Landlord and tenant — Forfeiture proceedings — Relief — Legal costs — Whether litigation costs recoverable under service charge — Whether relevant costs for purposes of section 20C of the Landlord and Tenant Act 1985
The defendant
company is the owner of a headlease to a block of flats; the plaintiff holds an
underlease of one such flat containing provisions for the payment of what were
defined as landlord’s costs as part of the service charges. In 1990 the
plaintiff commenced structural alterations to the flat without the defendant’s
permission. Following the service of a notice under section 146 of the Law of
Property Act 1925 and a purported peaceable re-entry by the defendant, the
plaintiff commenced the present proceedings claiming, inter alia, that
the underlease had not been forfeited, damages for trespass and an order under
section 20C of the Landlord and Tenant Act 1985 that the legal costs incurred
by the defendant in the proceedings were not relevant costs in determining the
service charges payable by the plaintiff. In the course of the trial the
defendant amended to seek an injunction requiring reinstatement of the flat to
which the plaintiff agreed. In the court below (see [1992] 2 EGLR 235) the
judge declared the lease had not been forfeited and granted an injunction
requiring the plaintiff to reinstate the flat. He decided that only the legal
costs in relation to the injunction were recoverable by the defendant as
landlord’s costs under the service charge, but he directed for the purposes of
section 20C that the costs incurred by the defendant in connection with the
claims for forfeiture and relief were not to be taken into account in
determining the amount of service charges payable by the plaintiff; and ordered
the defendant to pay half of the plaintiff’s costs of the action. The defendant
appealed in respect of the last two orders.
the litigation costs incurred by the defendant were costs which are included in
the landlord’s costs and so recoverable from underlessees by way of the service
charge. However, the defendant’s cost of the claim for forfeiture and of
resisting the claim for relief were not to be regarded as relevant costs to be
taken into account in determining the amount of service charges payable by the
plaintiff. The judge’s order that the plaintiff was entitled to half of his
costs was upheld.
The following
cases are referred to in this report.
Holding
& Management Ltd v Property Holding &
Investment Trust plc [1989] 1 WLR 1313; [1990] 1 All ER 938; (1989) 21 HLR
596; [1990] 1 EGLR 65; [1990] 05 EG 75, CA
Sella
House Ltd v Mears [1989] 1 EGLR 65; [1989]
12 EG 67
This was an
appeal by the defendant, Broadwalk House Residents Ltd, from two orders made by
Mr Recorder Mauleverer QC in proceedings brought by the plaintiff, Iperion
Investments Corporation.
Simon Berry QC
and Jonathan Ferris (instructed by Don Mileham & Haddock, of Brighton)
appeared for the appellant; David Neuberger QC and Stephen Jourdan (instructed
by Collyer Bristow) represented the respondent.
Giving the
first judgment at the invitation of Staughton LJ, PETER GIBSON LJ said:
This is an appeal by the defendant from part of the order made as long ago as
March 18 1992 by Mr Bruce Mauleverer QC, sitting as a deputy official referee.
The dispute before us relates to the incidence of the defendant landlord’s
legal costs incurred in litigation against the plaintiff tenant in which the
plaintiff was largely successful. Is the tenant contractually liable to pay a
share of such costs as part of the service charge payable by him? If so, should
the court exercise its statutory power to order that any part of such costs
should be disregarded in determining the service charge payable by the plaintiff?
Should the court interfere with the order for costs made by the judge?
The judge’s
judgment is now reported at [1992] 2 EGLR 235 and I can therefore set out the
background facts shortly. Broadwalk House, Hyde Park Gate, London SW7, is a
block containing flats and town houses or maisonettes. The freehold of
Broadwalk House is held by Campden (Non-Educational) Charities (‘Campden’)
subject to a lease (‘the headlease’) granted to a commercial company, Trafalgar
House Developments Ltd, for a term which expires in 2064. The defendant in 1985
acquired that lease. As its name suggests, the defendant is a company, the
shares in which are held by residents of Broadwalk House. Most, but not all, of
the underlessees there are shareholders. One such underlessee is the plaintiff.
It is a Liberian corporation controlled by a Greek, Captain Stravelakis. In
1980 it acquired the residue of the term (expiring 10 days before the end of
the term of the headlease) of an underlease of flat 26, which comprises the
entire top of the 11th floor and half of the 10th floor of Broadwalk House.
Flat 26 is let for residential purposes only.
