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By J
06/05/2011

Service charges and legal costs: am I missing something?

Forgive me for what may turn out to be a silly question, but this is something I’ve been thinking about recently and wanted to see what everyone else thought.

Leasehold property and legal costs

A well-drafted lease will usually contain a provision requiring the tenant to pay the landlords legal costs in the event that the landlord has to take action regarding a breach of covenant (e.g. failure to pay service charges). There is, as you might imagine, considerable scope for individual variation from lease to lease (e.g. does the right to costs arise only if the landlord ? Can the costs be billed personally or via the communal service charge), but, for present purposes, that broad description will do.

Now, if the landlord exercises such a right, what sort of charge is he imposing? I would have said that a landlord who bills legal costs via the lease is imposing a service charge on the leaseholder(s). I say this because:

(a) it is clear that legal costs can (on a properly worded lease) amount to a “cost of management” so as to make them a service charge within the meaning of s.18, Landlord and Tenant Act 1985 (see e.g. Iperion Investments Corp v. Broadwalk House Residents Ltd (1994) 27 HLR 196, CA; Re Forcelux Ltd LRX/33/2003, LT)

(b) section 20C, Landlord and Tenant Act 1985 (power of LVT/county court to prevent landlord enforcing a contractual right to costs) is expressly predicated on those costs being a service charge).

Commonhold and Leasehold Reform Act 2002

Now, Sch. 11, para 1(1)(d), Commonhold and Leasehold Reform Act 2002 defines, inter alia, an administration charge as a charge “…in connection with a breach (or alleged breach) of a covenant or condition in his lease.” Is this supposed to be a reference to legal costs billed under a lease? The LVT certainly seems to think so in various cases that have come before it.

This is quite an important distinction, since the regulation of administration charges is much weaker than for service charges:

(a) administration charges (unlike service charges) do not have to be reasonably incurred;

(b) administration charges (again, unlike service charges) do not have to be demanded within 18 months of being incurred;

(c) there is no right to challenge administration charges until they have been demanded;

(d) the LVT/county court has no power equivalent to s.20C, LTA 1985, in respect of administration charges.

Is this right?

So, we seem to have three possible situations:

(a) legal costs are a service charge – Iperion, etc;

(b) legal costs are an administration charge – e.g. Davies v Drayton Park Management Ltd LON/00AU/LSC/2008/0164;

(c) legal costs are both a service charge and an administration charge – e.g. Shersby v Grenehurst Park Residents Co Ltd CHI/43UF/LVA/2010/0001.

That surely can’t be right. Has anyone else (other than FJMD, who I’ve already debated this with) come across this? Any thoughts?

J is a barrister. He considers housing law to be the single greatest kind of law known to humankind and finds it very odd that so few people share this view.

9 Comments

  1. Mark

    If I were to rephrase your three suggested situations slightly, a possible answer becomes clearer:

    (a) all legal costs are service charges;
    (b) all legal costs are administration charges.

    These would make (c) redundant as they imply
    (c) all legal charges are both service charges and administration charges.

    This is all logically consistent but, I agree with you, that it is probably not right.

    Let’s try an alternative restatement:

    (a) some legal costs are a service charge;
    (b) some legal costs are an administration charge;
    (c) some legal costs are both a service charge and an administration charge.

    These are also logically consistent.

    I think that your concern stems from an unstated assumption:
    (d) there are no legal costs that are both service charges and administration charges.

    It is worth noting that such an assumption is inconsistent with both of the plausible restatements given above.

    Reply
    • J

      But how would you tell which legal costs are a s/c and which are an admin charge? That, perhaps, is also part of my question.

      Reply
  2. Pauline Vernon

    Is there a further option – that legal costs incurred by the landlord in recovering arrears are neither a service charge nor an administration charge, but payable by the individual being so pursued?

    I am not a lawyer and my experience of leasehold advice is confined to the retirement sector, but the ARHM issued a guidance note for managing agents that says:

    “The following extra duties should normally be charged to individual lessees:

    * All costs involved in the recovery of unpaid service charges or ground rents or non-compliance with leases including giving court evidence and instructing solicitors.”

    It then lists other items that can be charged to individual lessees such as providing copy documents and granting permission for alterations or improvements.

    Reply
    • J

      I’m not sure the ARHM note takes it any further. Providing copy documents & costs for consents are clearly now administration charges under CLRA 2002.

      You do, however, raise a further possibility, namely an order for costs in court proceedings in the usual way. That won’t be a service charge or admin charge.

      Reply
  3. David

    I have a slightly different question. Many leases especially older ones allow recovery of costs incidental to drafting and serving of a s.146 Notice. In a residential lease an lvt determination is required before a s.146 notice may be served. LVT costs are not recoverable unless allowed by the lease.

    Does anyone have experience of an argument that since an lvt determination is required it is ‘incidental’ to drafting a s.146 notice?

    Reply
    • NL

      David, it isn’t an LVT decision required, but a determination by the court/tribunal. So it can be a County Court claim. I’ve seen it done that way, and then argued as costs preparatory to serving a S.146 payable under the terms of the lease. I’ve not seen a Court or Tribunal decide that point, though.

      Reply
      • J

        or an admission will also do. For my part, (with my landlord hat on) I’d rather issue in the county court, seeking a judgment for the arrears and then I can claim my costs that way, thus avoiding the “incidental” argument (‘tho I think that argument also works, but there is nothing definitive on the point)

        Reply
  4. Sarah

    I used to try and argue that the costs of the determination were incidental to service of a section 146 notice but I don’t think that washes any more(see Contractreal v Davies and Davies [2001] EWCA Civ 928 for the limited meaning of ‘incidental to’). Many courts were prepared to accept the argument however.

    Reply
    • J

      ‘tho Contractreal was a bit of an odd case

      Reply

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