Landlord and tenant–Service charge–Whether landlord entitled to claim the costs of legal proceedings from tenants as part of service charge contributions
The plaintiffs
were 42 of the 50 tenants of various suites in a building known as The Grand,
The Lees, Folkestone, Kent, of which the defendant was the landlord. The
plaintiffs each held their respective suites under a lease in a standard form
for a term of 99 years from September 29 1975 at a ground rent. By clause 4(1)
of each lease the tenants covenanted to contribute a specified percentage of
certain expenditure of the landlord, such sums being paid half-yearly in
advance on March 25 and September 29 with a balancing payment to be made once
the accounts for the service charge to September 29 had been prepared and the
balance demanded. Para 5(b) of the second schedule to each lease provided that
each tenant was ‘To pay all legal and other costs that may be incurred by the
landlord in obtaining the payment of maintenance contributions from any tenant
in the building’. On September 15 1987 a consent order was drawn up and made in
proceedings commenced in 1985 by 30 of the 50 tenants in the building seeking
certain heads of relief against the defendant landlord in relation to service
charges. In accordance with the consent order, the defendant paid taxed costs
amounting to £88,585.91 to the solicitors acting for the plaintiffs in those
proceedings. The defendant then sought to recover through the service charge
the costs he had incurred in relation to the 1985 proceedings amounting to some
£130,000 of which £88,585.91 were the costs paid to the tenant’s solicitors by
the defendant, the balance representing the defendant’s costs. The defendant
contended that, as a result of fighting, settling and therefore incurring
substantial costs in relation to the 1985 proceedings, he had put himself in a
position as to be able to recover service charges from the parties who were
plaintiffs to those proceedings, which he might otherwise not have recovered. In
particular, by obtaining the eventual agreement of the plaintiffs in those
proceedings as to the correctness of the service charge accounts for the years
from September 1981 to September 1985 inclusive, which had been the principal
subject of the time and expense in those proceedings, he was able to recover
the balancing sums for the service charge year to September 1985 from all the
tenants.
incurred by the defendant in connection with the 1985 proceedings was costs
within the meaning of para 5(b) of the second schedule to the plaintiffs’
leases. The ability of the defendant to obtain some service-charge payments
which were being withheld by various tenants were a byproduct of the 1985 proceedings,
the main purpose of which was the appointment of independent managing agents,
the setting up of an independent account and a declaration that the
service-charge moneys were held on trust. These were not costs ‘incurred by the
defendant in obtaining the payment of maintenance contributions’. The
protection afforded to the landlord by para 5(b) on costs to the extent that
the court does not think it right to award him his costs should be given a
limited rather than a wide effect. Para 5(b) was not intended to apply to a
case, as with the 1985 proceedings, where the majority of the tenants of the
building seek and indeed obtain relief of a more general and long-term nature
and where the landlord himself is seeking no relief, let alone service charges.
The 1985 proceedings were not a case of proceedings being brought to enable or
even to prevent the defendant landlord from
Further, the plaintiffs were entitled to the relief they sought by reason of
the terms of the consent order made in 1987 and in particular the term that
involved the defendant agreeing to pay the plaintiffs’ costs in those
proceedings. There was a contract between the defendant and the plaintiffs
arising from the compromised 1985 proceedings to the effect that the defendant
would pay the costs of the plaintiffs. Inherent in that contract is that the
defendant would bear his own costs. That contract must have been taken to have
been made in the full knowledge of the parties’ rights and obligations under
the respective leases. Further, there must be implied into para 5(b) that the
‘legal and other costs’ referred to therein have to be reasonably and properly
incurred before they can be the subject-matter of a claim under the
service-charge provisions. In the 1987 consent order the defendant agreed to
pay the whole of the plaintiffs’ costs and in those circumstances it seems
there must be a presumption that the sums which the defendant is seeking to
claim under para 5(b) were not reasonably or properly incurred.
The following
cases are referred to in this report.
