Landlord and tenant –Arrears of rent — Tenancy provides that tenant pays landlord’s costs on indemnity basis in any proceedings — Whether indemnity costs payable in proceeding for arrears of rent
In 1993 the
appellant landlords granted the respondents an assured shorthold tenancy for a
term of two years at a rent of £9,000 pa. By clause 9 of the agreement the
tenants agreed to pay and compensate the landlords fully for any cost, expense,
loss or damage by reason of any breaches of the agreement, and to indemnify the
landlords in respect of all actions, claims and liabilities. In proceedings for
possession based on arrears of rent, which by the hearing were about £8,000,
the landlords sought an order for costs on an indemnity basis; they relied on
clause 9. The landlords appealed the decisions of the recorder, who declined to
make such an order.
to recover costs of any proceedings to enforce his primary contractual rights
is a highly relevant factor when it comes to making a costs order. Such a
litigant is not to be deprived of his contractual rights to costs unless there
is a good reason; this applies to the making of a costs order in his favour and
to the extent that costs are to be paid to him. Where the parties have agreed
the basis of taxation, it would be an improper exercise of the court’s
discretion to direct taxation on some other basis. Gomba Holdings (UK) Ltd
v Minories Finance Ltd (No 2) [1993] Ch 171 followed. The bargaining
strength of the landlord is not a good reason. On an undertaking by the
landlords not to enforce any order as to costs, the recorder’s order as to
costs was amended to an order that the landlords were entitled to an order for
costs on County Court Scale 2 on an indemnity basis.
The following
cases are referred to in this report.
Gomba
Holdings (UK) Ltd v Minories Finance Ltd (No 2)
[1993] Ch 171; [1992] 3 WLR 723; [1992] 4 All ER 588
This was an
appeal by the plaintiff landlords, Church Commissioners for England, against a
decision of Mr Recorder Serota QC in Central London County Court in proceedings
against the respondent tenants, Kamal Ibrahim and Abd-Al-Alah-Dauod.
Edwin Johnson
(instructed by Radcliffes Crossman Block) appeared for the plaintiffs; Paul
Randolph (instructed by William Heath & Co) represented the first
respondent; the second respondent did not appear and was not represented.
Giving the
first judgment, at the invitation of Butler-Sloss LJ, Roch LJ said: The appellants own the
freehold of flat 20, The Quadrangle, Cambridge Square, London. They granted the
respondent an assured shorthold tenancy for a term of two years from June 24
1993 to June 23 1995 of those premises at a rent of £9,000 pa. Clause 9 of the
second schedule of the tenancy agreement is one of the tenant’s covenants. It
is headed: ‘Indemnity‘, although it has to be observed that clause 1.13
of the agreement provides the paragraph headings in the schedules to the
agreement are for ease of reference only and have no effect on the construction
of the agreement. Clause 9 reads:
To pay and
compensate the Landlords fully for any cost expense loss or damage incurred or
suffered by the Landlords as a consequence of any breach of the agreements on
the part of the Tenant in this Agreement and to indemnify the Landlords from
and against all actions claims and liabilities in that respect.
The respondent
fell into arrears with payment of rent. He and the appellants reached an
agreement for the clearance of those arrears by instalments. The appellants had
prior to that arrangement commenced proceedings for possession in Central
London County Court.
In the
particulars of claim it is alleged that the arrears at the time of the
particulars of claim were a little over £6,000 and it appears from the judgment
of the recorder that at the time of the arrangement between the appellants and
the respondent the amount of the arrears was a little over £8,000. In the
particulars of claim the appellants set out clause 9 of the second schedule to the
agreement and sought an order that the respondent should pay their costs of
making the application for possession on the basis of clause 9 of the second
schedule.
That claim for
possession came before Mr Recorder Serota QC on October 6 1994. The recorder
was informed of the arrangement as to the payment of arrears and made a
suspended order for possession with the consent of the respondent. The
appellants then asked for an order that the respondent should pay their costs
on an indemnity basis. The appellants submitted that the respondent was bound
to indemnify them for the costs incurred by them in seeking to recover
possession of the premises and the arrears of rent because these were costs and
expense incurred by the landlords as a consequence of a breach of the agreement
on the part of the tenant. The recorder proceeded on the basis that that was
the true construction of clause 9 of the second schedule of the tenancy
agreement. Nevertheless he declined to make the order that the appellants
sought holding that the case was a perfectly straightforward claim for
possession; that the respondent had done nothing to justify an award for costs
on an indemnity basis; that costs were always in the discretion of the court
and that parties to litigation could not fetter the court’s discretion as to
costs by agreement. The recorder made an order that the appellants should have
their costs on scale 1 of the county court scale. The recorder in reaching this
decision observed that, and I quote from his judgment:
The courts
have been careful to control costs in undefended possession claims.
