Service charge – Residential premises – Commonhold and Leasehold Reform Act 2002 – Leasehold valuation tribunal determining that respondent landlord entitled to recover from appellant leaseholders costs of previous LVT proceedings to determine amount of service charge payable – Whether costs of such application amounting to costs arising out of breach of covenants in lease so as to fall within terms of indemnity covenant in lease – Whether such costs an “administration charge” within Schedule 11 to 2002 Act – Whether recovery precluded by para 10(4) of Schedule 12 – Appeal dismissed
The appellants were the leaseholders of two flats of the 16 flats in a building owned by the respondents. The leases provided for the payment of a service charge, which was expressly reserved as rent and which, by an indemnity clause, required the leaseholder to indemnify the respondent against all costs and expenses “arising directly or indirectly out of… Any breach or non-observance by the Tenant of the covenants conditions or other provisions of this lease or any of the matters to which this demise is subject”.
As a result of non-payment of service charges by the appellants, the respondent applied to the leasehold valuation tribunal (LVT), under section 27A of the Landlord and Tenant Act 1985, for a determination of the service charges payable. The respondent was subsequently successful in county court proceedings to recover the sums so determined.
On a subsequent application to the LVT, the respondent sought a determination, under para 5 of Schedule 11 to the Commonhold and Leasehold Reform Act 2002, that it was entitled to recover its costs of the earlier LVT proceedings from leaseholders through the service charge. The LVT held that: (i) such costs were recoverable under the indemnity clause in the lease; (ii) those costs were an “administration charge” to which Schedule 11 applied; and (iii) recovery of those costs was not precluded by the provision, in para 10(4) of Schedule 12 to the 2002 Act, that “A person shall not be required to pay costs incurred by another person in connection with proceedings before a leasehold valuation tribunal except by a determination under this paragraph or in accordance with provision made by any enactment other than this paragraph”. The LVT decided that the respondent was entitled to recover £6,944.37 from each of the appellants under the covenants in their leases.
The appellants appealed. In relation to the indemnity clause, they contended that the costs of the earlier LVT proceedings were not the result of a breach or non-observance of covenants in their leases since section 27A of the 1985 Act provided a free-standing right to apply for a determination of service charges irrespective of any breach.
Held: The appeal was dismissed.
(1) The disputed costs fell within the appellants’ contractual obligation under the indemnity clause in the lease. Those costs had been incurred in proceedings that arose directly out of a breach or non-observance by the appellants of the covenants in their leases. In the circumstances of the case, the costs were incurred because the appellants were refusing to pay the service charge and in order to put the respondents in a position to commence proceedings for its recovery. Although the application under section 27A did not result in a judgment for the disputed sum, but rather in a determination of the amount payable, that did not detract from the fact that the costs arose directly as a result of the appellants’ breaches. It followed that the respondent had a contractual right of recovery, which it could enforce either by commencing proceedings in the county court or, if the costs were also an administration charge, by first seeking a determination from the LVT under Schedule 11 of the 2002 Act.
(2) The charges representing those costs were properly to be regarded as administration charges within the meaning of Schedule 11 to the 2002 Act. Part 1 of Schedule 11 was concerned with the “reasonableness of administration charges” and created a regime, substantially for the benefit of residential tenants, limiting variable sums that could be recovered from them by their landlords. As defined in para 1(1), administration charges included amounts payable by a tenant directly or in respect of a failure by the tenant to make a payment by the due date to the landlord. There was no reason to give a narrow meaning to that the definition so as to exclude from its scope the costs of proceedings under section 27A that a tenant might have covenanted to reimburse. Para 1(1) was wide enough to encompass costs payable by a tenant under commonplace tenant covenants to indemnify a landlord against costs of proceedings or costs incurred as a result of a breach of covenant. The LVT had correctly held that the costs of the earlier proceedings were administration charges and had been entitled to find that the sums claimed were reasonable.
(3) Procedure before leasehold valuation tribunals was governed by Schedule 12 of the 2002 Act, under which the LVT’s power to award costs against a party was limited to cases where that party had acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the proceedings. The reference in para 10(4) to “provision made by any enactment other than this paragraph” accommodated, in practice, the statutory power to order reimbursement of fees under the Leasehold Valuation Tribunals (Fees) Regulations 2003 and the power of the tribunal under section 88(4) of the 2002 Act to determine, in right-to-manage cases, the costs payable by an RTM company that had failed in its application. Subject to those limited exceptions, the effect of para 10(4) was to protect a party to proceedings before the leasehold valuation tribunal from a requirement to pay costs incurred by another person in connection with those proceedings.
However, such costs might still be recoverable as an administration charge through the provisions in the lease. Although para 10(4) did not refer to the possibility of a contractual obligation to reimburse such costs, it had to be read as limited by its context and by its title (Leasehold Valuation Tribunals: Procedure) to matters of procedure not extending to substantive interference with contractual entitlements. Staghold Ltd v Takeda [2005] 3 EGLR 4; [2005] 47 EG 146 and Canary Riverside PTE Ltd v Schilling LRX/65/2005 applied. Para 10(4) did not impose a blanket prohibition on the recovery of costs of tribunal proceedings through a service charge; instead, it had to be read as a rule of procedure, regulating only the power of a court or tribunal to make an award of costs in relation to tribunal proceedings, and necessarily leave unscathed the right of contracting parties to agree that costs incurred in such proceedings were to be the subject of an indemnity given by a tenant to a landlord. Any other interpretation would be inconsistent with other legislative provisions contemplating that the costs of tribunal proceedings were within the scope of many suitably drafted service charge clauses: see section 20C of the Landlord and Tenant Act 1985. The treatment of para 10(4) as a rule of procedure was further confirmed by the omission of parliament to enact a rule in equivalent terms to apply to proceedings before the first-tier tribunals of the Property Chamber on their accession to the jurisdiction formerly exercised by the LVT on 1 July 2013.
Paul Letman (instructed by YVA Solicitors LLP) appeared for the appellants; Carl Fain (instructed by Harbottle & Lewis LLP) appeared for the respondent.
Sally Dobson, barrister