Finchbourne
Ltd v Rodrigues [1976] 3 All ER 581; (1976)
238 EG 717, [1976] 1 EGLR 51, CA
Holding
& Management Ltd v Property Holding &
Investment Trust plc [1989] 1 WLR 1313; [1990] 1 All ER 938; (1989) 21 HLR
596; [1990] 1 EGLR 65; [1990] 05 EG 75, CA
This was the
hearing of an originating summons by which the plaintiffs, Morgan and others,
tenants holding leases of various suites in The Grand, The Lees, Folkestone,
Kent, sought an order in relation to service-charge liability against the
defendant, Stainer, the owner of the reversion to the leases.
Erica Foggin
(instructed by Dibb Lupton Broomhead & Prior) appeared for the plaintiffs;
Donald Cryan and Peter Gower (instructed by Frederic Hall & Co) represented
the defendant.
Giving
judgment, MR DAVID NEUBERGER QC said: The main issue in this case is
whether the defendant is entitled to claim the costs of legal proceedings from
the plaintiffs as part of the plaintiffs’ service charge contributions. The
plaintiffs are 42 of the 50 tenants of various suites in a substantial
building, known as The Grand, The Lees, Folkestone, Kent, of which the
defendant is the landlord. The plaintiffs each hold their respective suites
under a lease in a standard form, which is for a term of 99 years from
September 29 1975 at a ground rent.
By clause 4(1)
of each lease the tenants covenant to contribute a specified percentage of:
. . . an
annual sum of £15,000, or such greater sum as the landlord shall from time to
time estimate and certify, its certificate being final and binding, as being
the cost of doing the work, employing agents and other staff and carrying out
all the things as specified in the second schedule hereto.
These sums
were to be paid half-yearly in advance on March 25 and September 29, with the
balancing payment to be made once the accounts for the service-charge year to
September 29 had been prepared and the balance demanded. By clause 5(1) of each
lease the defendant landlord covenanted that he would:
carry out
work and do the things specified in the second schedule hereto subject to the
terms and provisions mentioned thereto and keep proper account of the
maintenance contributions . . .
The second
schedule to each lease contains a number of items of service which one would
expect to find in a lease of a residential flat, such as the maintenance and
lighting of the common parts, the repair of the exterior and structure, the
decoration of the exterior and the payment of managing agents. Of central
significance is para 5(b) which reads as follows:
To pay all
legal and other costs that may be incurred by the landlord in obtaining the
payment of maintenance contributions from any tenant in the building.
On December 31
1985 about 30 of the 50 tenants in the building issued proceedings seeking
certain heads of relief.
First for:
an order that
the defendant do forthwith appoint some reputable independent firm of chartered
surveyors . . . to manage and administer the maintenance of The Grand and to
receive and administer the maintenance contributions received from the lessees
thereof in accordance with the provisions of the leases thereof and in
particular the second schedule hereto.
Second for:
an order that
the defendant do henceforth pay all maintenance contributions received by him
from the lessees thereof into a bank account designated for that purpose and
under the control of the said independent managing agent.
Third for a
declaration that:
all
maintenance contributions which have been paid to the defendant in the past and
which are paid to him in the future under the provisions of the plaintiffs’
said leases have been and are to be held by him as trustee for the plaintiffs
and other lessees of the flats of The Grand for the purposes set out in the
second schedule to their respective leases.
Fourth and
fifth:
all necessary
accounts and inquiries [and] further or other relief.
On April 18
1986 Master Gowers ordered in those proceedings (‘the 1985 proceedings’) that
an account be taken of all moneys received by the defendant from September 1981
by way of service charges and gave consequential directions. The evidence filed
on behalf of the plaintiffs suggested a number of alleged breaches or failure
on the part of the defendant in relation to the way in which the defendant kept
accounts and provided the services. The plaintiffs’ evidence in the 1985
proceedings included a detailed report from an accountant verified by
affidavit. The defendant himself put in a very detailed affidavit in reply on
December 11 1986 running to over 90 pages.
The matter
came on for hearing before Master Gowers on June 13 1987. That day and the next
two days, as I understand it, were given over essentially to three matters. The
first was an argument as to whether the defendant was entitled to retain
certain service-charge payments made in respect of three suites. On July 14
1987 this issue was determined in the defendant’s favour with an order for
costs against the plaintiffs.
