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30/11/2021

Court of Appeal on time of demands and legal costs in service charges

Kensquare Ltd v Boakye (2021) EWCA Civ 1725

A second appeal to the Court of Appeal from the Upper Tribunal on a service charge dispute – a decision we briefly noted as Kensquare Ltd v Adwoa & Anor here. There were two main issues, both of some significance, but the one on the recovery of freeholder’s costs of FTT proceedings through the service charge is likely to be of the broader importance.

Issue one was whether time was of the essence in relation to the lease’s interim service charge provisions. The second issue was whether the landlord could recover its costs in the litigation with the tenant as a service charge and/or an administration charge.

There is something of a complicated back story, not least as the landlord is a company owned by the leaseholders and of which Ms B is a shareholder, but the brief version is that in 2017, the landlord Kensquare had applied to the FTT for determination of the payability of interim service charges for 2011 to 2017 by the tenant, Ms Boakye. The Tribunal had found that they were payable, Ms Boakye having ‘no case to make or defend’.

“The real thrust of Ms Boakye’s position”, the FTT said, was that “she wishes to make a counterclaim for damages/a set-off which has yet to be made in the county court”.

(This makes no sense to me. Why not just bring the claim for damages? No matter. Onwards)

Kensquare then served a s.146 notice for failure to pay. Ms B’s mortgage lender paid up. But Ms B then brought a County Court claim for disrepair. This was settled for £20,000 and ‘some of her costs’.

In 2019, Kensquare made further interim (half yearly) service charge demands for 2018 and 2019, totally roughly £6000. Kensquare also served an administration charge demand for £8217 for the costs of the 2017 FTT proceedings and the s.146 notice. When Ms B did not pay, Kensquare applied to the FTT for a determination. The FTT held that a) time was of the essence for the interim charge demands, which were out of time, so Kensquare could only get the £360 pa specified as a minimum in the lease, and b) Kensquare could only get the £190 odd costs of preparing and serving the s.146 notice under the relevant lease clause.

Kensquare appealed. The Upper Tribunal held that a) time was not of the essence on the interim demands, which were payable in full, and b) the full costs of the previous FTT proceedings could be recovered under the service charge.

Ms B appealed.

Lease clauses:

Fourth schedule para 5: “To pay all costs charges and expenses (including Solicitors’ costs and Surveyors’ fees) incurred by the Lessor for the purpose of or incidental to the preparation and service of a Notice under Section 146 of the Law of Property Act 1925 notwithstanding forfeiture may be avoided otherwise than by relief granted by the Court and to pay all expenses incurred by the Lessor incidental to the preparation and service of a Schedule of Dilapidations at the expiration or sooner determination of the term hereby granted”.

Clause 4: (ii) Pay the Maintenance Contribution specified in Paragraph 9 of the Particulars or such revised sum as shall be calculated in accordance with the provisions of paragraph (x) of this subclause as a contribution towards the maintenance charge such sum to be paid to the Lessor by equal half yearly payments in advance on the 1st day of April and the 1st day of October in each year …

(financial year 1 April – 31 March. Usual clause on year end reconciliation of actual and contribution towards charges. Maintenance contribution set at £360 per year))

(x) It is further specifically provided that the Lessor may if it thinks fit revise and adjust the Maintenance Contribution for any of the Lessor’s financial years to such amount as it shall deem necessary in the light of expenditure reasonably anticipated for that year notice of such revision and adjustment to be served on the Lessee not less than one month prior to the commencement of that financial year and the Maintenance Contribution so revised and adjusted shall be payable by the Lessee in accordance with paragraph (ii) hereof”.

And under matters to be included in the service charge in the Seventh Schedule

“The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building”.

Issues:

i) Was time of the essence on the interim ‘Maintenance Contribution’ demands? If not, did a notice still have to be served before the start of the financial year oor before first payment?

While case law had established a general presumption against time being of the essence, at least for rent reviews and final service charge demands, it fell to be decided with reference to the parties intentions (as set out in the lease).