A little later
he observed:
… it would be
most unfortunate, as a matter of principle, to hold that a landlord of
residential premises, who is generally in a position to dictate the
terms of a tenancy agreement to his tenant, should be able to inflate the
amount of costs that he can recover by providing that, in the event of his
having to take proceedings for breach, he should be entitled to recover costs
on an indemnity basis.
The recorder
held that the appellants’ entitlement to costs was a matter for the court’s
discretion and that the clause in the tenancy agreement was merely a matter for
the court to take into account when deciding how to exercise its discretion.
The practical
effect of the recorder’s decision was that in Central London County Court it is
the almost invariable practice in cases of undefended possession actions to
allow costs of £225 together with the court fee of £70 in the case of private
landlords or rather less in the case of local authorities and housing
associations.
The sum to
which the appellants would be entitled if costs were to be awarded to them on
an indemnity basis would be in this case of the order of £550. The court’s
power to award costs is founded on section 51 of the Supreme Court Act 1981.
Section 51(1) provides:
Subject to the
provisions of this or any other enactment and to rules of court, the costs of
and incidental to all proceedings, in —
(a) the civil
division of the Court of Appeal, and
(b) in the
High Court, … [and
(c) any
County Court] shall be in the discretion of the court.
Subsection (3)
of the section provides:
The court
shall have full power to determine by whom and to what extent the costs are to
be paid.
In subsection
(6) it is provided that:
In any
proceedings mentioned in subsection (1), the court may disallow, or (as the
case may be) order the legal or other representative concerned to meet, the
whole of any wasted costs or such part of them as may be determined in
accordance with rules of court.
Subsection 7
defines ‘wasted costs’. Subsection 8 requires the person responsible for
determining the amount of costs which is to be awarded to the person who has
started the proceedings in the High Court, which should have been started, in
the court’s opinion, in the county court, to have regard to that fact when
assessing the amount of costs to be awarded.
The statutory
provisions, the rules of court and the decided cases, both in this country and
in certain Commonwealth jurisdictions, were considered by this court,
consisting of Sir Stephen Brown P, Stocker and Scott LJJ in Gomba Holdings
(UK) Ltd v Minories Finance Ltd
(No 2) [1993] Ch 171. In a reserved judgment delivered by Scott LJ the
court said (and I refer to p194A of the report):
In our
opinion, the following principles emerge from the cases and dicta to which I
have referred.
(i) An order
for the payment of costs of proceedings by one party to another party is always
a discretionary order: section 51 of the Act of 1981.
(ii) Where
there is a contractual right to the costs, the discretion should ordinarily be
exercised so as to reflect that contractual right.
(iii) The
power of court to disallow a mortgagee’s costs sought to be added to the
mortgage security is a power that does not derive from section 51 but from the
power of courts of equity to fix the terms on which redemption will be allowed.
(iv) A
decision by a court to refuse costs, in whole or in part, to a mortgage
litigant may be a decision in the exercise of the section 51 discretion or a
decision in the exercise of the power to fix the terms on which redemption will
be allowed or a decision as to the extent of a mortgagee’s contractual right to
add his costs to the security or a combination of two or more of these things.
The pleadings in the case and the submissions made to the judge may indicate
which of the decisions to which we have referred has been made.
(v) A
mortgagee is not, in our judgment, to be deprived of a contractual or equitable
right to add costs to the security merely by reason of an order for payment of
costs made without reference to the mortgagee’s contractual or equitable rights
and without any adjudication as to whether or not the mortgagee should be
deprived of those costs.
The recorder
is, in my view, correct that parties to litigation cannot tie the hands of the
court on the question of costs by agreement whether that agreement is one made
after the commencement of proceedings or in the contract, breach of the terms
of which gives rise to the proceedings. The court’s power to decide by whom
costs should be paid could probably not be fettered by a prior contract between
the parties to the effect that a successful litigant should have to pay costs
to an unsuccessful litigant. Clearly it would be contrary to the public
interest that the court should be deprived of the powers given under section
51(6) to disallow wasted costs. Further, section 51(8) requires the person
responsible for determining the amount of costs to take account of the factor
there mentioned if it exists and that duty placed on that person cannot, in my
view, be abrogated by a term in the contract. Whether the court’s discretion to
decide by whom the costs of proceedings should be paid could be fettered by a
contractual agreement made before the litigation is started is a more difficult
question which does not arise in this appeal.
Having made
these observations, in my judgment, the statements of principle in the Gomba
Holdings case are not confined to mortgage cases and have a wider
application. The successful litigant’s contractual rights to recover the costs
of any proceedings to enforce his primary contractual rights is a highly
relevant factor when it comes to making a costs order. He is not, in my view,
to be deprived of his contractual rights to costs where he has claimed them
unless there is good reason to do so and that applies both to the making of a
costs order in his favour and to the extent that costs are to be paid to him.