In 1989 the
plaintiff complained of an ingress of water into flat 26 for which the
defendant was responsible and on June 22 1989 commenced proceedings (‘the first
action’) against the defendant. In autumn 1990 the plaintiff decided to effect
major alterations to flat 26. Its surveyor wrote to Campden’s agents seeking
the freeholder’s consent to such works. Campden informed the defendant that it
wanted a solicitor’s undertaking to pay Campden’s legal and surveyors’ costs
whether or not the matter proceeded to completion and that demand was passed to
the plaintiff. The plaintiff was willing to give its own undertaking to pay the
costs of Campden and of the defendant, but was not willing to procure a
solicitor’s undertaking. Although aware that no alterations were to be made
without permission, the plaintiff in November or December 1990 commenced works
designed to make alterations, including structural alterations to flat 26. On
July 29 1991 the defendant served a notice under section 146 of the Law of
Property Act 1925 in respect of breaches of covenant committed by the plaintiff
and on February 13 1991 served a defence and counterclaim in the first action.
By the counterclaim an injunction for the reinstatement of flat 26 was sought.
A summons for interlocutory injunctive relief was issued by the defendants, but
was not proceeded with when the plaintiff gave an undertaking. Nevertheless the
works continued. The judge found that the plaintiff had acted deliberately and
dishonestly in breach of covenant persisted in over several months to secure
the completion of the works as quickly as possible so as to present the
landlord with a fait accompli. The summons for an injunction was
restored and the defendant, on April 3 1991, gave an undertaking to the court
not to proceed further with the alterations. The judge did not find there was
any breach of that undertaking.
On April 24
1991, acting on the advice of counsel, the defendant purported to effect a
peaceable re-entry. At the time there was a housekeeper in residence in flat 26
and the re-entry was therefore a trespass, unlawful under section 2 of the
Protection from Eviction Act 1977, as the judge found. The defendant
immediately informed the plaintiff of the re-entry and invited the plaintiff to
apply to the court so that the plaintiff could be allowed back into occupation,
but on terms. On April 27 1991 the action with which this appeal is concerned
commenced. The plaintiff by that action sought: an order for possession; a
declaration that the underlease had not been forfeited; damages in respect of
the wrongful re-entry; (by amendment on May 20 1991) an order pursuant to
section 20C of the Landlord and Tenant Act 1985 directing that the costs
incurred by the defendant in connection with the proceedings were not to be
regarded as relevant costs to be taken into account in determining the amount
of any service charge payable by the plaintiff; and (by further amendment) a
declaration that the defendant had consented to the use of part of flat 26 for
business purposes. On June 12 1991 the defendant served its defence and
counterclaim. It thereby claimed that the underlease had been forfeited and
sought: a declaration that the underlease had been terminated by the re-entry
on April 24 1991 and that there was no right to relief from forfeiture; an
order for possession; an injunction to restrain nuisance caused by the ingress
of water consequent on the alterations; and damages. On February 4 1992, in the
course of the trial which commenced on January 27 1992, the defendant amended
its defence and counterclaim to include a claim for an injunction requiring the
plaintiff to reinstate flat 26. Within 24 hours, as the judge recorded, the
plaintiff consented to an order for reinstatement. The trial ended on February
7 1992.
By his order
the judge declared: (1) the underlease had not been forfeited (because there
had been waivers by the defendant of the plaintiff’s breaches of covenant); (2)
dismissed the plaintiff’s claim for a declaration that the defendant had
consented to the use of part of flat 26 for business purposes; (3) dismissed
the defendant’s counterclaim for a declaration that the underlease was
terminated by the re-entry on April 24 1991; (4) dismissed the defendant’s
counterclaim for possession; (5) awarded the plaintiff agreed damages of £250
for the wrongful re-entry by the defendant, (6) awarded the defendant agreed
damages of £250 for nuisance; (7) granted an injunction, as agreed by the
plaintiff, requiring it to reinstate flat 26; (8) directed pursuant to section
20C of the 1985 Act that the costs incurred by the defendant in connection with
the respective claims for forfeiture and relief from forfeiture are not to be
regarded as relevant costs to be taken into account in determining the amount
of any service charge payable by the plaintiff; and (9) ordered the defendant
to pay half the plaintiff’s costs of the action. Only orders (8) and (9) are
under appeal by the defendant.
Landlord’s
costs
The first
issue that arises is whether, on the true construction of the underlease, the
litigation costs of the defendant are to be regarded as falling within the
service charge payable by a tenant.
By clause 1 of
the underlease the tenant covenanted to pay in addition to rent a service
charge by way of additional rent equivalent to 7.4% of ‘the Landlord’s costs’.
