Can a landlord recover expenditure incurred in contesting legal proceedings against the leaseholders of flats in a residential building through its service charge? The point has cropped up in a number of recent cases and, because leases are rarely identical in their language, the answer will depend entirely on the terms of the parties’ lease.
In Geyfords Ltd v O’Sullivan [2015] UKUT 683 (LC); [2016] PLSCS 16 the landlord was entitled to recoup expenses incurred “in and about the maintenance and proper and convenient management and running of the development”. The question was: was the landlord entitled to include in the service charge sums totalling £54,000 incurred in disputes with the leaseholders about their liability to contribute to the cost of major work required to the building? The answer depended on whether the costs fell within the concept of “management” in the parties’ leases.
The Upper Tribunal agreed that “management” can sometimes include obtaining professional and legal advice and might, in some circumstances, extend to litigation. For example, in Reston Ltd v Hudson [1990] 2 EGLR 51 the court decided that the cost of proceedings commenced by the landlord to establish whether the repair of the windows in the building was its responsibility fell within “the cost of management” because the leases were unclear and the outcome of the proceedings was of concern to the landlord and to every leaseholder.
However, courts and tribunals should not bring within the general words of a service charge clause anything that does not clearly belong there – and the cost of proceedings to enforce a tenant’s obligation to make payments to the landlord did not fall naturally within the ambit of the phrase “management and running of the development”. Clear and unambiguous terms are required to impose onerous and unusual payment obligations and it was improbable that the parties to a lease would regard general words as sufficient to express an intention that any shortfall in the landlord’s cost of litigation between them should be charged to all the leaseholders.
The leases were granted in 1978, when the legal landscape was very different. The parties would not have expected the landlord to have to incur expenditure to establish the quantum of its service charge before a statutory tribunal operating in a largely costs-free jurisdiction. This made it unlikely that the parties had intended that the service charge costs should include unsuccessful litigation expenses as part of the “proper and convenient management and running of the development”.
The words “proper and convenient were imprecise and, if anything, suggested routine or unexceptional expenditure. Furthermore, the leases included specific provisions dealing with the recovery of costs elsewhere. As a result, the landlord was entitled to recover legal costs from leaseholders incidental to the preparation and service of section 146 notices, as well as any costs arising from breaches of any statutory requirements.
The Tribunal considered that this reinforced its views that it would be inappropriate to allow the landlord to recover the costs of litigation with its leaseholders through a general and residual provision in the service charge clauses in the leases.
Allyson Colby is a property law consultant
