Lenders often end up writing a cheque to landlords where their borrower has defaulted on the payment of sums due under their long lease. That sum is then usually added to the principal debt and repaid over the remainder of the term of the mortgage. However, mortgagees frequently complain that they are being forced into paying landlords’ unreasonable demands in order to protect their security from forfeiture.
It is becoming increasingly common for lenders to refuse to pay until landlords have issued proceedings. But this is not always the most cost-effective approach, because a well-advised landlord will make it clear from the outset that he intends to serve a notice under section 146 of the Law of Property Act 1925 (“LPA 1925”), triggering the liability for costs under any contractual indemnity.
The following is a checklist of considerations and steps the mortgagee can take to ensure the sums demanded are due and reasonable – and possibly save money.
Check the lease
It may seem obvious but the lease is a contractual document and the landlord must demand sums due under it in accordance with its provisions. The contractual obligation to pay is not triggered unless the landlord has done so properly.
Check compliance with sections 47 and 48 of the Landlord and Tenant Act 1987
Section 47 requires the landlord to give his name and address in demands for rent or other sums payable under the lease. Giving his agent’s address is not sufficient to discharge this obligation (see Beitov Properties Ltd v Martin [2012] UKUT 133 (LC); [2012] 3 EGLR 21). Section 48 states that the landlord should provide the tenant with his address in England and Wales for service of notices.
Failure to comply with either of these sections means any sums due under a demand are not payable until the landlord complies.
Has the landlord served a summary of rights and obligations?
A lessee (and therefore his mortgagee) is not required to pay the service or administration charges unless the summary has been served with the demand in accordance with section 21B of the Landlord and Tenant Act 1985 (“LTA 1985”), in the form prescribed by the Service Charges (Summary of Rights and Obligations, and Transitional Provision) (England) Regulations 2007.
Challenge the sums demanded
The method by which the lender does so depends on the stage at which it discovers the arrears. If the sums demanded are service charges, there are no proceedings and the borrower has not admitted that the sums are due, the lender may issue or join in proceedings under section 27A of the LTA 1985 for a determination that the service charges are reasonably incurred and the works are to a reasonable standard.
It is extremely rare for a mortgagee to join in or commence such proceedings but it may be economically sensible where the service charge is sufficiently large and the equity in the property sufficiently low. An assessment of the service charges and the merits of pursuing an application should be made at an early stage.
Check the contractual costs demanded
Often leases will provide that the lessee shall pay all the costs, charges and expenses incurred by the lessor in contemplation of, or incidental to, the preparation and service of a notice under section 146 or 147 of the LPA 1925, notwithstanding the fact that forfeiture may be avoided. It is under this provision that landlords will seek to recover their costs of seeking a determination.
There are two important considerations to which lenders should have regard in respect of these costs.
First, this clause will be engaged only where forfeiture has truly been avoided. If the tenant was not in breach or the landlord has waived his right to forfeit for the breach, it will not have been possible to have forfeited the lease.
Second, costs will be incurred in contemplation of a section 146 notice only if, at the time the expenditure is incurred, the landlord has in mind that he will serve a section 146 notice (see Barrett v Robinson [2014] UKUT 322 (LC); [2014] 3 EGLR 42).
The latter consideration may seem obvious but, unless the landlord can prove he contemplated service of a notice when he started incurring costs, he cannot recover them under the contractual indemnity.
If there is no letter or email at an early stage stating the landlord’s intention to serve a section 146 notice, mortgagees should challenge the right to recover
the costs.
Furthermore, this type of claim for costs is a variable administration charge (see Christoforou v Standard Apartments Ltd [2013] UKUT 586 (LC); [2014] PLSCS 16), which are recoverable only to the extent that the amount of the charge is reasonable.
Often borrowers do not pay their service charge because they cannot afford it. Where lenders are likely to pay on their behalf, but the tenant or the lender intends to challenge the charges, it is sensible to make the payment in full at the earliest possible stage so the landlord cannot rely on the indemnity costs provision.
If the sum has been paid, the landlord cannot be contemplating a section 146 notice and any costs incurred by him will merely be in relation to a challenge to the reasonableness of the charges under section 19 of the LTA 1985. Any sums found not to be due can be recovered from the landlord or credited against future service charge years.
When a mortgagee is considering making payment, it should ensure it is entitled to do so. Most lenders will have standard terms which permit them to make payments on the borrowers’ behalf where the security is at risk. However, it is important to check the terms applicable to the mortgage.
Well-advised lenders will act early and swiftly when they discover their borrowers are in arrears of charges under their lease. Such action may prevent increasing liabilities for costs or the forfeiture of the security and the associated costs of seeking relief.
Michael Walsh, barrister, Tanfield Chambers