Recital (1) to the underlease defined the term:
(K) ‘The
Landlord’s costs’ means all costs sums payments charges and expenses properly
incurred by the Landlord in carrying out its obligations under the seventh
schedule and also under the covenants and conditions contained in the Head
Lease (but not so as to include any sum reserved by way of rent in the Head
Lease) and in the proper and reasonable management of in and about [Broadwalk
House]. The items comprising and included in the Landlord’s costs are set out
(but not by way of definition) in the eighth schedule.
The eighth schedule
is headed ‘Items Included in the Landlord’s Costs’ and consists of 10 items one
of which, ‘7. The proper cost of management of [Broadwalk House]’, was the
provision relied on principally, if not exclusively, by counsel then appearing
before the judge. But before us Mr Simon Berry QC, who did not appear below,
has relied on the words used in recital (1)(K) and in particular on:
all costs
… properly incurred by the Landlord in
carrying out its obligations … under the
covenants and conditions contained in the Head Lease … and in the proper and reasonable management
of in and about [Broadwalk House].
The defendant
says that the alterations which had not been approved by Campden exposed it to
the risk of action being taken against it by Campden for breach of two
covenants by the tenant in the headlease. One is clause 2(17), which is a
covenant not to cut, maim or injure or permit or allow to be cut, maimed or
injured any of the walls, timbers, roofs, floors or ceilings of Broadwalk
House. The other is clause 2(25), which is a covenant not to make any
alterations to Broadwalk House except in accordance with plans first approved
of in writing by the landlord’s surveyors.
The judge held
that for reasons similar to those advanced by this court in Sella House Ltd
v Mears [1989] 1 EGLR 65* the costs of the defendant’s forfeiture claim
and of the plaintiff’s claim for relief from forfeiture could not properly be
regarded as within the proper cost of management of Broadwalk House. In the Sella
House case the question was whether the landlord could recover, as part of
the service charge, legal expenses incurred by it in recovering rent from other
tenants. The service charge was based on the expenditure incurred by the
landlord in carrying out obligations (among other things):
*Editor’s
note: Also reported at [1989] 12 EG 67, [1989] 1 EGLR 65.
To employ
Managing Agents and Chartered Accountants to manage the Building and to
discharge all proper fees … and expenses
payable to such agents or other person who may be managing the Building
including the cost of computing and collecting the rents … in respect of the Building
— and —
To employ all
such surveyors builders architects engineers tradesmen accountants or other
professional persons as may be necessary or desirable for the proper
maintenance safety and administration of the Building.
Dillon LJ,
with some hesitation in respect of the position where solicitors are instructed
by the managing agents, on the whole came to the conclusion that the judge
below was right in his view that the fees of solicitors and counsel were
outside the contemplation of the provisions which I have quoted. Taylor LJ
pointed to the absence from those provisions of any specific mention of
lawyers, proceedings or legal costs and said that the scope of the provisions
was concerned with management, maintenance, safety and administration. He said
at p68:
On the
respondent’s argument a tenant, paying his rent and service charge regularly,
would be liable via the service charge to subsidise the landlord’s legal costs
of suing his co-tenants, if they were all defaulters. For my part, I should
require to see a clause in clear and unambiguous terms before being persuaded
that the result was intended by the parties.
I am not able
to derive any assistance from that case. The language of the relevant provision
is very different from that in the present case. The definition in recital
(1)(K) of the landlord’s costs, seems to me to be broader. Indeed the judge
himself held that some legal costs did come within the cost of the management
of the property. Thus, he said that the costs associated with the claim for an
injunction did qualify.
He said (at
p252A):
In my
judgment, it cannot have been intended that a lessee in the position of the
plaintiff could be required to pay a proportion of the costs of the defendant
in claiming a forfeiture, particularly where the court has ruled there to have
been a waiver.
He agreed with
the defendant in contending that the costs associated with enforcing covenants
must be recoverable as part of the service charge. But he continued:
But I do not
agree, as a matter of impression and ordinary English, that the costs of the
contest as to whether the plaintiff’s entire leasehold interest in one of the
flats in the building should be forfeited (and thereby extinguished) qualify as
the costs of ‘management of the Property’, the more so as I have held that the
defendant was not entitled to forfeit the lease.
Accordingly,
he held that apart from the costs of the claim for an injunction the defendant
could not recover its costs as part of the service charge.
