January 2017

Costs in relation to breaches of long residential leases

Before a Landlord can commence forfeiture proceedings against long lessees of residential property, there are a number of hurdles which need to be surmounted:

Section 168 of the Commonhold & Leasehold Reform Act 2002 [CLRA] is headed “No forfeiture notice before determination of breach”: Before a landlord can serve a Notice under Section 146 of the Law of Property Act 1925, the breach must have been admitted by the tenant; or determined in Court or Tribunal proceedings; or the First Tier Tribunal Property Chamber [FTT] has determined, on application by the landlord, that a breach of a covenant or condition in the lease has occurred.

This normally means that unless a tenant admits the breach, a landlord will have to bring proceedings to determine the amount due [where the claim relates to arrears of ground rent, outstanding service charges or other sums] or the breach alleged.

The dispute will normally be dealt with by the First-tier Tribunal (Property Chamber) (FTT) or the County Court.

Often such claims are for relatively modest sums which will be allocated to the small claims track in the County Court.

Both the FTT and the small claims track have very restrictive cost regimes and there is no presumption that the winning party will be entitled to an order to recover its costs.

However a Landlord may be able to separately recover costs under a contractual indemnity clause under the lease, albeit this right will very much turn on the precise wording of the lease itself.

For example in a recent case (in which we acted for the Tenant) the Court ruled against the Landlord on the meaning of an indemnity clause and the Landlord found itself unable to recover claimed costs of both earlier proceedings and the claim itself amounting to something in the order of £20,000!

In another recently reported case, the Upper Tribunal confirmed a Landlord’s entitlement to indemnity costs, but only in relation to specific work so that much of the Landlord’s costs were likely to be irrecoverable.

Where however the lease does include an appropriate indemnity clause, the County Court will normally order costs to be assessed on an indemnity basis even in proceedings that have been allocated to the small claims track.

Where the indemnity clause relates to the landlord’s legal costs which arise as a result of a breach or non-observance of covenant by the tenant, those costs will however be variable ‘administration charges’ for the purposes of paragraph 1 of Schedule 11 to the CLRA. Paragraph 2 of that Schedule provides that administration charges are only payable to the extent that they are reasonable. The demand for their payment must also be accompanied by a summary of the tenant’s rights and obligations in relation to administration charges.

Either Landlord or Tenant can apply to the FTT to determine whether an administration charge is payable, to whom and in what amount; and in the light of paragraph 2 of Schedule 11 the FTT will arguably be able to consider the proportionality of those costs as part of its assessment of reasonableness.

This may well differ from the position in the County Court, albeit this is likely to be the position in both Court and Tribunal when Section 131 of the Housing and Planning Act 2016 comes into force – the courts and tribunals will be given a discretionary power to limit the ability of a landlord to recover litigation costs from a leaseholder as an administration charge.

This whole area of law can represent a minefield and, whether a landlord or a tenant, it would be very sensible to seek specialist advice at an early stage to assist in determining whether and how best to pursue or defend any such action.