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05/09/2021

Late service charge demands and the importance of contemplating forfeiture for recovering legal costs

No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd (2021) EWCA Civ 1119

This was a second appeal to the Court of Appeal from the Upper Tribunal on two issues arising from long running litigation between the freeholder, West India Quay and the head lessee, East Tower Apartments (ETAL) on the arrangements for and charging for utilities for the residential parts of the building (a 33 storey tower, including a hotel). The initial proceedings brought by ETAL had gone through the FTT and the Upper Tribunal and had resulted in a significant reduction in charges. For our purposes, the relevant part of these decisions where that ‘Switch 2) – the utility provider – had levied ‘standing charges’ (actually costs for reading meters and preparing bills) from 2008 onwards. The freeholder had included these charges in the utility charge to the lessee. The FTT had found that they were not recoverable, as there had never been “a contractually valid demand for them as service charges, and it was not open to the Landlord to “re-allocate” them as general service charge.”

ETAL argued that the sums were not payable if now demanded as a service charge, as Section 20B Landlord and Tenant Act 1985 applied – the costs had been incurred by the freeholder more than 18 months before such a demand for payment – between 2008 and 2012.

This was one of the issues in the appeal, after the Upper Tribunal had held for the leaseholder.

The other issue was whether West India could recover its legal costs in the litigation, which had started in 2014, from the leaseholder under the lease. Again, the Upper Tribunal had found for the leaseholder.

Section 20B and late charges.

The freeholder argued that demands for payment of the ‘standing charge’ had been made within 18 months of each charge being incurred, albeit that, as the FTT had found, it hd been made under the wrong provision in the lease and so was not a contractually valid demand for payment as a service charge.

The Court of Appeal found that a demand for payment of the service charge, for the purposes of s.20B(1) must be a contractually valid service charge demand.

Even if the matter were free from authority, I would have little hesitation in concluding that a demand for the purposes of section 20B(1) must be a contractually valid demand which is served in accordance with the service charge provisions of the relevant lease. It is of the nature of a limitation period that it prevents reliance upon a cause of action or other legal right which the claimant would otherwise be entitled to assert. This is reflected, in the present context, by the requirement that the relevant costs should have been “taken into account in determining the amount of any service charge”, which can only be interpreted as a reference to the operation of the contractual service charge machinery in the Lease (subject, of course, to any relevant statutory constraints). Similarly, the consequence, if the eighteen month period has expired, that “the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred” (emphasis supplied) presupposes that the tenant would be liable to pay the relevant portion of the service charge had the period not expired. Again, such liability could only arise if the amount in question were one which the tenant would otherwise be contractually liable to pay. If, as I consider, this is both the natural and the correct reading of the language of section 20B(1), it cannot in my judgment make any difference if the amount in question was in fact demanded from the tenant otherwise than as a component of the service charge, and a fortiori, if it has never been the subject of a valid contractual demand at all.

Authority supported this. Brent London Borough Council v Shulem B Association Ltd (2011) EWHC 1663 (Ch), (2011) 1 WLR 3014, and Skelton v DBS Homes (Kings Hill) Ltd (2017) EWCA Civ 1139, (2018) 1 WLR 362 both found the necessity of a valid demand for payment. The Upper Tribunal had considered itself bound by Skelton. The Court of Appeal found it was likewise bound, but would have found a valid demand was necessary anyway.

Recovery of litigation costs

The lease contained a fairly common costs covenant:

“3.10 To pay to the Lessor on demand all proper costs charges and expenses (including legal costs and surveyors’ fees) which may be incurred by the Lessor: –
3.10.1 under or in contemplation of any proceedings under Sections 146 or 147 of the Law of Property Act 1925 by the Lessor in the preparation or service of any notice thereunder respectively and arising out of any default on the part of the Lessee notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court.”

In order to be recoverable as an administration charge, therefore, as the Upper Tribunal correctly put it:

To be recoverable under this provision legal costs incurred by the Lessor must satisfy two conditions. First, they must have been incurred under or in contemplation of any proceedings under Sections 146 or 147 of the Law of Property Act 1925; secondly, they must arise out of some default on the part of the leaseholder.