Mr David
Neuberger QC, for the plaintiff, supported that conclusion. He submitted that
in the particular circumstances of this case, as the defendant’s costs were
incurred in defending an unlawful and unenforceable re-entry and in opposing an
application for relief from forfeiture in respect of the very valuable (worth
between £1.4m and £2m) lease of flat 26, in offering to compromise the
litigation on the basis that the defendant took 80% of the proceeds on sale of
the flat and in pursuing the case even after the defendant had agreed to an
injunction to reinstate the premises, those costs were not properly incurred in
the proper and reasonable management of Broadwalk House.
I see the
force of that submission, but I am not able to accept it. Mr Simon Berry QC, in
my opinion, was right to submit that the definition of the landlord’s costs was
not drawn by reference to the costs of successful (as opposed to unsuccessful)
action taken by the landlord in its management of Broadwalk House. All costs
properly incurred in the proper and reasonable management of the property were
included and they will include costs of unsuccessful proceedings properly
brought in managing the property. Throughout the defendant was acting with
legal advice. A landlord faced with a tenant who had acted in flagrant breach
of covenant is always likely to bring forfeiture proceedings against the tenant
even if relief from forfeiture is likely to be granted on terms at the end of
the day. I find it difficult to draw a satisfactory line between the costs of
enforcing tenant’s covenants and of claiming an injunction on the one hand and
the costs of forfeiture proceedings on the other. All such costs may be
described as costs incurred in managing the property and it matters not whether
the rights enforced are rights under covenants prohibiting certain acts by the
tenant or rights conferred by the condition for re-entry.
Further, in
the present case the judge found both that the plaintiff clearly provoked the
defendant into litigation and that it was by no means obvious to the defendant
that the plaintiff would comply with the undertaking given on April 3 1991, the
plaintiff’s previous conduct having done little to induce such confidence in
the defendant. It is true that once the plaintiff had agreed to an injunction
to reinstate the premises, the defendant might reasonably have proceeded no
further with the case. But by then the trial was nearly over and the vast bulk
of the costs would have been incurred already. The judge, although ruling
against the defendant on most issues did not say that it had acted improperly
or unreasonably in the litigation. I would therefore hold that the costs
incurred by the defendant in the litigation were costs which are included in
the landlord’s costs and so recoverable from underlessees by way of the service
charge.
This
conclusion renders it unnecessary for me to decide whether Mr Berry is right in
his further contention that the costs were costs properly incurred by the
defendant in carrying out its obligations under the headlease.
Section
20C
Section 19 of
the Landlord and Tenant Act 1985 prevents a landlord from recovering so much of
a service charge as consist of costs unreasonably incurred. Section 20C,
introduced in 1987, goes further. Subsection (1) provides:
A tenant may
make an application to the appropriate court for an order that all or any of
the costs incurred, or to be incurred, by the landlord in connection with any
proceedings are not to be regarded as relevant costs to be taken into account
in determining the amount of any service charge payable by the tenant or any
other person or persons specified in the application; and the court may make
such order on the application as it considers just and equitable in the
circumstances.
Thus it is
apparent that the court has a discretion to direct that litigation costs be
excluded from a service charge, even if the costs have passed the test of
section 9 and have been reasonably incurred. The obvious circumstance which
Parliament must be taken to have had in mind in enacting section 20C is a case
where the tenant has been successful in litigation against the landlord and yet
the costs of the proceedings are within the service charge recoverable from the
tenant.
The judge,
having held that the costs of the litigation (apart from those incurred in
connection with the injunction) were costs not within the landlord’s costs,
surprisingly said in the very next paragraph (at p252D):
For the
purposes of section 20C of the 1985 Act I direct that the defendant’s costs of
the claim for forfeiture and of resisting the claim for relief from forfeiture
are not to be regarded as relevant costs to be taken into account in
determining the amount of any service charge payable by the plaintiff.
If the judge
was right that those costs were not recoverable under the service charge, there
was no question of a direction under section 20C.
Mr Berry
submits and Mr Neuberger accepts, that the judge did not exercise the
discretion conferred by section 20C and this court is free to decide whether it
should exercise that discretion. We have the benefit of the judge’s full and
careful judgment, and for my part, I think we should consider whether it is
just and equitable in the circumstances to make an order under that section.
Mr Berry’s
contention was that the contractual position should not be altered: the costs
having been properly incurred, the plaintiff should pay its share of the costs.
If that is not accepted, he adds that the plaintiff should pay its share of the
costs incurred which relate to the period before it amended its writ and
statement of claim on May 20 1991 to ask for directions under section 20C.
