Most investors prefer to grant leases that require tenants to pay the rent and all the bills. In addition, landlords expect tenants to pay their costs should it become necessary to enforce the terms of a lease.
Agricullo Ltd v Yorkshire Housing Ltd [2010] EWCA Civ 229; [2010] PLSCS 78 concerned an unsuccessful attempt to recover legal and surveyor’s costs incurred after the service of a section 146 notice during a dispute over repairs. On first impressions, the provisions in the tenant’s lease appeared sufficiently wide to deprive it of a defence to the claim.
The lease required the tenant to pay “the fees, costs and expenses charged, incurred or payable by the Landlord, and its advisors or bailiffs in connection with any steps taken in or in contemplation of, or in relation to, any proceedings under section 146 or 147 of the Law of Property Act 1925 or the Leasehold Property (Repairs) Act 1938”.
The tenant’s argument was ingenious. It relied on the fact that the landlord had chosen to negotiate rather than litigate. The tenant reminded the court that it had served a counternotice under the Leasehold Property (Repairs) Act 1938, requiring the landlord to obtain the court’s permission before enforcing the repairing obligations in the lease, and that the landlord had failed to apply to the court for the requisite permission to proceed.
The Court of Appeal accepted the tenant’s arguments. It ruled that none of the costs incurred after the service of the section 146 notice had been incurred in connection with, or in contemplation of proceedings under sections 146 or 147 because, without permission, the landlord could not proceed. This took the steps taken by the landlord’s solicitor and surveyor beyond the ambit of the costs recovery clause in the lease.
What should landlords do to protect themselves in such circumstances? The court indicated that, had the landlord applied for and obtained permission to proceed, it could have recovered its costs from the tenant. Alternatively, since the lease included a Jervis v Harris ([1996] Ch 195) clause, the landlord could have exercised its powers of entry to carry out the work and recover the costs as a debt without having to seek the court’s permission. However, the disadvantage of invoking such rights is that landlords will have to incur the expenditure and take the risk that tenants will be slow to pay or may fail to pay.
The simplest solution is to ensure that costs clauses in leases are sufficiently widely drafted to cover all eventualities. The Court of Appeal suggested adopting a clause of the type used in Riverside Property Investments Ltd v Blackhawk Automotive [2004] EWHC 3052 (TCC); [2005] 1 EGLR 114. Consequently, landlords should ensure that tenants covenant to pay all costs and expenses that they incur in or in connection with the enforcement of any of the tenant’s covenants (both during and after the termination of the term).
Allyson Colby is a property law consultant