Here clause 4(ii)(x) made clear provision for the notification of the amount to be one month prior to the start of the financial year, and provided for an imterim amount in default of that – the £360. It would be easier to see the parties intending time to be of the essence for interim demands.

In short, it seems to me that the presumption against time being of the essence is displaced with clause 4(2)(x). The terms of this lease, taken in their context, clearly indicate that the landlord must serve any notice under clause 4(2)(x) “not less than one month prior to the commencement of that financial year” if it is to have effect. As Peter Gibson LJ noted in Starmark, the Court has to seek to discern “the intention of the parties, viewed objectively, with the aid of the presumption”. In the present case, to adapt words of Lord Wilberforce in Bunge, “the circumstances of the case indicate that (requiring precise compliance) would fulfil the intention of the parties”.

It follows that, in my view, Kensquare’s letter of 15 August 2019 was ineffective and that Ms Boakye’s Maintenance Contribution for 2018-2019 and 2019-2020 remained £360 per annum.

ii) Recovery of costs under an administration charge

The Court of Appeal held that Fourth Schedule para 5 was certainly wide enough to encompass the costs of the FTT proceedings as a necessary precursor to service of a s.146 notice.

In the present case, the relevant lease provision obliges the tenant to pay “all costs charges and expenses (including Solicitors’ costs and Surveyors’ fees) incurred by the Lessor for the purpose of … the preparation and service of a Notice under Section 146 of the Law of Property Act 1925”. I agree with Mr Warwick that, read naturally, those words are quite wide enough to apply to the costs of the FTT proceedings which Kensquare had no choice but to bring if it wished to serve a section 146 notice. It is true that, at the date of the lease, a landlord did not need to make an application to the FTT (or any other Tribunal or Court) before serving a section 146 notice. That requirement arrived years later, with the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002. That does not matter, however. The parties to the lease agreed that the tenant should bear costs incurred for the purpose of the service of a section 146 notice, and the costs which Kensquare incurred in the 2017 FTT proceedings fit that description.

iii) Recovery of costs under the service charge

After reviewing the somewhat incompatible case law of Sella House Ltd v Mears (1989) 21 HLR and Iperion Investments v Broadwalk House Residents Ltd (1995) 27 HLR 196 on similar ‘costs of management’ provisions and legal costs, the Court of Appeal noted the more recent case of No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd (2021) EWCA Civ 1119 (post dating the UT decision) which found against a similar clause extending to legal costs, and went on to note the words of Lord Neuberger in Arnold v Britton (2015) UKSC 36

the court should not ‘bring within the general words of a service charge clause anything which does not clearly belong there’.

The Court of Appeal concluded

Like the FTT, though, I have concluded that, read naturally, paragraph 5 does not extend to litigation costs. While the reference to “professional advisers” is apt to apply to lawyers, they are not mentioned specifically and nothing is said about legal proceedings. As in No. 1 West India Quay, the focus is on management services rather than litigation and, to adapt words of Rix LJ which Lord Neuberger quoted in Arnold v Britton, a decision in favour of Kensquare would involve “bringing within the general words of a service charge clause” something “which does not clearly belong there”. The fact that paragraph 5 speaks of advisers and agents being employed “in connection with” the management of the Building, not “for” its management, does not seem to me to matter.

Legal costs were not recoverable under the service charge, and this included the costs of the present proceedings.

Comment

A bit of a curate’s egg for both parties here. But of significance for many others.

Interim or estimated service charge demands are more likely to be subject to time being of the essence than year end demands, and most particularly if the lease makes provision for advance notification of the leaseholder. Landlords run a real risk of late demands being ineffective. While the sums could doubtless be recouped in a year end demand, this could present difficulties in having funds to hand.

The issue of whether a costs incurred ‘in contemplation of’ or ‘in preparation of’ a s.146 notice clause is effective for Tribunal proceedings that are necessary as a precursor to a s.146 notice appears to be resolved finally. Those cost can be recovered as an administration charge (subject to intention to forfeit, at least).

And after West India Quay and this case, it should be clear that legal costs cannot be recovered under the service charge under a general ‘costs of management’ clause.

 

 

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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