The second
matter was a hearing of argument and evidence relating to some of the
complaints which the plaintiffs had made about the defendant’s accounting
system and provision of services. The third matter centred on attempts to
settle the whole dispute which, in fact, resulted in the agreement in principle
reached on June 15 1987 and formally concluded in the form of a consent order
drawn up and made by Master Barratt on September 15 1987 (‘1987 order’).
The 1987 order
had a number of principal parts. First, the defendant undertook to appoint an
independent managing agent with effect from September 30 1987 and to co-operate
with him. There were certain consequential undertakings from both sides flowing
from this. Second, the plaintiffs in the 1985 proceedings undertook to agree
the service-charge accounts for the five years up to and including September 30
1985 as they had been drawn on behalf of the defendant. Third, the parties
agreed to enter into deeds of variation in relation to each of the leases,
essentially to give effect to the terms contained in the 1987 order. Fourth,
the defendant agreed to pay £7,000 into the maintenance fund. Fifth, the
defendant agreed to pay to the plaintiffs ‘the costs of the account up to and
including July 15 1987’ save in relation to the costs for which an order was
made in the defendant’s favour on July 14 1987.
In due course
the plaintiffs’ taxed costs in the 1985 proceedings due from the defendant
under the 1987 order were assessed and amounted to £88,585.91, which sum the
defendant has paid to the solicitors acting for the plaintiffs in the 1985
proceedings. Meanwhile, at the end of January 1987, the defendant had started
proceedings against 12 of the tenants for sums which were the balancing service
charges for the year ending September 29 1985. The various tenants against whom
such proceedings were brought in the county court filed defences relying on the
1985 proceedings and the order for an account, which was made on April 18 1986
in those proceedings.
The tenants’
defence in the county court proceedings
. . . denied
that after relying for moneys received by or on behalf of the landlord from the
tenant and other lessees of flats at The Grand aforesaid moneys had been
expended by or on behalf of the landlord in relation to The Grand . . .
sufficient to enable the landlord to recover from the tenant the maintenance
moneys referred to in the particulars of claim.
This was
consistent with the position taken by the tenants in correspondence passing
between solicitors for the plaintiff in the 1985 proceedings and the tenants in
the 1987 county court proceedings. Indeed, the tenants’ solicitors proposed
that the county court proceedings be transferred to the High Court and heard
together with the 1985 proceedings. However, that did not happen. The county
court proceedings were in fact adjourned generally and, with one exception,
stand adjourned at the present day, as I understand it.
The upshot of
the settlement of the 1985 proceedings was that each of the tenants of the building–at
least those who were parties to the 1985 proceedings–owed the defendant a sum
in respect of the balancing charge for the service-charge year to September 29
1985, the sum being a few hundred pounds in the case of each tenant.
The defendant
now seeks to recover through the medium of the service charge, by virtue of
para 5(b) of the second schedule to each lease, the costs he has incurred in
relation to the 1985 proceedings. These costs are said to amount to some
£130,000, of which £88,585.91 are the costs paid to the plaintiffs’ solicitors
by the defendant, the balance representing the defendant’s costs. Subsequently
the defendant has claimed a further £60,000, or thereabouts, in relation to
unspecified bank charges and interest.
The primary
issue in these proceedings is whether the plaintiffs are entitled to the relief
they seek in para 1 of the originating summons before me, which is in the
following terms:
An order that
none of the costs incurred by the defendant in connection with [the 1985 proceedings]
including all costs ordered to be paid by the defendant to the plaintiffs and
the defendant’s own legal or other costs constitute costs incurred by the
defendant in obtaining the payment of maintenance contributions from any tenant
in the building within the meaning of paragraph 5(b) of the second schedule, to
the plaintiffs’ leases of the flats in The Grand . . . and accordingly the
plaintiffs are not liable to contribute to such costs under the provisions of
clause 4 of the said leases.
I do not find
this an altogether easy issue to resolve because there is a force in the
defendant’s contention, as ably advanced by Mr Cryan, that as a result of the
defendant fighting, settling and therefore incurring substantial costs in
relation to the 1985 proceedings he has put himself in a position as to be able
to recover service charges from the parties who were plaintiffs in those
proceedings, which he might otherwise not have recovered. In particular, by
obtaining the eventual agreement of the plaintiffs in those proceedings as to
the correctness of the service-charge accounts for the years from September
1981 to September 1985 inclusive, which had been the principal subject of the
time and expense in the 1985 proceedings, he was able to recover the balancing
sums for the service-charge year to September 1985 from all the tenants and,
indeed, payment in respect to service charges thereafter.