Indeed I would adopt the citation in the Gomba Holdings case from the
judgment of Vinelott J which appears at p193A, namely:
If the
parties have agreed the basis of taxation it would, I think, be an improper
exercise of the court’s discretion to direct the taxation on some other basis,
unless satisfied that there had been some conduct on the part of the mortgagee
disentitling him to costs or to costs on the agreed basis.
A good reason
for depriving a successful litigant to part of the costs to which the
contractual term would entitle him would be that that part of the costs came
within the definition of wasted costs in section 51(7), that is to say they
were costs incurred by him as a result of improper, unreasonable or negligent
conduct on his part or that of his legal or other representatives. There may
well be other sufficient reasons for interfering with the basis of taxation.
In my opinion,
it is not a proper exercise of a judge’s discretion to refuse to allow a
successful litigant to recover his contractual entitlement to costs because the
judge considers that a lessor has an unfairly strong bargaining position or it
is desirable that the courts keep a careful control of costs in undefended
possession claims. Of course a landlord cannot by contract provide that he
should recover a greater sum by way of costs than the costs that he has
actually and reasonably incurred.
In this appeal
Mr Paul Randolph, for the respondent, has raised the question of the
construction of clause 9 of schedule 2 of the tenancy agreement. His submission
is that on a proper reading of that clause the appellants are only entitled to
costs on the standard basis and that the clause does not entitle them to costs
on an indemnity basis. This interpretation, in my judgment, does not attribute
meaning to the words ‘fully for any costs’ or to the later words ‘to indemnify’
which appear in this clause. In my judgment, the view accepted by the recorder
of the proper construction of clause 9 is the correct interpretation of that
provision.
The conclusion
I have reached is that the recorder misdirected himself. The proper exercise of
his discretion was to award the appellants their costs on the scale applicable
to a claim for over £6,000, namely scale 2, and on an indemnity basis unless
there was a good reason for not making that order or there was a good reason
for depriving them of part of their costs, such reason to be found in the
conduct of the appellants. The fact that this was a straightforward possession
action was not such a reason. The appellants were clearly justified in bringing
the proceedings and had been reasonable in coming to an accommodation with the
tenant which entitled him to stay in the premises.
In their
skeleton argument the appellants’ position is summarised in this way. If the
appeal is successful the appellants’ position on costs is as follows, in view
of the nature of the issue raised on this appeal the appellants do not seek
their costs of this appeal and would not propose to enforce an award of the
indemnity costs against the first defendant. Mr Edwin Johnson, who appears for
the appellants, having taken instruction has given this court an undertaking on
behalf of the appellants that they would not enforce an order for costs below
against the respondent. The position that they are not seeking their costs of
the appeal remains. In those circumstances I would allow this appeal. I would
amend the costs order made below to an order that the appellants should have
their costs on scale 2 on an indemnity basis and I would make no order as to
the costs of this appeal.
Agreeing, Hobhouse LJ said: The order made by
the recorder included a monetary judgment in favour of the plaintiffs for
£8,277 plus costs. He also made, in favour of the plaintiffs, a possession
order which was suspended upon terms that the defendants do pay by instalments
the amount of the judgment plus the rent that was continuing to accrue
meanwhile. Therefore the plaintiffs had succeeded in the action. They had
obtained a substantial money judgment. They had also obtained a conditional
possession order. However, the recorder only ordered that the plaintiffs’ costs
be taxed on scale 1. The point of principle raised upon this appeal is whether
he was right and whether he had any grounds for doing what he did. He was asked
to make an order for indemnity costs in favour of the plaintiffs on the basis
of the clause in the lease by which the tenant covenanted:
to pay and
compensate the landlords fully for any cost, expense, loss or damage incurred
or suffered by the landlords as a consequence of any breach of the agreements
on the part of the tenant in this agreement and to indemnify the landlords from
and against all actions, claims and liabilities in that respect.
The recorder
simply said:
However, I
can see nothing special in the circumstances of this case to set it apart from
the ordinary run of the mill undefended possession claim so as to justify the
making of an order for payment of costs on the indemnity basis.
Implicitly he
was also refusing to order costs other than on scale 1.
This case is
governed by the decision of the Court of Appeal in Gomba Holdings (UK) Ltd
v Minories Finance Ltd (No 2) [1993] Ch 171. The judgment of the court,
delivered by Scott LJ, includes statements of general principle. The first two
are (at p194):
(i) An order
for the payment of costs of proceedings by one party to another party is always
a discretionary order: section 51 of the Act of 1981.
(ii) Where
there is a contractual right to the costs, the discretion should ordinarily be
exercised so as to reflect that contractual right.
The recorder
did not follow the guidance given by that case which was binding on him as it
is on us. He did not give reasons for departing from what the Court of Appeal
has said is the manner in which the discretion should ordinarily be exercised.
