Invariably, the first question we are asked by clients when instructed to enforce a breach of the terms of a lease - whether that be for a monetary breach (such as non-payment of rent or service charges) or a non-monetary breach (such as unlawful alterations or sub-letting etc) - is “can we claim our costs from the leaseholder?”.

This should be a straight forward question, but often the answer is not so straight forward. Whether the costs can be claimed depends on a number of factors, which we summarise in this week’s Legal Update. Whether the costs are ultimately recovered from the leaseholder is another question entirely and depends primarily on the leaseholder’s willingness and ability (in terms of means at their disposal) to pay, as well as the action available to the client to try to enforce payment. But the focus on this Legal Update is the question of whether costs can be claimed directly from the defaulting leaseholder being pursued.

The starting point - the terms of the Lease!

The starting point in considering this question is always the terms of the relevant lease. In most cases, the lease will include some contractual entitlement for the client to claim its costs for enforcement action taken by the landlord, or RTM company or RMC, however the specific wording of the covenant to pay legal costs does need to be considered. Variations on the particular wording from lease to lease may seem minor, but can have major implications on whether the costs for the action being taken can be claimed.

It’s impossible to document all the different variations of costs covenants which might be contained in a lease, but some of the most common are those which require the lessee to pay legal costs which have been incurred in connection with Section 146 of the Law of Property Act 1925 (“LPA”) in some way. That being, in essence, action taken toward or for forfeiture of the lease.

Remembering that residential leases require a determination of a breach before any notice can be served under Section 146 and possession proceedings for forfeiture of the lease can be issued (as per Section 81 Housing Act 1996 for service charge breaches and Section 168 of the Commonhold and Leasehold Reform Act 2002 for non-monetary breaches), the question we are often asked is whether the costs for the determination proceedings that precede a Section 146 notice or forfeiture proceedings can be claimed.

Two of the most common covenants which entitle a landlord to recover such costs are those which require the leaseholder to pay costs incurred :-

1. in or in contemplation of proceedings under Section 146 of the LPA;

   The key case here is Freeholders of 69 Marina, St Leonards-on-Sea v Oram [2011] EWCA Civ 1258, (“69 Marina”), reported in our previous Legal Update here.

   Whilst criticised at the time, 69 Marina remains good law after nearly 15 years and is authority that enables, under this sort of covenant, a landlord can claim its costs for steps taken in determination proceedings even before getting to the point of serving a Section 146 notice. The Court of Appeal in 69 Marina held that this is the case even where a lease reserves service charges as rent or deems it as such for enforcement purposes.

2. for the purpose of or incidental to the preparation and service of a Notice under Section 146 of the LPA

   The key case here is Kensquare Ltd v Boakye [2021] EWCA Civ 1725, where the Court of Appeal held that legal costs incurred in determination proceedings would also fall within the scope of this costs covenant.

This is just a summary of the two most common costs covenants and whether the costs can actually be claimed will depend on a number of factors including the type of enforcement action taken and by whom and the level of success in that action too.

Costs under the Court Rules 

In some cases, legal costs incurred in the determination proceedings can be claimed even where there is a lack of contractual entitlement to such costs in the lease, pursuant to the Court Rules. This will depend on the type of claim being pursued and, in monetary claims, the value of the claim itself. This is something that needs to be considered on a case by case basis.

Will the costs be ordered in the proceedings?

Even where there is a contractual entitlement to claim costs under the terms of the lease, it does not necessarily follow that the legal costs incurred in the determination proceedings will be ordered to be paid by the leaseholder in those proceedings. Again, this depends on a number of factors. Where costs can be claimed under the lease but not awarded in the determination proceedings, the advice will usually be that the legal costs would need to be demanded as an administration charge from the leaseholder, at the conclusion of the determination claim, and a new claim pursued for those costs. For that reason, it is preferable if the landlord, RTM company or RMC can be in a position to claim the costs in the determination claim itself, to save the costs and time for a second round of litigation, just to claim costs.

Forum

Which forum the proceedings are being dealt with will be a major factor in the question of whether the costs will be ordered in those proceedings. Whilst the Courts have an ability to award costs, the Tribunal has a much narrower jurisdiction when it comes to awarding legal costs (typically limited to unreasonable costs orders) - see here.

So the starting point is that, where there is an ability to claim costs, legal costs would typically only be ordered in the determination proceedings where those proceedings are being dealt with in the Court, as opposed to the Tribunal. There are some limited exceptions to this (for example, where the claim starts in the Court and is transferred to the Tribunal such that the Tribunal judge can ‘double hat’ (see here) as a judge of the County Court when it comes to considering costs), but this is the general rule.

Costs follow the event

Where the Court or Tribunal has jurisdiction to award costs, it is important to remember that typically costs in litigation ‘follow the event’ meaning that typically (but not always) only the successful party will be entitled to make a claim for their costs. There will be exceptions to this general rule and there may be cases where the unsuccessful party can make a claim for some or all of their costs (for example, due to poor conduct or unreasonable refusals of settlement attempts), but the starting point will always be that only the successful party will be entitled to make a claim for their costs.

Discretion of the judge

Notwithstanding the general rule above, the award of costs is always at the discretion of the Court or Tribunal, meaning that an order can be made that all, or some, or none of the costs are awarded irrespective of the level of success of the winning party.

Assessment

Where a costs order is made, those costs will be subject to an assessment by the judge. That will either be by the judge at the conclusion of the determination proceedings as a ‘summary assessment’, or as part of separate costs proceedings known as ‘detailed assessment’. Again, the principles and procedures for assessment via either process are outside the scope of this Legal Update, but deductions are always to be expected on the total costs claimed.

Conclusion

Whilst the question of whether enforcement costs can be claimed from the defaulting leaseholder is not necessarily straight forward, in our experience in most cases the answer will be ‘yes’, at least some (if not all) of the costs can be claimed. But it is imperative to take competent advice on the question, ideally at an early stage before embarking on the enforcement process.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.