Recovery of Costs and Service Charge Disputes

Article

15 January, 2014

Alexander Christoforou & Diogenous v Standard Apartments Ltd

The Upper Tribunal last month ruled that although a party to proceedings before a LVT (now the First Tier Tribunal (Property Chamber) are not required to pay costs incurred by the other party, it does not stop a party being required to pay the costs of proceedings where they had agreed to do so in their lease.

In this matter the tenants appealed against the decision of a LVT that the landlord could, under a clause in their lease, recover the legal costs incurred from bringing proceedings against them to recover outstanding service charges.

History of the Case

The landlord in this matter owned the freehold of 2 apartments in a building which were leased by the tenants. The lease required the landlord to provide services and obliged the tenants to contribute towards the costs of these services. The wording of the lease expressly reserved the service charges as rent and under the terms of the lease, the tenants agreed to pay the rent on the due date and not to exercise any right or claim to withhold it. The tenants also agreed to indemnify the landlord against all costs the landlord incurred as a direct result of the tenants breaching any of the covenants in their lease.

The tenants then failed to make service charge payments and the landlord applied to the LVT under s.27A Landlord and Tenant Act 1985 which determined that the disputed service charges were payable. The landlord then recovered the outstanding service charges after obtaining judgments against the tenants in the county court. By the time the landlord recovered the outstanding service charges, the landlord had incurred costs of around £21,000.

The landlord sought to recover these costs from the tenants by relying on the indemnification covenant in the lease. The tenants defended this claim and the landlord applied to the LVT for a determination of whether or not the tenants were liable under the terms of the lease to pay the costs that had been incurred.

The LVT decided that the costs came within the scope of the indemnification covenant; were a variable administration charge within the ambit of Schedule 11 Commonhold and Leasehold Reform Act 2002; the costs had resulted from the tenants failure to pay the service charges and therefore the costs were payable by the tenants.

The tenants appealed against this decision, arguing that the costs did not fall within either the indemnification covenant or Schedule 11, the LVT had failed to address their challenge to the amount of costs claimed, the sum of £21,000 was disproportionate to the disputed service charges of about £4,000 per flat and the landlord was prohibited by Schedule 12 of the 2002 Act from recovering any of the sums which it claimed in respect of the costs of the earlier proceedings.

Key Points of the Upper Tribunal Decision

The disputed costs clearly fell under the indemnification clause as costs incurred in proceedings which arose directly out of a breach or non-observance by the tenants of covenants in their lease. The costs were incurred because the tenants had refused to pay the service charge and so had forced the landlord to begin proceedings to recover the service charge.

The costs were a valid administration charge. Schedule 11 of the 2002 Act was wide enough to include costs payable by a tenant that have been incurred as a result of a breach of covenant.

Therefore, the LVT was correct in finding that both the costs of the earlier proceedings fell within the indemnification covenant and that they were administration charges.

In response to the tenant's argument that the LVT had not considered the amount of costs claimed, the Tribunal held that there was no duty on any court or tribunal to deal with each and every point made in an argument.

The Tribunal considered that the £21,000 costs claimed were not disproportionate as solicitors had been involved for nearly 3 years in an attempt to recover the disputed service charges.

Finally, the Tribunal concluded that although the normal costs rules applicable in civil litigation did not apply to proceedings before a leasehold valuation tribunal. In particular this meant that the successful party would not be entitled to recover their costs of the proceedings from the unsuccessful party. However, where a lease included a contractual indemnity covenant against the costs of proceedings, a sum payable under that covenant was not required to be paid by the tribunal, but by the parties' own contract.

Summary

This decision will provide some comfort to landlords seeking to recover disputed service charges by applying to the Tribunal for a determination that any disputed service charges are payable. The decision clarifies the costs position for parties bringing claims to the Tribunal and should encourage landlords to ensure that a valid indemnification covenant is included in their lease.

If you have any questions relating to this article or require any further information please contact Bethany Paliga on 01772 220241 or via email Bethany Paliga

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