Section 81 Housing Act 1996 meant that a landlord could not exercise forfeiture for failure to pay a service or administration charge until 14 days after a final determination by (or on appeal from) the appropriate tribunal that the amount of the service or administration charge is payable by the tenant. Exercising a right of re-entry or forfeiture here includes service of a section 146 notice, as required by s.146 Law of Property Act 1925.

The FTT had found that there was no evidenced intention by the landlord to initiate forfeiture proceedings, so the costs didn’t fall under clause 3.10.1.

The Upper Tribunal had found this was a finding of fact that the landlord had not sought to challenge.

The landlord argued that this was irrelevant. The necessity of a Tribunal finding on payability before a s.146 could be served was itself enough to bring the legal costs under clause 3.10.1, with reference to Freeholders of 69 Marina, St Leonards-on-Sea v Oram (2011) EWCA Civ 1258, (2012) L. & T. R. 4 (our note). The alndlord also argued that Barrett v Robinson (2014) UKUT 322 (LC), (2015) L. & T. R. 1 (our note here) was wrongly decided.

The Court of Appeal did not accept this, approving the Upper Tribunal’s observations in Barrett that

proceedings before the First-tier Tribunal for the determination of the amount of a service or administration charge need not be a prelude to forfeiture proceedings at all… proceedings are often commenced in the County Court for the recovery of service charges without a claim for forfeiture being included. A landlord may or may not commence proceedings before the First-tier tribunal with a view to forfeiture; a landlord may simply wish to receive payment of the sum due, without any desire to terminate the tenant’s lease, or may not have thought far enough ahead to have reached the stage of considering what steps to take if the tenant fails to pay after a tribunal determination has been obtained.

The facts in 69 Marina were very different. It did not

establish, either expressly or by necessary implication, that legal costs are incurred by a landlord in contemplation of proceedings under section 146, in a clause similar to clause 3.10.1 in the present case, merely because they are incurred in relation to proceedings before the FTT which could in theory be the necessary prelude to service of a notice under section 146. The words “in contemplation of any proceedings” in clause 3.10.1 do in my view require an investigation of the landlord’s state of mind at the time when the costs were incurred, although any intention formed at that stage to serve a section 146 notice will of necessity be contingent upon the conditions of section 81 of the 1996 Act being satisfied.

An attempt by the landlord to rely on another lease clause which provided for paying legal costs

“3.10.5 as a result of any default by the Lessee in performing or observing the Lessee’s obligation in this Underlease.”

also failed. The FTT and UT had concluded that the proceedings could not be viewed as being ‘as a result of any default by the tenant’. The Curt of Appeal agreed.

First, the proceedings were begun by the Tenant to establish the extent of overcharging by the Landlord which denied that its charges for utilities were excessive; secondly, the proceedings have clearly established that, to a substantial extent, the Tenant was right and the Landlord wrong; and thirdly, there is no suggestion that the Tenant has ever been unwilling or unable to pay what it properly owes, once that amount has finally been quantified. In the light of those considerations, each tribunal was in my opinion fully entitled to conclude that there had been no “default” by the Tenant within the meaning of either of the relevant sub-clauses of clause 3.10. The short point is that the Tenant cannot sensibly be regarded as a party in default under the Lease when it was the Tenant which started proceedings to clarify the confusion and uncertainty surrounding the payment of utility charges, when it achieved a very substantial measure of success in those proceedings, and when its willingness to pay the correct amount, when ascertained and quantified, has never been in doubt.

General service charge expenditure clauses, including for ‘proper management’ could not extend to litigation costs without express mention. Sella House Ltd v Mears (1988) 21 H. L. R. 147 approved.

Appeal dismissed.

Comment

It is helpful to have the strictness of the section 20B limitation confirmed. It is perhaps even more helpful to have the Court of Appeal confirm the approach to ‘s.146 costs clauses’ as taken in Barrett v Robinson – that the landlord’s intention to forfeit must be present from the start of the relevant legal proceedings in order for such a clause to be engaged (depending on the precise wording).

 

 

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts.

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