By Nicholas Kissen, Senior Legal Adviser
March 2017
In Bretby Hall Management Company Limited v.Christopher Pratt [2017] UKUT 70 (LC) the Upper Tribunal (Lands Chamber) (UT) recently considered whether legal costs arising from defending separate threatened county court proceedings were recoverable under the service charge provisions of a lease.
Bretby Hall (“BH”) is a former Grade II listed country house in Burton upon Trent. It has been converted into 30 apartments of varying sizes, and Mr Pratt owned one of the apartments. Bretby Hall Management Company Limited (“BHMC”) was responsible for the management of BH and is a party to the lease which requires that Mr Pratt would be a member of BHMC. BHMC’s only income derives from service charges from the apartment owners.
There was a long-running service charge dispute between BHMC and Mr Pratt lasting many years and covering different issues causing BHMC to incur legal costs in the sum of £11,100 including VAT.
Mr Pratt had threatened to begin legal proceedings, but none were ever issued by him. The sum of £11,100 comprised counsel’s fees of £2,000 plus £400 VAT and solicitor’s fees of £7,250 plus £1,450 VAT.
Before the First-tier Tribunal (Property Chamber) (“FTT”) BHMC sought to include these legal costs as an item of service charge to be divided between the leaseholders in accordance with the proportions in their leases and submitted that the costs fell fairly within paragraph 16 of the Sixth Schedule of the lease which states the following can be recovered by BHMC through the service charge fund:
“All other expenses (if any) incurred by the Manager in and about the maintenance and proper and convenient management and running of the development…. and any legal or other costs reasonably and properly incurred by the Manager and otherwise not recovered in taking or defending proceedings (including any arbitration) arising out of any lease of any part of the Development…”
The First-tier Tribunal (Property Chamber) (“FTT”) disallowed the claim for £11,100 in its entirety.
BHMC appealed.to the UT which clarified that there were two issues it would be convenient for it to decide; namely
- Were these legal costs recoverable through the service charges under Paragraph 16 of Schedule 6 of the lease; and
- Could the FTT have disallowed the costs under s20C of the Landlord and Tenant Act 1985?
What did UT decide?
The UT came to the view that the first part of the above extract:
“All other expenses (if any) incurred by the Manager in and about the maintenance and proper and convenient management and running of the development”
was sufficiently wide to include the costs of intended proceedings and therefore it was unnecessary to decide whether these costs were included in the second part of the clause:
“…and any legal or other costs reasonably and properly incurred by the Manager and otherwise not recovered in taking or defending proceedings (including any arbitration) arising out of any lease of any part of the Development”
UT ruled that the words of the lease plainly contemplated that the reasonable costs of managing the development should be recoverable under the service charge and that, subject to the question of reasonableness, the costs of defending proceedings fell squarely within such a definition. HHJ Behrens said:
”I can think of no reason why the parties should have intended that the costs would only be recoverable under the service charge if proceedings were actually commenced.”
UT then went on to consider whether at the hearing before the First-tier Tribunal (Property Chamber) Mr Pratt could seek an order to disallow the above costs totalling £11,100 by way of an application under Section 20C of the Landlord and Tenant Act 1985. UT noted that Section 20C concerned proceedings before a court, tribunal or arbitral tribunal and the application is to be made to the court, tribunal or arbitral tribunal where the proceedings are taking place Proceedings were threatened but did not materialise, and therefore Mr Pratt was not in a position to apply for an order under Section 20C.
Finally, since BHMC’s appeal to UT had succeeded on almost all points and it is a residents-owned Management Company with no resources, except for the service charge income, UT declined to make an order under s20C in respect of the costs of the appeal.
Points to note
- The wording of the lease is key – is it wide enough to allow the recovery of costs where a leaseholder threatened legal proceedings? As a leaseholder take care to avoid threats that may result in costs being incurred where the lease contemplates their recovery as service charges.
- An order under Section 20C may not be available technically, were no proceedings are engaged; and as a matter of discretion dependent on the facts of the case.
- Although this case concerned recovery of legal costs through the service charge the lease may include wording entitling the landlord to recover such costs directly against the leaseholder.
On 6th April 2017, Section 131 of the Housing and Planning Act 2016 will give courts and tribunals a discretionary power to restrict the ability of a landlord to recover the costs of taking part in legal proceedings from the leaseholder as an administrative charge on the tenant’s application.
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