The position,
translating what was said by the Court of Appeal to the County Court Rules, can
usefully be outlined by reference to Ord 38, r 1(2). It provides:
The costs of
and incidental to all proceedings in a county court shall be in the discretion
of the court.
That is an
overriding and general provision. R 2:
(1) Subject
to this Order, where by or under these rules or any order or direction of the
court costs are to be paid to any person, that person shall be entitled to his
taxed costs.
In other words
there is a right to have the costs taxed unless some different order is made
and nothing in Gomba Holdings or in what we are saying on this occasion
means that a plaintiff or other person who is the beneficiary of an order for
costs may recover costs in the absence of some special order to that effect
without their claim being subject to the assessment of a taxing master on a
taxation.
R 3 provides
for the scales of costs and r 4 provides that where there is a monetary claim
and a sum of money is recovered by the judgment in the action the prescribed
scales shall be observed. The recorder did not observe this provision. By para
(3) of r 3:
In relation to
a sum of money only, the scales shall apply as follows: — …
|
Exceeding £3,000 |
Scale 2 |
|
As appears
from paras 3B and 3C scale 2 is equivalent to what would be allowed in the High
Court on a taxation in the High Court proceedings.
The judge
therefore clearly was at fault in limiting the costs that were recoverable to
costs under scale 1. He gave no special reason for departing from the
provisions of the rules or for depriving the plaintiffs of the award of costs
to which they were entitled under the rules.
The other
aspect of this appeal is the contractual point which was specifically the subject-matter
of the Gomba Holdings case. Here again the judge was at fault in
restricting the costs that were recoverable to scale 1, directly contrary to
the contractual provision. There was no justification for departing from the
contractual provision. He also erred in his approach to the basis of taxation.
The basis of
taxation is to be decided after the scale to be applied has been determined. If
there was any doubt about that, it is made clear in the notes to the County
Court Practice.
The difference
between the bases of taxation is not a difference between the criterion to be
applied. The criterion still remains whether the costs were reasonably incurred
and reasonable in amount. The difference between the two bases is that in one
any doubt that a taxing master may feel is resolved in favour of the claiming
party and in the other in favour of the paying party. The use of the phrase
‘indemnity basis’ has a historical origin and is misleading. Under both bases
the claimant at the end of the day may only recover reasonable costs. The
difference relates to the grey area where there is room for doubt on the one
side or the other.
The terms of a
contract may be material to the basis which is to be ordered. That was the view
of the Court of Appeal in the Gomba case. The judgment of Scott LJ
includes an analysis of the contractual provisions which existed in that case
and how they were to be construed. There were claims both under a mortgage and
under a guarantee. As regards the language used in the mortgage, Scott LJ said
at p186G of the report:
The language
used does, in our opinion, justify an approach that would hold the mortgagee
prima facie entitled to recover or retain the full amount of its actual costs,
charges and expenses; but the language leaves open, in our opinion, the right
of the mortgagor to have excluded any costs, charges and expenses that were
incurred in bad faith or were unreasonably incurred or were unreasonable in
amount.
With regard to
the guarantee, Scott LJ said at p187F:
Reading the
two clauses together, the quantification direction did, in our opinion, entitle
the defendants to quantification on an indemnity basis but did not entitle the
defendants to recover costs, charges and expenses that had been unreasonably
incurred or were of an unreasonable amount.
In carrying
those contractual provisions into effect the court ordered under heading (4) on
p194:
The Chancery
master taking the account has power under Ord 62, r 24 to request a taxing
master to tax any of the items of costs, including fees, charges,
disbursements, expenses and remuneration, contained in the account. The
taxation must be on the contractual basis, that is to say, the indemnity basis.
Therefore it
is clear that in deciding what should be the basis of the taxation the court has
a discretion but it should ordinarily exercise it in a way that carries into
effect the contractual provision.
I agree with
Roch LJ that in the present case the recorder failed to follow Gomba and
that the appellants are entitled to the order for which they ask, in other
words, an order for a taxation of their costs on scale 2 and the basis of
taxation to be the indemnity basis.
On other
contractual provisions, or in other circumstances, it may be appropriate for
the court to make some different order. If some
costs (this is unlikely to happen in cases such as this but it may happen) then
the court may in its discretion choose to make a different order with regard to
the basis of taxation in order to ensure that the claiming party places the
appropriate material before the taxing master so that the relevant issue will
be addressed in the most appropriate fashion. But in the present case there is
no basis for exercising a discretion which departs from that indicated by the
case of Gomba.
As regards the
particular financial difficulties of the defendants in the present case, an
undertaking has been given to this court as referred to already by Roch LJ and
there is no need to say any more about it. I agree that this appeal should be
allowed as he proposes.
Butler-Sloss LJ agreed and did not add
anything
Appeal
allowed.
