Property litigation – Recovery of costs out of service charge

Until comparatively recently Tribunals have taken the view that, before lessees under a long lease could become liable for payment of legal costs incurred by the lessor in respect of any advice sought or action taken, there has to be “clear and unambiguous language” in the lease.

This view arose out of a decision in Gilje in 2001 supporting the general view as to recovery of costs. However in more recent cases a different and more relaxed interpretation of the detailed wording in the lease has been applied and this started with a decision by the Supreme Court in the case of Arnold in 2012 where Lord Neuberger intimated that he was “unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation”.

This new approach has been applied by the Upper Tribunal in a case involving legal fees arising from a party wall dispute where it was held that legal and other costs were recoverable under the service charge, the Tribunal accepting that there were no special principles to be applied when considering legal fees.

All such decisions now depend upon the proper construction of the service charge clause in the lease enabling such expenditure and two recent cases namely Assethold in 2014 and Sinclair in 2016 have confirmed that there are no specific rules relating to recovery of costs out of the service charge account.

It should be noted that the wording of the lease must be wide enough to cover legal costs, and from the point of view of the lessee it is possible to obtain a decision from the Tribunal under Section 20C of the Landlord and Tenant Act 1985 as to whether the whole or any part of the costs incurred are to be regarded as “relevant costs” for service charge purposes.

Bearing in mind that so many of the landlords are companies set up the lessees to manage the property and that the service charge is their only income, it must be appreciated that a failure to recover all the costs expended would render the landlord company bankrupt with all the unpalatable results of that event.

For this reason alone it should be considered as inequitable if in circumstances where a dispute arises the landlord company is not entitled to seek advice or take action to protect itself and the lessees who are not parties to that dispute. It is, however, important to appreciate that, whilst there are no special rules of interpretation applying to the expenditure of legal costs, it is a matter of construction as to whether or not such costs come within the scope of the charging clause in the lease.

For more information or for any property litigation enquiries please contact Colin Jaque at [email protected] or on 020 7408 8828.