Service charge – Legal costs – Section 20C of Landlord and Tenant Act 1985 – LVT determining service charges demanded from respondent lessees to be reasonable in amount – Whether appellant management company entitled to recover its legal costs of the proceedings – Whether reduction to be made in exercise of discretion under section 20C – LVT disallowing legal costs – Appeal allowed
The respondents were the lessees of two flats within an estate in Battersea, London SW11. The respondents were liable, under the terms of their leases, to pay a service charge to the appellant management company representing a specified percentage of various costs including the “Building Cost”. This was defined to include “the enforcement… of any covenants… contained in the lease… relating to any unit within the building… where… such enforcement will be in the interests of good estate management”. Also recoverable were the “fees charges… and expenses of… professional advisers and others performing and carrying out the matters specified in each Category of Services”.
The appellant brought county court proceedings against the respondent to recover unpaid service charges. The respondents contended that the charges were unreasonable; the proceedings were accordingly transferred to the leasehold valuation tribunal (LVT) for a determination, under section 27A of the Landlord and Tenant Act 1985, of the reasonableness of the charges for three years from 2006 to 2009.
The LVT found that the sums claimed were reasonable but refused to award the appellant its legal costs of the proceedings. It held that: (i) legal costs were not recoverable under the terms of the leases; and (ii) had legal costs been recoverable, it would have exercised its discretion, under section 20C, to reduce them by one-third in light of the appellant’s repeated tendency to over-budget and the difficulty that lessees had experienced in obtaining an explanation of how the excess funds had been spent.
The appellant appealed. It submitted that the LVT had erred in its construction of the lease and had misunderstood the position as to the amount of service charge, which had not exceeded its expenditure for two of the yeas and, for the third, had exceeded it only because of prudent management that had saved the lessees considerable expense.
Decision: The appeal was allowed.
(1) The appellant’s legal costs, incurred in connection with the recovery of the respondents’ unpaid service charges, were properly recoverable under the service charge provisions in the lease. The enforced collection of the covenanted service charges from lessees who were refusing to pay them could be “in the interests of good estate management”, within the meaning of the service charge provisions, since otherwise there would not be enough money to manage the estate properly. A primary, if not the only, proper method of enforcing covenants against a lessee was by bringing legal proceedings. It was difficult to contemplate the bringing of legal proceedings, in most circumstances, without also contemplating the employment of lawyers, whether solicitors or counsel and whether advising, drafting, or acting as advocates. The cost of employing them was included within the “fees charges… and expenses of… professional advisers” engaged in connection with the enforcement of covenants against lessees. Although the words “legal costs” or “the costs of legal advisers” did not appear in the lease, it was overwhelmingly clear that such costs were included, on any fair construction. There was therefore a clear and unambiguous provision in the lease so as to permit the recovery of legal costs: Sella House Ltd v Mears [1989] 1 EGLR 65; [1989] 12 EG 67 and Iperion Investments Corp v Broadwalk House Residents Ltd [1995] 2 EGLR 47; [1995] 46 EG 188 applied.
(2) It was not appropriate to disallow any proportion of those legal costs pursuant to section 20C of the 1985 Act. The LVT had erred in finding that the appellant had asked for substantially more money by way of service charge than was really needed in the event. There had been no repeated over-budgeting in that sense; it had occurred only in respect of one year, for which there was a reasonable and accepted explanation. There had not been the sort of repeated over-budgeting by substantial sums that would justify depriving the appellant of part of its costs. The matter would be remitted to the LVT to reconsider the exercise of its discretion under section 20C.
Alexander Bastin (instructed by Davenport Lyons) appeared for the appellant; the respondents did not appear and were not represented.
Sally Dobson, barrister
