Leasehold disputes, like any litigation, are capable of generating significant legal and other professional costs. The position is generally better for freeholders/third party managers than it is for leaseholders in that a well-drafted lease will usually give the landlord/manager a right to recover legal costs, often through a variety of different forms of covenant. These clauses can (and do) “trump” any procedural restrictions on the award of costs, see, e.g. Chaplair, but, of course, it is always a question of construction as to what the clause in question covers.

Now, until quite recently, there was a general view that such clauses were interpreted restrictively (see, e.g. Gilje v Charlegrove Securities Ltd [2001] EWCA Civ 1777. More recently, however, we’ve been told that is wrong and there is no special rule for leases, see, e.g. Arnold v Britton [2015] UKSC 36; Philips v Francis [2014] EWCA Civ 1395; and, Assethold Ltd v Watts [2014] UKUT 537 (LC). The Assethold case is the one that seems to have generated particular interest, with landlords trying to use it to recover a very wide range of costs (for the most part, unsuccessfully, see Union Pensions Trustees Ltd v Slavin [2015] UKUT 103 (LC).

Which brings us to Fairbairn v Etal Court Maintenance Ltd [2015] UKUT 639 (LC). Etal Court is a development of 39 flats in three blocks. Ms Fairbarin is the leaseholder of flat 34 under a 999 year lease. The landlord is a lessee-owned company.

In 2010, there was a dispute between the leaseholder of flat 29 and the landlord relating to the condition of the building. The landlord eventually admitted liability for certain disrepair and commenced the s.20 consultation process (s.20, Landlord and Tenant Act 1985). For reasons which are not quite clear, proceedings were nonetheless issued and a settlement was agreed. The landlord agreed to pay £2,500 in damages and just over £13,000 in costs.

Those costs were then put through the service charge for the flats. Mrs Fairbairn denied she was liable to make any such payments and proceedings were issued. The landlord contended that it was entitled to recover the costs pursuant to this clause:

To do all other acts and things for the proper management administration and maintenance of the blocks of flats as the Lessor in its sole discretion thinks fit.

The FTT found for the landlord and Mrs Fairbairn appealed to the UT.

Her appeal was successful (despite, it seems, her best efforts – see para.31 for a rather unflattering description of how her advocate approached the appeal). It was hard to see how paying costs to a third party was related to the “management” or “administration” or “maintenance” of the building where those costs had been occasioned by the landlord’s own breach of covenant. Payments arising from a proven breach of covenant had nothing to do with the building. They might be related to the management and administration of the landlord, but that was not what the lease provided for. Moreover, there was no reason to give the lease a more generous interpretation simply because the respondent was a lessee-owned company.

Comment

The landlord had relied on the Assethold case and, again, the UT distinguished that case so as to close the argument down. Is Assethold slowly being confined to its own (unusual) facts? The obvious point is “read your lease very closely”. And, if you are drafting leases for lessee-owned bodies, perhaps you need an express power to recover costs (as a service charge) which relate to the cost of running the landlord, not simply administering the building?

The suggestion that the nature of the landlord is irrelevant is, if I may, perhaps slightly too forceful. Imagine, if you will, that a developer has granted leases of flats and those leaseholders have then enfranchised. I can accept that the fact that there is now a lessee-owned company as freeholder must be irrelevant when interpreting the lease, since we interpret leases (and all contracts) as at the date of grant. But here, as I understand it, the flat lease was granted by the present landlord, i.e. part of the factual background was that it was a lessee-owned company and (as with almost all lessee-owned companies) it has no money other than service charge income. If that is part of the admissible background, then it is admissible and relevant when construing the terms of the lease.

There is, perhaps, an easier way to have decided this case. In Sella House Ltd v Mears [1989] 1 EGLR 65, Taylor LJ made clear that it would require “clear and unambiguous” words before a service charge  liability could be imposed on a tenant who was not a party to proceedings. But, I wonder, does this still hold true after Arnold, Francis and Assethold?