Mayor and Burgesses of the London Borough of Tower Hamlets v Khan (2022) EWCA Civ 831

A Court of Appeal judgment on whether a freeholder, LB Tower Hamlets, was entitled to contractual legal costs under the lease, following a money claim for unpaid service charges.

Mr Khan, the leaseholder, had failed to pay some £4917 in service charges demanded. LB TH brought a County Court claim for the unpaid amount. This was transferred to the First Tier Tribunal after Mr K disputed the reasonableness of the charges. The FTT found the charges (now some £3663 outstanding after Mr K had made a payment) were reasonable. Mr K’s application to the Upper Tribunal to appeal was refused. LB TH made an application for rule 13 costs to the FTT, which the FTT refused. Rather oddly, Mr K also sought to appeal this decision to the Upper Tribunal, but again permission was refused. The matter returned to the County Court, where LB TH sought a costs order for the County Court and FTT proceedings, as contractually entitled.

The relevant clause in the lease provided:

“To pay to the Lessors all costs charges and expenses including Solicitors’ Counsels’ and Surveyors’ costs and fees at any time during the said term incurred by the Lessors in or in contemplation of any proceedings in respect of this Lease under Sections 146 and 147 of the Law of Property Act 1925 or any re-enactment or modification thereof including in particular all such costs charges and expenses of and incidental to the preparation and service of a notice under the said Sections and of and incidental to the inspection of the Demised Premises and the drawing up of Schedules of Dilapidations such costs charges and expenses as aforesaid to be payable notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court.”

LBTH argued that the costs of both were ‘of and incidental to the preparation of a section 146 notice’, as it had made it intention clear and the determination of the amount due was necessary prior step for service of a s.146 notice. (Remember ‘incidental to the preparation’, this will be important later.) As contractual costs they were entitled to them at the indemnity rate.

At first instance, LBTH were successful. The District Judge made an order for the £3663 and for £20,000 in costs, which the DJ held was a ‘proportionate’ amount, including the FTT and UT costs. Mr K appealed and the appeal was referred to the Court of Appeal.

At the Court of Appeal and now represented, Mr K argued that:

i) The decision of the Court of Appeal in Freeholders of 69 Marina, St Leonards-on-Sea v Oram (2011) EWCA Civ 1258, (2012) L&TR 4 (“69 Marina”) (our note) was wrong and should not be followed or, alternatively, should be confined to its particular facts;

ii) The Council’s costs of the proceedings in the County Court and FTT were not “incidental to the preparation and service of a notice under [sections 146 and 147 of the Law of Property Act 1925]” within the meaning of clause 3(9) of Mr Khan’s lease.

LBTH argued:

i) Had Mr Khan properly sought to challenge before the District Judge the factual basis of the Council’s claim that the costs of the FTT proceedings were “in contemplation of” forfeiture, the Council would have referred to a letter of claim dated 10 May 2016 which expressly referred to forfeiture;

ii) Regardless of whether Mr Khan was entitled to contractual costs under clause 3(9) of Mr Khan’s lease, it was entitled to its costs, including those of the FTT phase of the proceedings, pursuant to section 51 of the 1981 Act and CPR Part 44;

iii) The Judge’s decision to award indemnity costs was justifiable on the alternative ground that Mr Khan had been found by the FTT to have behaved unreasonably in challenging the service charge claim; and

iv) This Court should, if necessary, re-exercise the costs discretion in favour of the Council.

The Court of Appeal rejected Mr K’s argument that 69 Marina was wrong. But the contrast with the earlier case of Contractreal Ltd v Davies (2001) EWCA Civ 928 was resolveable.

The more fundamental point, however, is that there is no necessary inconsistency between Contractreal and 69 Marina. The clauses at issue in Contractreal and 69 Marina differed significantly. In 69 Marina, costs were recoverable if incurred “incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925 or … in or in contemplation of proceedings under Section 146 or 147 of the Act” or if “of and incidental to the service of all notices and schedules relating to wants of repair of the premises”. In Contractreal, the tenant was to meet costs incurred by the landlord “of and incidental to the preparation and service of … a notice under section 146 of the Law of Property Act 1925 … or … proceedings for the recovery of any rents reserved”. Unlike the 69 Marina provision, therefore, that with which the Court was concerned in Contractreal omitted any mention of “contemplation”, section 146 “proceedings” or “notices and schedules relating to wants of repair”, but included a reference to “proceedings for the recovery of any of the rents reserved”. Arden LJ made the points I have cited in paragraph 29 above when explaining why the costs in question were not incidental to the recovery of rent. Moreover, the specific way in which the Contractreal clause was drafted meant, as Arden LJ said in paragraph 42, that it would be “odd if the effect of the clause is that the costs of the whole of the proceedings under section 81, claimed to be £21,000 or more, could be recovered from the tenants, but only a much narrower category of costs could be claimed under this clause in respect of the proceedings for recovery of rent themselves, namely the costs of and incidental to the preparation and service of those proceedings”. The 69 Marina provision gave rise to no similar oddity. On top of that, as discussed further in paragraph 49 below, it is far from clear that Morritt C’s conclusions in 69 Marina depended on his considering any of the relevant costs to have been “incidental” to a section 146 notice. To the extent that Morritt C may have relied on the costs having been “incidental” to anything, he spoke of their “appear(ing) to have been incidental to the preparation of the requisite notices and schedules” (emphasis added).

This was also congruent with Kensquare Ltd v Boakye (2021) EWCA Civ 1725 (our note).

The upshot was that there was a distinction between ‘costs in contemplation of’ a s.146 notice and ‘costs incidental to’ preparation and service of a s.146 notice.

In this case, no s.146 notice had been prepared or served:

and it is, I think, very much open to question whether costs of proceedings can be deemed “incidental” to “the preparation and service of” a section 146 notice when no such “preparation” or “service” has ever taken place. While costs can be incurred “in contemplation of” the service of a section 146 notice without any such notice being prepared or served in the event, the extent to which costs can be considered “incidental” to “the preparation and service” of a notice which is never undertaken strikes me as much more doubtful. In any case, it seems to me that the costs which the Council incurred in its litigation with Mr Khan were too remote from “the preparation and service” of a section 146 notice on Mr Khan to be considered “incidental” to such “preparation and service”. To regard the sizeable costs of the proceedings as so “incidental” would, to echo what was said in Contractreal, be “a case of the tail wagging the dog”

So, LBTH were not entitled to contractual costs of proceedings on the basis of ‘costs incidental to preparation’ of a s.146 notice.

While the lease clause also included ‘costs in contemplation of’ s.146 proceedings, this was not how the case had been pleased at first instance, and the Court of Appeal declined to allow LBTH to raise this as fresh argument.

Appeal allowed. However, LBTH were allowed their costs of the County Court proceedings under s.51 County Courts Act, on the standard basis. The costs of the FTT and UT prceedings were not allowed. This was a different costs regime and both the FTT and UT had declined to award rule 13 costs, as per Behjat v Crescent Trustees Ltd [2022] UKUT 115 (LC) (our note).

Comment

The whittling away of what once looked like an extensive provision for landlord’s contractual legal costs in 69 Marina continues. The exact wording of lease clauses will have to be considered very carefully (and as per the first instance decision here, pleaded very carefully – it looks a little like someone messed up on the pleaded and argued case).

‘Incidental to’ won’t work for costs of a money claim or FTT proceedings on determining unpaid service charges. ‘In contemplation of’ just may work, so long as the landlord has (and shown) the requisite intention to forfeit. But the wording has to be in the lease…