However, I
have reached the conclusion that the plaintiffs are entitled to the relief they
seek. I reach that conclusion essentially for two reasons.
The first
reason
First, while
it is true that the settlement of the 1985 proceedings had the result of
enabling the defendant to obtain some service-charge payments, which were being
withheld by various tenants, it seems to me that that was really a byproduct of
the 1985 proceedings. The purpose of those proceedings, as one sees from the
writ, was the appointment of independent managing agents, the setting up of an
independent account, a declaration that the service-charge moneys were held on
trust and the obtaining of accounts inquiries. There was no claim by the
defendant for any service charge, which there could have been by way of
counterclaim. The claim for accounts and inquiries was based on an allegation
that the defendant had failed to comply with his obligation under clause 5(1)
of each lease to keep proper books of account in respect of the service
charges. It was also a prerequisite for the other relief sought in the 1985
proceedings that an account be taken.
In these circumstances
I consider that the costs incurred by the defendant in resisting the relief
sought by the plaintiffs in the 1985 proceedings and, in particular, in
contesting the account with the plaintiffs were not costs ‘incurred by the
defendant in obtaining the payment of maintenance contributions’. They were
costs incurred by the defendant in resisting the various heads of relief and in
particular the account sought by the plaintiffs, in the originating summons in
the 1985 proceedings. I appreciate that that can be said to involve reading
para 5(b) restrictively, as opposed to widely. However, it seems to me that a
narrow construction of a provision, such as para 5(b), is justified. In the
first place, if one reads the paragraph as having a wider effect, as the
defendant contends, one could find some startling results. Thus, if a tenant
were to succeed in obtaining judgment for damages for breach of covenant
against the landlord together with costs the landlord could obviously not
recover the costs under the service-charge provisions. If, on the other hand,
the same tenant were refusing to pay service charges on the basis of an alleged
set-off it would seem to me wrong that the landlord could contend that the
costs incurred in the proceedings could be recovered as part of the service
charge by virtue of para 5(b). Yet, if the defendant is right in the instant
case, it seems to me that such an argument should succeed on the basis that it
would be necessary for the landlord to incur costs in bringing those proceedings
to a conclusion so that he could recover the service charge from the particular
tenant.
Second, in
connection with any dispute which gets to court between the landlord and any
tenants the court would of course have the power to award costs in the normal
way. Accordingly, giving para 5(b) a restrictive rather than a wider effect
does not result in any great unfairness to the landlord. Should he be involved
in proceedings under the lease, which involve him incurring costs which do not
fall within para 5(b), the court would normally award him costs if his position
was right in law. The protection afforded to the landlord by para 5(b) on costs
to the extent that the court does not think it right to award him his costs
should, in my view, be given a limited, rather than a wider, effect
accordingly.
It seems to me
that para 5(b) was not intended to apply to a case, as with the 1985
proceedings, when the majority of the tenants of the building seek, and indeed
obtain, relief of a more general and long-term nature such as that sought in
the 1985 proceedings and where the landlord himself is seeking no relief, let
alone service charges. The relief sought in the writ in the 1985 proceedings
and the terms embodied in the 1987 consent order concern the future management
of the building and the settlement of a dispute as to the landlord’s alleged
breach of his obligations under the lease in preparing service-charge accounts,
which had been drawn up and to a very substantial extent–four years out of the
five completely, and the fifth year to the tune of substantially more than
50%–being paid out. It was not a case of proceedings being brought to enable or
even to prevent the defendant landlord from recovering service charges from one
or more tenants who had failed to pay. It was an action brought by the majority
of tenants to sort things out with regard to the future management of the
building and in order to verify past accounts.
The amounts
outstanding by way of service charges when the 1985 proceedings were issued were
small and owing only from a few tenants. There is no evidence that those
service-charge amounts were being withheld as a result of the matters raised in
the 1985 proceedings. It was only after the 1985 proceedings got under way that
their existence was put forward as a reason, or excuse, for not paying
subsequent service charges.
