We are frequently asked whether tenants have to pay service charges and what they have to pay for, but another thorny issue concerns legal costs and who has to pay for those if there has been a dispute about payment of service charges.
This issue was considered in the recent case of Thanet Lodge (Mapesbury Road) & Anor v Mirchandani [2024] UKUT 205 (LC).
The tenant, under a long lease, had challenged service charge demands on the basis that some costs were outside the scope of the service charge clause. The costs included legal costs incurred by the landlord in relation to a compensation claim brought by another tenant. The compensation claims had arisen out of disrepair allegedly caused by the landlord’s failure in its repairing responsibilities. Although the actual repair costs would ordinarily be recoverable under the service charge provisions, the question here was: would the landlords’ legal costs incurred in relation to an alleged lack of repair, be recoverable?
The tenant’s lease enabled the landlord to charge costs incurred:
- to employ a firm of managing agents and chartered accountants to manage the building,
- to employ all such surveyors builders architects engineers tradesmen accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the building.
The wording was identical to that found in a lease in the Court of Appeal case of Sella House Ltd v Mears (1988) 21 HLR 147, in which it was held that nowhere in the language used was there any specific mention of lawyers’ fees, legal proceedings, or legal costs. The scope of the first paragraph was concerned with the management of the building, whilst the second was with maintenance, safety, and administration.
The Upper Tribunal therefore decided that there was nothing in the facts of the current case to reach a different conclusion (to Sella), and that legal fees were not payable. The Upper Tribunal, cited further authority from the case of No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119 and Kensquare Ltd v Boakye [2021] EWCA Civ 1725, which confirmed that a clause concerned with management, or with the provision of services, would not ordinarily enable a landlord to recover its legal costs of a dispute with any of its tenants, through the service charge regime.
The tenant’s lease also included some “sweeper” wording in which the tenant covenanted to pay a percentage of the “total expenditure” incurred in the provision of the services. “Total expenditure” included “any other costs and expenses reasonably and properly incurred in connection with the building”. The Upper Tribunal referred to and was bound by the Court of Appeal decision of Holland Park Management Company Limited v Dell [2023] EWCA Civ 1460, in which it was said, “It is inherently unlikely that the parties would have intended to include an obligation to fund uncertain but potentially significant costs of a dispute within general wording of a definition in circumstances where extensive and specific provision is made for the types of costs that may be included in the service charge”.
Comment
Costs incurred in disputes between a landlord and one of its tenants are not normally intended to be recoverable from all of the tenants in a building through the service charge regime. Such costs are a matter between the parties to the dispute and are generally dealt with within whatever jurisdiction the dispute is resolved.
The RICS professional standard for service charges identifies as an excluded service charge cost: “Costs and fees relating to the owner’s investment interest, for instance, asset management and rent collection, cost of letting units and matters between the owner and an individual occupier. This last category may include activities such as enforcement of lease covenants, dealing with landlord consents for assignments, sub-letting, alterations, rent reviews, additional opening hours, etc.”
Whilst a commercial lease may make the point clear through its service charge exclusion clause, standard commercial leases may allow for recovery of costs in proceedings in connection with establishing, preserving or defending any rights, amenities or facilities used or enjoyed by tenants and occupiers of the building. Such wording does not (unless expressly including it) extend to dispute costs with individual tenants and so careful drafting of the provisions is required, bearing in mind the intended outcome or consequence.