To my mind, it
is unattractive that a tenant who has been substantially successful in
litigation against his landlord and who has been told by the court that not
merely need he pay no part of the landlord’s costs, but has had an award of
costs in his favour should find himself having to pay any part of the
landlord’s costs through the service charge. In general, in my judgment, the
landlord should not ‘get through the back door what has been refused by the
front’: Holding & Management Ltd v Property Holding &
Investment Trust plc [1989] 1 WLR 1313* at p1324 per Nicholls LJ.
*Editor’s note:
Also reported at [1990] 1 EGLR 65.
In the present
case, the plaintiff tenant’s reprehensible conduct has been reflected in the
award of costs, the proportion of costs awarded to it being lower than what it
otherwise would have been had the plaintiff behaved unexceptionably throughout.
That being so it seems both just and equitable to exercise the discretion under
section 20C, directing as the judge in fact did. The fact that the plaintiff
only sought an order under section 20C by amendment after the commencement of
proceedings, but before the trial, is no reason for limiting the discretion to
costs after the amendment.
Costs
Mr Berry
submitted that the judge, in making his order as to costs, failed to take into
account a relevant matter, namely the consequence of: (a) his direction under
section 20C; and (b) the order that the defendant pay half the plaintiff’s
costs. The only proper order in all the circumstances, he said, was no order as
to costs.
The judge gave
a separate judgment on costs and it is apparent from it that his approach of
dealing with costs globally rather than issue by issue was agreed. It is clear
that he regarded the plaintiff as the substantial victor in the litigation and
that he took into account the issues which occupied most time and occasioned
most costs. But he also had regard to the conduct of the plaintiff and the fact
that reinstatement was not offered until the injunction requiring reinstatement
was introduced at the trial even though the plaintiff knew from the relief
sought in the first action that the defendant wanted reinstatement. That
appears to have led the judge to reduce the proportion of costs to be awarded
to the plaintiff to only half of its costs. I see no basis on which this court
could find that the judge had omitted to take into account any relevant matter.
I would not interfere with the exercise of his discretion.
For my part I
would dismiss this appeal.
WAITE LJ agreed and did not add anything.
Also agreeing,
STAUGHTON LJ said: On the first two issues I entirely agree with the
judgment of Peter Gibson LJ. In other words, I consider that the defendant’s
costs, and the costs which it has to pay the plaintiff, are in general
expenditure which can be taken into account in calculating the service charge.
But they are to be left out of account when calculating the 7.4% share payable
by the plaintiff. We were not asked to make any similar order under section 20C
of the Landlord and Tenant Act 1985 in relation to the other tenants and do not
do so. Indeed it would be a disaster for the defendant, a company owned by
residents of Broadwalk House, if such an order were made; the company would
presumably be insolvent unless it could raise further capital.
I have much
more difficulty with the third issue in this appeal, as to whether we should
alter the order for costs made by the recorder. He described the plaintiff, in
his judgment, as having acted deliberately and dishonestly in breach of
covenant; and in his reasons for the award of costs he referred to the
‘dishonest and dishonourable conduct of the plaintiff’. The defendant’s
solicitor in his affidavit went rather further; he said that the plaintiff had
proved to be deceitful, evasive and not to have any regard to the rule of law.
The plaintiff’s counsel did not challenge that description.
It seems to me
very arguable that the plaintiff brought this litigation on itself. It is also
very arguable that the result was no worse than a draw, from the defendant’s
point of view; it can scarcely have been expected that the claim for forfeiture
of this hugely valuable flat would succeed; and the reinstatement of the
building was achieved.
In addition,
the plaintiff’s solicitors wrote a letter during the proceedings which, I feel
bound to say, I regard as unattractive. It stated that the defendant was not
entitled to use service charge moneys to fund its defence of the proceedings
(which we have held to be bad law), and threatened an application for costs
against the defendant’s officers personally, including a named individual.
Coming from a Liberian corporation (the plaintiff), which had behaved in the
manner described by the recorder and by the defendant’s solicitor, I regard
that letter as inappropriate.
So if the
discretion had been mine, I very much doubt whether I would have awarded any
costs at all to the plaintiff. But as Peter Gibson LJ has pointed out, it was
the recorder’s discretion; he took into account everything which he ought to
have done and nothing which he ought not to have done. What is more, he was
able to observe the entire course of the proceedings and the conduct of the
parties in the litigation. So, most reluctantly, I do not feel able to
interfere with the order for costs which he made.
Appeal
dismissed
