Recovering Legal Costs from Leaseholders

If there is any ambiguity in a lease, it will be construed against the landlord. The obligation to contribute towards an expense must arise “clearly and plainly from the words that are used”. If it does not, it will not be recoverable.

A well drafted modern lease will expressly allow the landlord or management company to recover all manner of legal expenses, whether incurred in enforcing covenants, collecting service charges or granting licences. The majority of leases are not so wide ranging.

Commonly, the landlord or management company will seek to claim that legal fees form part of their defined expenditure and fall to be recovered as a service charge. Where the lease does not clearly and explicitly mention professional legal expenses, difficulties can arise.

The Courts have not adopted a consistent approach to the interpretation of cost recovery clauses.

In Sella House Ltd v Mears and (more recently) Greening v Castelnau Mansions Limited, a provision allowing a landlord to recover the cost of employing “professional persons as may be necessary or desirable for the proper … administration of the Building” was held not to extend to the recovery of legal expenses.

Similarly, in Twenty Two Clifton Gardens Limited v Thayer Investments SA, a ‘sweeping up’ clause, which allowed a management company to “provide such other services as it shall in its reasonable discretion deem necessary for the better use and enjoyment of the Property” did not include legal costs, incurred in bringing LVT proceedings against the lessee.

The Upper Tribunal found in favour of the landlord in Plantation Wharf Management Company Limited v Jackson & Irving. The service charge included “the fees charges…and expenses … of professional advisers” engaged in “the enforcement … of any covenants … in the interests of good estate management”. The UT held that legal fees incurred in collecting service charges were clearly “in the interests of good estate management” and “although it is true that the words ‘legal costs’ do not appear in the lease, it seems … overwhelmingly clear that such costs are indeed included”.

Understandably, the recovery of legal fees as a service charge, from all of the lessees in a block or estate, might be considered unfair; especially where those costs have been incurred as a consequence of the actions of one or a small group of lessees. Thankfully, there is usually at least one other option.

Lessees will often covenant to indemnify the lessor against costs incurred “in or in contemplation of proceedings under section 146 of the Law of Property Act 1925”, which relates to proceedings to forfeit a lease following a breach of covenant. It was the scope of this type of covenant that was considered by the Court of Appeal in the Freeholders of 69 Marina v Oram & Ghoorun.

The Court held the lessor could rely on that provision to recover the cost of a hearing before the LVT, to determine that a breach of covenant had occurred (pursuant to s168 of the Commonhold and Leasehold Reform Act 2002), because the LVT determination was a pre-condition to the service of a section 146 notice.

In the absence of any single “golden rule”, the exact wording of the lease and the precise factual matrix in each case will be of paramount importance. Landlords and management companies would be well advised to read the lease before instructing a lawyer to advise in connection with a leasehold dispute; and lessees should do so the same, if they find that legal expenses have been included in their service charge budget or end of year accounts.