Indeed, it
seems to me that, in so far as the 1985 proceedings were concerned when they
were issued, they were directed to the obtaining of accounts only as a
prerequisite for obtaining the other relief sought in the first three
paragraphs of the writ in the 1985 proceedings.
The second
reason
The second
reason for my conclusion that the plaintiffs are entitled to the relief they
seek under para 1 of the originating summons in the instant case is based on
the terms of the consent order made in the 1985 proceedings and, in particular,
the term that involved the defendant agreeing to pay the plaintiffs’ costs in
those proceedings.
In Holding
& Management Ltd v Property Holding & Investment Trust plc
[1989] 1 WLR 1313* Mervyn Davies J held it appropriate to make no order for
costs in an action brought against tenants by the plaintiff, who was the person
responsible for the provision of services in a block of flats and who was
entitled to the recovery of service charges from the tenants.
*Editor’s
note: Also reported at [1990] 1 EGLR 65.
Nicholls
LJ–with whom the other two members of the Court of Appeal agreed–held that the
judge ‘was fully entitled to make’ such an order for costs, bearing in mind the
court’s usual discretion on costs (see p1323F-J). The plaintiff, however,
claimed to be entitled to reimbursement none the less, either by virtue of the
provisions of the Trustee Act 1925 (which are not and cannot be relied on here)
or by virtue of the provision in the leases. At p1324E Nicholls LJ said:
The effect of
the plaintiff’s claim to reimbursement is this. The plaintiff brought
proceedings against the tenants. At the conclusion the judge decided that, as
between the plaintiff and the tenants, there should be no order as to costs;
each party should bear his own costs of the proceedings. On the plaintiff’s
argument that still leaves the plaintiff entitled to require the self-same
tenants to pay its costs, by including those costs in the following year’s maintenance
provision which the tenants are contractually bound to pay. This is indeed a
case of seeking to get through the back door what has been refused at the
front. The contention has, I think, only to be spelled out for its
unattractiveness and unreasonableness to become apparent.
In this case
Miss Foggin contends, with justification in my judgment, that the defendant’s
contention is even less attractive than that of the plaintiff in Holding &
Management essentially for two reasons. First, in the instant case the order
for costs in the 1985 proceedings was not merely an order for costs, but that
the landlord should reimburse the tenants their costs. Second, the order for
costs in Holding & Management was simply an order imposed by the
court in the normal way, whereas in the instant case the order for costs is not
merely contained in a court order but arises also by way of contract, which
contract is, of course, evidenced by the fact that the order in question is a
consent order.
In Holding
& Management at p1325A the plaintiff relied on the provision in the
service-charge clause which provided that one of the purposes for which the
maintenance fund ought to be applied was:
. . . to make
provision for the payment of all legal costs incurred by the maintenance
trustee . . . (a) . . . in the enforcement of the covenants . . . contained in
the leases granted of the flats in the building . . .
Nicholls LJ
said, at p1325B:
I can deal
with this very shortly. Read fairly, this paragraph embraces legal costs reasonably
or properly incurred by the plaintiff in the enforcement of the
covenants. I have already indicated my view that the costs were not reasonably
or properly incurred in this case.
In my
judgment, there are two reasons why the terms of the consent order which
disposed of the 1985 proceedings prevent the defendant succeeding in the
instant case. The first is that, at least as between the defendant and the
plaintiffs from the 1985 proceedings, there is a contract to the effect that
the defendant will pay the costs of the plaintiffs. Inherent in that contract
is not merely the agreement that the defendant will pay the costs of the
plaintiffs, but that the defendant would bear his own costs. That contract must
have been taken to have been made in the full knowledge of the parties’ rights
and obligations under the respective leases, particularly as the terms of the
consent order itself involve references to, and variations of, those various
service-charge provisions. In those circumstances, assuming in the defendant’s
favour that immediately before the consent order was agreed he had the right to
recover any costs incurred in the 1985 proceedings under para 5(b), it seems to
me at the proper reading of the contract embodied in the consent order as a
whole, and particularly the agreed term that the defendant would pay the costs
of the plaintiffs, leads to the conclusion that the plaintiffs would not then
be held liable for the defendant’s costs. It is one thing for a person to
argue–as the plaintiff did (albeit unsuccessfully) in Holding &
Management–that as a result of the court making no order for costs the
lease properly construed none the less entitles him to recover his costs as a
matter of contract from the tenants. It is quite another to contend that an
agreement by a landlord that he would pay the tenants’ costs none the less does
not impliedly prevent the landlord from invoking the terms of the lease
subsequently to recover the costs from the tenants, not only being the costs he
had to pay them but also his own solicitor’s and client’s costs.
