Most leases enable the landlord to recover the costs of tenant default. But what will the courts look for, when deciding whether to award costs on a standard or indemnity basis?
Standard costs must have been reasonably incurred, as well as being reasonable in amount and proportionate. Furthermore, the court will resolve any doubt about whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party. By contrast, there is no proportionality requirement where costs are awarded on an indemnity basis. Furthermore, the court will resolve any doubt about whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party. So indemnity costs are usually higher than costs awarded on the standard basis.
The decision in Criterion Buildings Ltd v McKinsey [2021] EWHC 314 (Ch); [2021] PLSCS 35 followed hard on the heels of proceedings to recover just over £2.2m of service charge arrears from a tenant. The landlord’s claim was successful – and McKinsey accepted that it would have to pay the landlord’s costs. But McKinsey argued that it should only be required to pay costs on the standard basis.
The landlord relied on contractual provisions in the lease to support its claim for indemnity costs. But McKinsey had covenanted to pay the landlord costs that were “properly incurred” and it relied on Primeridge Ltd v Jean Muir Ltd [1992] EGLR 273.
In Primeridge, the tenant had covenanted “to pay the landlord all proper costs charges and expenses… incurred by the landlord” and the judge held that the inclusion of the word “proper” qualified the costs payable. So he had awarded costs on the standard basis. And McKinsey argued that “proper” and “properly incurred” meant effectively the same thing.
But the judge refused to accept that a 30-year-old case should govern his decision. Primeridge was decided on the basis of procedural rules then in force. Whereas this case was governed by a new and different procedural code: the Civil Procedure Rules 1998, as amended. Furthermore, the phrase “proper costs” is not the same as “costs properly incurred”; something may be a “proper cost”, in the sense that it would be appropriate in some circumstances to incur it, and yet not “properly incurred”. Also, in Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd [2019] EWHC 3668 (Comm), the use of the phrase “reasonable costs” had not prevented the court from awarding indemnity costs – and similar reasoning could be applied where costs had to be “proper”.
Consequently, the judge felt free to decide that an award on the indemnity basis would best reflect the contract between the parties. But, in case he was wrong about this, the judge also ruled that McKinsey’s conduct, and its refusal of a settlement offer, justified his award.
It will be interesting to see whether practitioners acting for tenants start amending draft leases to exclude the recovery of costs on an indemnity basis (unless the court decides that the exclusion should, in all the circumstances, be disapplied), or to introduce a requirement that the landlord’s costs must be proportionate to the amount claimed, to the complexity and importance of the issues in dispute, and also as between the parties.
Allyson Colby, property law consultant
