for the interim demands meaning that the interim demands could be raised at any time.
In respect of costs, the Upper Tribunal found that all legal costs were incurred for the purpose of a section 146 notice on the ordinary meaning of the clause wording.
The Upper Tribunal also found that the wording “in connection with the management of the Building” could be construed so as to include costs incurred in legal proceedings issued to recover service charges.
Court of Appeal
The decision of Upper Tribunal was appealed to the Court of Appeal on the following four grounds:
1. Whether time would be of the essence in respect of interim service charge payments. 2. If time is not of the essence, were there limits on when that notice could be served. 3. Whether legal costs incurred from the 2017 FTT proceedings could be recovered pursuant to the section 146 costs clause. 4. Alternatively, whether the legal costs could be put through the service charge.
The Court of Appeal allowed the appeal on grounds 1 and 2, finding that whether a clause in a lease requires strict compliance with its time stipulations will be decided following contractual interpretation and in accordance with the principles of construction. In Kensquare, the lease required strict compliance with the timescales stipulated and therefore the interim demand issued part way through the financial year in August 2019 was ineffective.
As to ground 3, the Court of Appeal dismissed the appeal and held that when read within its natural meaning, FTT proceedings that were necessary in order to issue a section 146 notice were applicable costs “for the purpose” of a section 146 notice.
The Court made this finding notwithstanding that the lease pre-dated the statutory requirement for proceedings prior to a section 146 notice being issued. However, the Court reinforced that the construction of each lease would be dependent upon its own wording so comparison against other leases would not provide reliable guidance.
The appeal of ground 4 succeeded on the basis that the wording in the particular lease (i.e. “the cost of employing such professional advisers… in connection with the management of the Building.”) did not extend to litigation because to conclude differently would be to bring within the general words something that did not belong there. The Court found that the focus of the particular service charge clause was on management services as opposed to legal proceedings.
Section 146 costs clauses often appear in residential and commercial leases. Such clauses almost always include wording which includes “the preparation of and incidental to” the service of a section 146 notice. The Court of Appeal held in Kensquare that the natural reading of the clause would include costs associated with FTT proceedings that were brought as a pre-requisite to serving a section 146 notice. However, importantly, the Court relied upon the construction of the lease on its own terms.
Furthermore, in deciding whether the costs associated with the FTT proceedings would be payable via the service charge and whether the service charge machinery allowed for interim demands to be raised at any time, the Court again considered and relied upon the construction and wording of the lease.
In conclusion, it is advisable that in order to mitigate potential confusion and later contention, that leases are carefully and explicitly worded at the point of construction. Given that exact terminology may vary depending on individual lease terms, it also advisable for leaseholders to ensure they are fully aware of the implications of cost clauses. Should you wish to discuss the article, or the issue of costs further, please contact us: P.firstname.lastname@example.org L.email@example.com
JB Leitch are specialist solicitors for freehold investor and property management companies. Whatever the tenure and whether it's residential, mixed-use or commercial - if you manage it, we can help.