This week we focus on a Court of Appeal decision from November 2021 which deals with three points that will affect most landlords/RMCs or RTMs.  The three points were as follows:

1. Can interim demands be subject to time limits such that recovery is prevented until the end of the financial period if demands are served late?

2. Can the leaseholder be liable to pay legal costs incurred in the claim prior to the service of a s.146 notice?

3. Can the service charge funds be used to pay any element of legal costs not recovered from a defaulting leaseholder?

The case was Kensquare Ltd v Boakye [2021] EWCA Civ 1725 which had ended up in the Court of Appeal following commencement in the FTT and then appeal to, and now from, the Upper Tribunal.

Very briefly, the relevant facts are as follows.  Mrs B was the owner of a flat subject to the terms of a lease granted in 1982 for 125 years.  In 2017 Mrs B had not fully paid service charges due for the period 2011 to 2016 and did not admit that those sums were due.  Kensquare issued a claim for those service charges in the FTT and won but no finding was made in relation to the legal costs incurred to that stage (a fairly standard outcome, given the FTT’s limited jurisdiction to award costs - see more here).

Mrs B still did not pay despite the FTT ruling against her and so Kensquare drafted and served a s.146 notice requiring her to pay the arrears sum, with a view to progressing to forfeiture proceedings in default of payment.  Forfeiture was avoided, however, because payment was shortly then received from the mortgagee with a charge against the leasehold title for Mrs B’s flat - also a fairly standard outcome.

After that claim was settled, Kensquare issued demands for the interim charges due in 2018 and 2019 charges PLUS an administration demand for the legal costs it had incurred in the FTT action up to and including the service of the s.146 notice.  Importantly, the interim demands were levied after the commencement of the financial years to which they related.

Mrs B once again elected not to pay what had been demanded of her and so Kensquare issued a new claim in the FTT for a determination of the 2018 and 21019 charges and the historic legal costs.

So, to the three questions considered in this case.

1.  Can interim demands be subject to time limits such that recovery is prevented until the end of the financial period if demands are served late?

The clauses in this lease are, it has to be said, less than common.  We have seen similar provisions elsewhere and so this point is something to at least be aware of when considering the lease at your development and how its wording might affect the manner of your demands, budgeting processes and the sense of urgency in relation to those. 

The Court of Appeal considered that the relevant provisions of the lease required the Landlord to provide notice of the sums due at least one month prior to the start of the financial year and that, in the absence of notice by that date, a default sum of £360 would be payable (irrespective of the budget and the leaseholder’s actual proportion thereunder).  The Court of Appeal commented that, whilst there is a general presumption in the case law against finding that time is of the essence in demands, the Court had to consider what the intention of the original parties to the lease was when negotiating the relevant covenant(s).  In this case the Court found that there was a binding deadline for the service of the interim demands of at least one month prior to the due date.    

The result of this finding was that the leaseholder would only be liable to pay, on the due date at the commencement of the year, for the default sum expressed in the original lease (£360) with the remaining balance still payable but only after the end of the financial year.

This is far from a devastating outcome where only one leaseholder holds the landlord to the strict lease wording but it is something to be aware of in the leases within your portfolios because, at the very least, delayed payment resulting from late demands will cause some embarrassment and potential funding issues within the year.

2.  Can the leaseholder be liable to pay legal costs incurred in the claim prior to the service of a s.146 notice?

This, and the following point, are perhaps of more interest as they are issues that arise in most legal actions against a defaulting leaseholder.   The arguments revolved around the specific wording of the clause in the lease relating to the requirement for the leaseholder to pay costs incurred in seeking remedy of a breach.   The relevant clause is pretty standard to most leases:-

“To pay all costs charges and expenses (including Solicitors’ costs and Surveyors’ fees) incurred by the Lessor for the purpose of or incidental to the preparation and service of a Notice under Section 146 of the Law of Property Act 1925 notwithstanding forfeiture may be avoided otherwise than by relief granted by the Court…”

The FTT, somewhat bizarrely given cases such as 69 Marina -v- Oram and various others, found that the covenant only enabled the Landlord to recover the costs of actually drafting the s.146 notice, around £300, and no ability to recover the costs incurred in obtaining the determination required to reach that stage.  This notwithstanding that, due to s.81 Housing Act 1996, the s.146 notice cannot be served in the absence of a prior determination of the Court or Tribunal or an admission by the defaulting leaseholder that the charge were payable. 

The Court of Appeal overturned that rather odd ruling remarking that:-

“The landlord] had no choice but to bring [the 2017 proceedings] if it wished to serve a section 146 notice. It is true that, at the date of the lease, a landlord did not need to make an application to the FTT (or any other Tribunal or Court) before serving a section 146 notice. That requirement arrived [only after the introduction of s.81 Housing Act 1996].  That does not matter, however. The parties to the lease agreed that the tenant should bear costs incurred for the purpose of the service of a section 146 notice, and the costs which Kensquare incurred in the 2017 FTT proceedings fit that description.”

Accordingly, and in line with past rulings, it is the case that cost covenants relating to work in contemplation of or in the preparation and service of a s.146 notice will likely bind the defaulting leaseholder to pay the costs incurred at every stage required to get to the point of being able to serve the notice, and not just the limited costs of drafting the notice itself.

3.  Can the service charge funds be used to pay any element of legal costs not recovered from a defaulting leaseholder?

The lease contained the following (again fairly common) clause in respect of certain costs recoverable as service charge costs from all leaseholders. 

“The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building”

The FTT took the view that the clause did not enable recovery from the leaseholders as a service charge expense those legal costs incurred in bringing proceedings but not recovered from the defaulting leaseholder.  It considered that lawyers appointed by the landlord in the recovery of unpaid service charges were not “professional advisers [employed] in connection with the management of the Building”.  The Court of Appeal agreed with this finding commenting that the provision was not drafted widely enough to cause the provisions to relate to more than management so as to include litigation and that to interpret otherwise would involve “bringing within the general words of a service charge clause [something] which does not clearly belong there”.

Accordingly, the landlord would not be able to cover from the service charge funds the legal costs incurred in the litigation, where it did not recover an element of those costs from the defaulting tenant.

Conclusions

The Court of Appeal were clear to point out that, in a case such as this, comparison of lease clauses in other cases does not provide a reliable guide on how the subject lease should be interpreted.  It said that each case was fact specific and that what matters are the words of the covenant irrespective of the words of related statutory provisions known at the date that the lease was granted.  In other words, what was the intention of the original parties to the lease in agreeing the wording that they did.

Careful reading of service charge provisions and, if litigation is contemplated, costs recovery provisions too, is plainly essential.  Use of the KDL Law Covenants Review Service is something that many of our clients and professional managing agent colleagues take full advantage of for that very reason.

So, the golden rule is (and has always been) read the lease and, if in doubt, obtain competent advice before acting and, thereby, avoid embarrassment or costly mishaps.

If you have any queries whatsoever, please get in touch with a member of the team on 01435 897297 or info@kdllaw.com

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