Landlord and tenant – Service charge – Insurance costs – Appellant tenant required to contribute to respondent landlord’s insurance costs as variable administration charge – Terms of lease entitling respondent to recover from appellant costs incurred in relation to proceedings or preparation of notice under section 146 of Law of Property Act 1925 – Whether respondent entitled to recover her costs of application by appellant for determination of insurance charge payable – Whether those proceedings a step in contemplation of forfeiture or service of section 46 notice – Appeal allowed
The appellant was the long leaseholder of a flat above a shop under a lease the terms of which required her to pay a contribution to the respondent landlord’s costs of insuring the building. Although described in the lease as “insurance rent”, that charge was not in fact reserved as rent but was a variable administration charge. The lease contained a forfeiture clause entitling the landlord to forfeit for non-payment of rent and a further clause requiring the appellant to pay the landlord’s reasonable costs incurred “in or in contemplation of any proceedings or the preparation of any notice under section 146 of the Law of Property Act 1925 notwithstanding forfeiture is avoided otherwise than by relief granted by the Court.”
The landlord sought to charge the appellant £324 for insurance, that being half the cost of a policy that she had taken out to cover both the flat and the shop. The appellant brought an application to challenge the amount of the charge, arguing that it was unreasonable for her to pay half the premium when the risks associated with the shop were greater than those referable to her flat. The leasehold valuation tribunal (LVT) decided that the manner of apportionment of the premium was reasonable, although the overall amount was reduced owing to the discovery of errors in the way the insurer had calculated the premium.
A second LVT subsequently found that the appellant was bound by the terms of her lease to pay £6,250 to the respondent as costs incurred in connection with the first LVT proceedings. The appellant appealed against that decision, contending that such costs did not fall within the relevant clause in the lease. The respondent contended that the costs were recoverable either because, properly read, the clause covered the landlord’s costs in any proceedings or because the first LVT proceedings were in fact taken in contemplation of the preparation of a notice of forfeiture under section 146 of the 1925 Act; in that regard, it argued that, by virtue of section 168(1) of the Commonhold and Leasehold Reform Act 2002, it could not take forfeiture proceedings without a prior determination by the LVT that the charge was payable, and that it made no difference that the relevant application had been made by the tenant and not the landlord in the particular case.
Held: The appeal was allowed.
(1) Although the appellant had failed to persuade the first LVT that the costs of insuring the building should not be divided equally between the flat and the shop, she had succeeded in establishing that she had been paying too much for insurance and was entitled to a credit. The credit had had the effect of satisfying her liability for the sum in issue when she made her application to the LVT. She was not, in those circumstances, to be faced with a bill for costs which was almost 20 times as great as the insurance rent demanded by the respondent. Although a lease could provide for the recovery of costs by way of a contractual indemnity covenant, that was not a result for which the contract provided in the instant case. The covenant on which the respondent relied did not provide a general indemnity against the landlord’s costs of any proceedings, whether connected to section 146 or not; the clear sense of the clause was that it covered costs incurred in taking steps preparatory to forfeiture such as were envisaged by section 146, namely costs incurred in proceedings under section 146 of the 1925 Act or in contemplation of such proceedings, or costs incurred in the preparation of any notice under section 146 or in contemplation of the preparation of any such notice. Both parties were likely to have regarded it as fair that costs incurred by the landlord in dealing with a breach of the tenant’s covenants in the lease should fall on the tenant and not on the landlord. Neither party could have considered it fair for the tenant to be liable to pay the landlord’s costs of any proceedings, whatever their subject matter or outcome: Christoforou v Standard Apartments Limited [2013] UKUT 586 (LC); [2014] PLSCS 16 distinguished.
(2) The respondent’s reliance on section 168(1) of the 2002 Act was misplaced since that provision did not affect the service of a notice under section 146 of the 1925 Act in respect of the failure to pay a service charge. Additionally, when it did apply, it required an application by the landlord under section 168(4) for a final determination that a breach of covenant had occurred; an application by a tenant for a determination of the extent of her liability to pay an administration charge under para 5 of Schedule 11 to the 2002 Act was not such an application.
(3) The purpose of the clause was to ensure that, where a breach of covenant was remedied within a reasonable time in compliance with a notice under section 146(1), the landlord had a contractual right to recoup the significant costs that she might have incurred in the preparation of the notice and which, in forfeiture proceedings, the court might have ordered the tenant to pay as a condition of granting relief against forfeiture. The clause would only be engaged, so as to give the landlord the right to recover her costs, if a forfeiture had truly been avoided. That would not be the case if the tenant was not in fact in breach of covenant or if the landlord had previously waived the right to forfeit; in such cases, there had never been any opportunity to forfeit, or that opportunity had been lost before the relevant costs were incurred, and so it could not be said that forfeiture had been avoided. Moreover, costs would only be incurred in contemplation of proceedings or of the service of a notice under section 146 if, at the time the expenditure was incurred, the landlord had such proceedings or notice in mind as part of the reason for the expenditure. There was no evidence that the respondent had contemplated proceedings for the forfeiture of the appellant’s lease or the service of a notice under section 146 as a preliminary to such proceedings. The first LVT proceedings had been commenced by the appellant for a determination of the extent of her liability to pay the insurance rent and there was nothing to suggest that the respondent had had any intention of forfeiting the lease.
Furthermore, section 167(1) of the 2002 Act prohibited a landlord from exercising a right of forfeiture in respect of rent, service charges or administration charges unless the unpaid amount exceeded the prescribed sum, which, under the Rights of Re-entry and Forfeiture (Prescribed Sum and Period) (England) Regulations 2004, was currently £350. Since the insurance charge claimed by the respondent was below the statutory threshold, it could not in any event provide grounds for forfeiture and the respondent could not legitimately have contemplated the service of a notice under section 146: [2011] EWCA Civ 1258; Freeholders of 69 Marina, St Leonards-on-Sea v Oram [2012] L&TR 4; [2011] PLSCS 263 distinguished.
The appeal was determined on the written representations of the parties.
Sally Dobson, barrister
