Barrett v Robinson [2014] UKUT 322 (LC) is very, very important decision on costs from the Upper Tribunal (Lands Chamber). It came out a few weeks ago and I’ve been promising to do it since then. Sorry.

You’ll be aware that most, if not all leases, have a “forfeiture costs” clause in them – something along the lines of a covenant to pay costs incurred by the landlord in or in contemplation of forfeiture or preparation of a notice under s.146, Law of Property Act 1925, notwithstanding that forfeiture is avoided otherwise than by way of relief. For many years, this clause didn’t really trouble practitioners. Then along came Freeholders of 69 Marina v Oram [2011] EWCA Civ 1258 (our note here). That case held that (i) you can’t forfeit a long residential lease for non-payment of service charges unless and until the liability has been determined in accordance with s.81, Housing Act 1996 (and, for other breaches, see s.168, Commonhold and Leasehold Reform Act 2002, in similar terms); (ii) it followed therefore that proceedings in a court or tribunal to determine the amount of money owing as service charges must be incidental to forfeiture; and, (iii) could therefore be recovered under a s.146 costs clause.

As we noted at the time, that conclusion was rather surprising. The practical effect was that, all of a sudden, almost all residential leases permitted landlords to recover all their costs. As someone who acts for leaseholders, this was a very unwelcome development. The position was worsened by the fact that the Upper Tribunal was of the view that costs under these clauses were probably administration charges under Sch.11, 2002 Act, such that there could be no protection under s.20C, Landlord and Tenant Act 1985 (power of court or Tribunal to direct that legal costs are not recoverable as a service charge).

Which brings us to the present case. B was the leaseholder of a flat above a shop. Under the terms of her lease, she had to pay a service charge for the insurance of the building. Her landlord was charging £324 p.a. for this. She disputed these costs in the LVT (as it was then) and the premium was reduced to £205, meaning that she was actually in credit with her payments, having paid the larger sum for some years. The leaseholder sought an order under s.20C, 1985 Act but this was refused by the LVT on the basis that the contractual right to costs (a forfeiture costs clause) created a right legal costs as an administration charge, not a service charge.

In due course, the landlord sought to recover the costs of the first LVT proceedings via the forfeiture costs clause. The quantum of costs was agreed at £6,250 but the issue of liability was contested and, in due course, came before the LVT. The leaseholder pointed out that it was she who had initiated the first LVT proceedings and so denied that they could be said to be incidental to (or, indeed, related at all) to forfeiture. The LVT disagreed, holding that the effect of 69 Marina was that any proceedings which satisfied s.81, 1996 Act, were within the scope of a forfeiture clause.

And so the case came before the UT. The Deputy President noted that the issue involved one of “… general significance to tenants seeking access to justice though the tribunal system…” ([38]). The tribunal itself had quite limited costs powers (true of both the FTT and LVT, albeit the FTT is slightly more powerful), but that did not impact on the contractual position (as explained in Christoforou v Standard Apartments Ltd [2013] UKUT 586 (LC)).

The forfeiture costs clause was potentially relevant to the case. It was clear from s.81, 1996 Act that forfeiture could not have occurred unless and until the service charge dispute was settled in the LVT. But that did not mean that the costs were recoverable under a forfeiture costs clause.

(i) The costs clause was limited to costs as were envisaged by s.146 itself. That would include costs incurred by a landlord to establish a breach, but not costs by a tenant to determine his liabilities.

(ii) The point of such a clause was to ensure that a landlord recovered all his costs even if forfeiture was avoided, i.e. if the tenant complied with all the conditions imposed by the s.146 notice.

(iii) Further, the clause required there to actually be a right to forfeiture which the tenant could be said to have “avoided”. Thus, if there was no prospect of forfeiture because of, e.g. waiver (or, as here, because the tenant was actually in credit), then the clause could not apply.

(iv) In any event, there had to be an intent to forfeit – proceedings to establish a breach of covenant did not necessarily amount to proof of any such intent; it may, for example, simply be a debt claim. In the present case, the landlord had led no evidence as to his intent (and wouldn’t have been able to forfeit anyway, as the underlying debt did no exceed £350, as required for forfeiture – see s.167, 2002 Act).

If you think this isn’t all entirely consistent with 69 Marina, then I’d agree with you. The Deputy President deals with this (in part) by noting that 69 Marina “… came as a surprise to landlord and tenant practitioners.” ([55]). He notes that relevant previous authority did not seem to have been cited to the Court of Appeal (or, if it was, they didn’t refer to it in their judgment) and that the case had been subject to “…cogent criticism…” (at [56]; not citing NL, sadly).

Comment

So, the UT can’t overturn 69 Marina, but has tried pretty hard to reduce the scope and application of the decision. I have two (minor) concerns. First, there is a High Court decision (Cussens v Realreed [2013] EWHC 1229 (QB), out note here) which, albeit in an obiter passage, suggests a slightly more generous approach to how s.81/s.168 can be satisfied than the UT plumps for. Secondly, and more substantially, I’m slightly concerned that this leads to more front-loading of trials. If I have to prove (as a landlord) a right to forfeit, surely I’ll have to plead and prove the same. Will there be cross-examination on prospective future intent in all service charge cases brought by landlords? The answer, I suspect, is for the tenant to issue the proceedings to try to minimise the risk.