Mr Cryan
argued that to abrogate the landlord’s contractual right to recover costs as
part of the service charges it was necessary for the order expressly to provide
for this as happened in Holding & Management, but not in the 1987
order. Where, as here, he argued, the order does not provide for anything in
those terms the landlord and, indeed, the tenants is and are free to rely on
their own contractual rights under the lease.
While it would
obviously be better if the parties had spelt out in the 1987 order the position
with regard to the landlord’s arguable right to recover the costs under para
5(b) the parties did not do so. In those circumstances it seems to me that one
must do the best one can with the material one has, which is what the parties
had agreed. For the reasons I have given it seems to me that the proper
construction of the agreement is that the landlord, the defendant, would not
claim the costs through the service-charge provision–namely para 5(b). Different
considerations may apply to the effect of an agreed no order for costs by a
landlord claiming and obtaining service charges from a single recalcitrant
tenant on the one hand and on the other hand to the landlord agreeing to pay
the costs of the majority of the tenants in a case where they are seeking
relief of the type sought and obtained in the 1985 proceedings.
My conclusion
on this point is not altered by the fact that not all the tenants of the
building and not all the plaintiffs in the current proceedings were plaintiffs
in the 1985 proceedings. It seems to me that the leases clearly envisage all
the tenants be liable for the same costs and, therefore, if none of the
plaintiffs to the 1985 proceedings can be held liable for these costs under
para 5(b) I think that none of the other tenants in the building could be held
so liable otherwise.
The second
ground for rejecting the defendant’s argument under this head is essentially
the same reason that the plaintiffs’ argument on this point failed in Holding
& Management. It must, in my judgment, be implied into para 5(b) that
the ‘legal and other costs’ referred to therein have to be reasonably and
properly incurred before they can be the subject-matter of a claim under the
service-charge provisions. In addition, it seems to me that the sums claimed
must, not only with regard to their quantum but also with regard to
their nature, be fair and reasonable as discussed in Finchbourne Ltd v Rodrigues
[1976] 3 All ER 581* at pp586J to 587C, per Cairns LJ, with whom the other
members of the Court of Appeal–Orr and Brown LJJ–agreed.
*Editor’s
note: Also reported at (1976) 238 EG 717, [1976] 1 EGLR 51.
In the consent
order in the 1985 proceedings the defendant agreed to pay the whole of the
plaintiffs’ costs. In those circumstances it seems to me that there must be a
presumption that the sums which the defendant is seeking to claim under para
5(b) were not reasonably or properly incurred. I am not saying that the mere
fact that the court orders the landlord to pay or the landlord agrees to pay
some of the tenants’ costs must result in the conclusion that the sums paid out
by
fair and reasonable. What I am holding, however, is that where the landlord has
agreed to pay the whole of the tenants’ costs the onus is firmly on the
landlord to establish that those costs, or some of them, have been reasonably
and properly incurred and that they are fair and reasonable as service charges.
Although a substantial amount of evidence has been before the court I have not
seen sufficient to persuade me that the costs were reasonably or properly
incurred or that it is a fair and reasonable item to include in the service
charges. What I do know is that the defendant accepted liability for costs,
apparently amounting in all to some £130,000, accepted liability to pay £7,000,
accepted that an independent surveyor should be appointed a managing agent and
in return received acceptance of the five-year service charge accounts, which
appears to have resulted in the payment of a total of some £22,000. On the face
of it the benefit to him whether one looks at his interests broadly, or more
narrowly, as the person who collected the service charges, seems to have been
far far less than the cost to him of the settlement.
Conclusion
In these
circumstances I propose to grant the plaintiffs the relief they seek in para 1
of the originating summons, which I have set out earlier in my judgment.
