Landlord and tenant – Service charge – Legal costs – Appellant having long lease of flat in development maintained by respondent landlord – Respondent incurring costs in settlement of claim brought by another leaseholder for breach of repairing covenants – Whether such costs recoverable from leaseholders through service charge – Whether incurred in “proper management administration and maintenance” of blocks of flats – Appeal allowed
The appellant was the long leaseholder of a flat in a development in North Shields, Tyne and Wear, which was maintained by the respondent landlord, a company whose members were all leaseholders of the flats. The appellant’s lease, which was in similar terms to those of the other flats in the development, provided for the payment of a service charge to the respondent in respect of its costs incurred in carrying out its obligations under the leases.
In 2010, one of the other leaseholders noticed cracking to the floors in her ground-floor flat, which gave rise to a dispute with the respondent as to who was responsible for repairing the damage. The respondent ultimately accepted that the cracking was caused by a structural problem for which it had responsibility under the terms of the lease and, after carrying out a statutory consultation with the leaseholders as required by section 20ZA of the Landlord and Tenant Act 1985, it carried out remedial works at a cost of roughly £27,000.
Meanwhile, however, the ground-floor leaseholder had commenced proceedings against the respondent for breach of its repairing covenants. After the remedial work was carried out, that claim was settled on terms that the respondent pay compensation of £2,500 to the leaseholder along with her costs of the proceedings. Together with its own costs, the respondent’s liability in relation to the dispute was almost as much as the cost of remedial works themselves.
The respondent sought to recover its costs of the dispute from the leaseholders through the service charge for the three years from 2011 to 2013. The appellant disputed the respondent’s entitlement to recover those sums. Determining an application under section 27A of the 1985 Act, the first-tier tribunal (FTT) found that the legal fees were reasonably incurred pursuant to the respondent’s obligation, set out in the leases, to “do all other acts and things for the proper management administration and maintenance of the blocks of flats as the Lessor in its sole discretion shall think fit.” It held that the respondent was entitled to recover a total of £26,980 in respect of legal and professional fees. The appellant appealed.
Held: The appeal was allowed.
The costs of unsuccessfully defending a claim for damages for breach of a landlord’s repairing covenant were not recoverable under the provision relied on by the respondent. Such costs did not properly fall within the scope of expenditure incurred “for the proper management administration and maintenance of the blocks of flats”. Even though the costs had been incurred in taking reasonable steps in response to the proceedings brought by the leaseholder of the ground-floor flat, the litigation expenses were not recoverable unless they fell within any of the heads of expenditure which the respondent was entitled to recoup through the service charge. The fact that the respondent was a company without means, other than those available to it directly from its members, did not require any assumption to be made that all expenditure by the respondent had to have been intended to be reimbursed through the service charge. While a general charging provision of the kind under consideration was, in principle, wide enough to cover expenditure on legal advice or even, in an appropriate case, on the conduct of litigation, it did not allow recovery where the steps required to be taken by the respondent were the result of its breach of its own obligations under the lease.
In that regard, it was necessary to distinguish between the costs incurred in investigating and remedying the defective floor, on the one hand, and, on the other, the costs of litigation over the respondent’s failure to carry out appropriate action. The present dispute was concerned only with the latter. The claim brought by the ground-floor leaseholder was for the enforcement of the respondent’s obligation and for damages for breach of covenant. It seemed to have been a valid claim in principle, as the respondent had eventually accepted, and all the costs were referable to that claim. A sum paid in satisfaction of a successful claim for damages for breach of covenant did not readily fall within the scope of expenditure on proper management and administration of the buildings. It was not appropriate to classify the reasonable legal costs incurred in minimising such an award of damages, or payable as a condition of a settlement of a valid claim, as having been incurred under that provision. Each element of the payment was either part of, or a consequence of, a valid personal claim by the leaseholder against the defaulting landlord. Such payments had nothing to do with the management and administration of the buildings, but were instead costs incurred by the landlord in protecting itself from the consequences of its own previous omissions. It followed that the FTT had erred in holding that the settlement sum, and the legal costs incurred in securing the settlement, could form part of the service charge.
Alan Ridley, a friend of the appellant, appeared for the appellant with the permission of the tribunal; Jonathan Rodger (instructed by Hay & Kilner, of Newcastle upon Tyne) appeared for the respondent.
Sally Dobson, barrister
Click here to read the transcript of Fairbairn v Etal Court Maintenance Ltd
