Geyfords Ltd v O’Sullivan & Ors [2015] UKUT 683 (LC)

The issue of the recovery of lessors’ costs of county court and/or Tribunal proceedings from lessees under the service charge has been a hot topic of late. And it seems that there is something of a trend of lessors trying to recover costs under service charges, only to fail once the First Tier or Upper Tribunal comes to consider the lease provisions.

A couple of weeks ago, we looked at Fairbairn v Etal Court Maintenance Ltd [2015] UKUT 639 (LC). Geyfords Ltd v O’Sullivan follows a similar line with the UT taking a restrictive (or precise) view of the meaning of ‘maintenance and running’ of the building. The case also perhaps answers J’s question in the Fairbairn post – what is the ongoing significance of Sella House Ltd v Mears [1989] 1 EGLR 65, after Assethold Ltd v Watts [2014] UKUT 537 (LC) and Arnold v Britton [2015] UKSC 36 in the Supreme Court (which we haven’t done yet!).

The facts are fairly straightforward. The freeholder had brought county court claims in 2010-12 against 3 of the 5 leaseholders (the freeholder owning the other 7 flats). These were settled by consent order, which provided that each party would bear their own costs. In 2012, all 5 leaseholders applied to the LVT (as was) for a determination of 7 years of service charges. In this, the freeholder was broadly successful, and no s.20C order was made to prevent recovery of freeholder’s costs via the service charge (but no determination made on the question of whether they could under the lease, either).

The freeholder then sought to put some £54,000 of legal costs through the service charge for both sets of proceedings. The leaseholders took this to the First Tier Tribunal (Property Chamber). (And parenthetically, why hasn’t Futtpuc caught on as the term of preference yet?). The FTT decided that no clause in the lease allowed recovery of the legal costs through the service charge.

The freeholder appealed to the Upper Tribunal.

The only lease clause at issue stated that the following was recoverable under the service charge:

“All other expenses (if any) incurred by the Lessors or their managing agents in and about the maintenance and proper and convenient management and running of the Development”.

There were separate provisions allowing specifically for the recovery of legal costs against individual leaseholders for costs incidental to preparation and service of a s.146 notice, and an indemnity for legal costs arising from the leaseholder’s breach of law, regulations or planning permissions.

The FTT had held that ‘running’ didn’t add anything to ‘management’ and that this did not include litigation costs.

The UT disagreed, to an extent – “It is not necessary to identify a distinction between management and running in order to give proper consideration to the scope of the expression “proper and convenient management and running of the Development”.

However, the words did not clearly include or exclude “the activity of litigating over the collection or quantification of sums required to repair the building”.  ‘Management’ may include costs of legal advice and ,ay, in some circumstances, include the costs of litigation. For example, in Reston Ltd v Hudson [1990] 2 EGLR 51, the costs of proceedings by the landlord to determine whether repair to the windows was its responsibility were held to be costs of management.

However, it was less clear that proceedings to enforce the obligations of an individual leaseholder would fall under ‘management’. In Sella House Ltd v Mears [1989] 1 EGLR 65, Taylor LJ

“stated that he would “require to see a clause in clear and unambiguous terms” before being persuaded the parties had intended that a tenant who paid his rent and service charges would be obliged to subsidise the landlord’s costs of proceedings against his fellow tenants who were defaulters”

While Taylor LJ’s statement could perhaps not be the basis for argument that “legal costs may not be recovered through a service charge unless there is specific mention of lawyers, proceedings or legal costs”, the freeholder was wrong to describe this as a ‘heretical’ view and was wrong to suggest that the dictum had been disproved by the Supreme Court in Arnold v Britton. It should not be controversial that ‘clear and unambiguous terms’ are required to impose such a payment obligation. As Lord Neuberger put it at para 23 of Arnold v Britton:

Seventhly, reference was made in argument to service charge clauses being construed “restrictively”. I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. …. The origin of the adverb was in the judgment of Rix LJ in McHale v Earl Cadogan [2010] HLR 412, para. 17. What he was saying, quite correctly, was that the court should not “bring within the general words of a service charge clause anything which does not clearly belong there”.”

In Francis v Philips [2014] EWCA Civ 1395, at [74], there is reference to a “broad principle” which could be detected in service charge cases, that:

” … it is reasonable to expect that, if the parties to a lease intend that the lessor shall be entitled to receive payment from the tenant in addition to the rent, that obligation and its extent will be clearly spelled out in the lease: see, for example, Gilje v Charlgrove Securities Ltd [2002] 1 EGLR 41 at [31] (Mummery LJ). It is to be expected that the tenant will wish to be fully aware of any such additional obligation on which his or her continuing right to possess the land and to occupy it may depend. It is to be expected that the lessor will wish to make such a continuing additional obligation clear because it arises under a lease which will subsist through successive ownerships of the reversion and the tenancy and because the lessor will not wish to be out of pocket in respect of services provided for the benefit of the tenant…”

An absence of clarity is therefore an aid to identifying the boundaries of payment obligations, including service charges.

The relevant clause in this case was “less clear than is to be expected” for the legal costs to be recoverable. In contrast with the other clauses on costs recovery – the s.146 clause and the breach clause – which spelled out the legal cost recovery.

In addition, the lease clauses were drawn up at a time in the 1970s when proceedings for non-payment or service charge disputes would have taken place in the county court, with costs shifting. So it was not contemplated that a ‘no costs’ tribunal would have been involved. As facts and circumstances known to the parties at the time of entering the lease, this was relevant in construing the lease clauses.

The FTT decision was upheld. The legal costs were not recoverable under the lease as a service charge.

Comment

The UT here seems to have reached a resolution – at least for itself – of Sella, Assethold, Francis and Arnold v Britton. While express mention of legal costs may not be required, the UT is very happy to  go with ‘clear and unambiguous terms’, interpreting Arnold to mean any purported costs recovery clause must have words to show that it  ‘clearly belongs there’.