Costs and forfeiture

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.

 

 

About J

J is a barrister in London. He loves service charges and all things leasehold law related. He also likes beating rogue landlords and mortgage companies.
Posted in Housing law - All, Leasehold and shared ownership.

12 Comments

  1. I think it will works it way through eventually. All a landlord has to do is put in correspondence we are seeking recovery of this sum with a view to forfeiture. If they don’t they lose. If they do they win. Everyone will soon cotton on.

    • I agree that the landlord probably now has to assert it, but doesn’t that just invite cross-examination on the point? In every trial…

  2. If its in a letter, and unless the tenant has actual paper evidence of bad faith, I doubt the Deputy President will be terribly impressed by the point being taken that forfeiture was not intended.

  3. A very useful case for leaseholders who are falsely accused of breach.

    The FTT will also now need to decide if the right of forfeiture has been waived in any way.

    • Also, consider claims of damages and whether there is a right to set-off of an amount equal to or in excess of the amount of arrears.

  4. All a landlord need do in their LBA is make it clear that they intend to forfeit as soon as a determination is reached- pay up/offer installments, invoke mediation or we got to the FTT and then forfeit.

    Some may indeed be a little crafty and, where an owner does not disagree with the amount billed, or the billing itself (s 47 summaries etc), try and get the tenant to admit and agree the SC in the process of negotiating their inability to pay (while of course carefully avoiding waiver), and then snap shut the trap with the section 146.

    In that way (subject to the lease wording of course) there is little exposure to costs, for the landlord that is.

    What will be interesting will be the RTM or a resident’s party to the lease manager, who has to drag in the landlord in order to forfeit. Clearly they will have to be persuaded to get involved early on, opening the door to costs for them on an indemnity basis, rather than at a later stage post determination

    Otherwise in general I agree pay then dispute, and if you can’t pay dispute anyway and take the initiative, whether its mediation arbitration or the FFT. The latter of course is the longer game that can buy you time if that is what you need.

    • But the problem with paying and then disputing is how do you get the money back given the ex p Daejan problem?

    • But was that problem not fixed by CLRA2002? The jurisdiction of the LVT now allows them to decide when the SC’s have been paid. The leaseholder then enforces the judgement in the CC.

    • No – look at para.17 of ex p Daejan in the CA. The court considered what the position would be if the LVT could look at charges which had been paid (i.e. the post-CLRA 2002 position) and considered there would still have to be restitutionary proceedings.

    • Thanks.

      Are there any post-CLRA 2002 authorities on such restitution proceedings? I’m only a layman but I would have thought the intentions of parliament (LVT can determine whether paid SC’s are payable) would trump any defence by the freeholder.

  5. J yes thats a further issue; you have to weigh up your opponent. If you have a sensible landlord and agent who will refund the monies that is one thing, if you feel that you will need to ask the Court to order a payment, and yes its not a simple matter, that is another, as is being prepared for a credit to be applied to your SC account and having a SC “holiday”. Where you feel that there is a snowball’s chance in Heck of getting a refund, then that is the case where you might exercise your rights early on to stifle any attempts at DCA and, where the lease allows, the legal costs start to mount under “s146”, rather than react – there are a few landlords and solicitors ( sorry but you know who I mean) who will churn out a bog standard letter and ask as much as £500 in costs.

  6. Siva – there is a fascinating article in the Conveyancer by a law prof at Greenwich University which discusses the problems (2002 edition, article by a chap called Roberts) but nothing beyond LVT/FTT level yet.

    LHA – sure, we all come across legal bills from time to time which make us exclaim in surprise, but, then again, some of this stuff is pretty complex and will cost lots to get it done properly. The real point is that it’s disgraceful that Parliament lets the law be left in this messy state. Anyone working in this field could easily propose 10 (minor and uncontrovercial) changes that would work to improve the law for all parties and could be put through without huge delay (clarify how ss.47, 48, LTA 1987 applies to tri-partite management companies; extend s.20C LTA 1985 to administration costs, etc). But we all know that won’t happen, thus leaving the law messy and, therefore, expensive to access.

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