You are a landlord or a residents’ management company (often known as a RTM). You are bringing a claim against an errant leaseholder or adjoining landowner. But there is going to be a costly shortfall. Can you recover the legal costs from a leaseholder under a service charge ‘sweeper clause’? Landlord and tenant specialist, James Holton, considers how the Court of Appeal dealt with such an issue in the case of 89 Holland Park (Management) Ltd v Dell and Dell.
The Original Dispute
The owner of adjoining land was an award-winning architect, Sophie Hicks, who planned to build a mansion in Holland Park, Kensington, including two floors below street level and a glass cube which would glow at night. The land in question was subject to a restrictive covenant which benefitted the freeholder of adjoining land, of which the appellants in this case were one of the leaseholders.
In the original proceedings, the Court of Appeal found that the residents’ management company (“the Management Company”) could take account of the leaseholders’ interests as well as its own and potentially refuse consent to development plans based on aesthetic objections. The High Court subsequently found that the Management Company had acted reasonably in refusing consent.
So far, so good, but what about the costs of the case?
The Management Company incurred over £2.7m in costs (some of which was recoverable from Ms Hicks) and therefore demanded that two of the leaseholders, Mr and Mrs Dell, pay £430,411.50 as their share. The Management Company relied upon a catch-all ‘sweeper’ clause in Mr and Mrs Dell’s lease.
The Upper Tribunal found that the Management Company was not entitled to recover its costs from the leaseholder. The Management Company therefore appealed to the Court of Appeal.
The Decision
Unfortunately for the Management Company, the appeal was dismissed. The Court of Appeal found that the relevant clauses in the lease provided for costs to be recovered from the leaseholders for works such as the management and maintenance of the building rather than litigation costs generally, such as in this case. The Court of Appeal noted that had the parties agreed that litigation costs would be recoverable in these circumstances, then their lease would have expressly stated so.
What does this mean for landlords and management companies?
Unless a lease includes a clause providing for a specified cost to be recoverable from a leaseholder, then the landlord or management company will struggle to recover it from them.
What can I do?
This case is not going to allow parties to change clauses in existing leases. However, institutional investors and their professional advisors need to bear in mind that the trend in judgments in recent years is that clauses in contracts and leases will be given their literal meaning; if the lease doesn’t allow you to do it then you can’t do it. Where new leases are being granted, the drafting needs to accurately reflect these recent trends.
What if I need to bring a claim against a leaseholder?
Sometimes, litigation is unavoidable and a regrettable last resort. If so, then you need to think carefully about whether you are contractually entitled to recover your costs. Even so, you then need to consider whether the leaseholder even has the resources to pay any damages or legal costs. Early intervention and resolution will be preferable to a protracted dispute.
Property dispute resolution at DTM Legal LLP
Our specialist landlord and tenant team support clients and their professional advisors nationally in issues such as service charge arrears, Section 20 consultations, breaches of covenants and lease extensions. Visit our Property Litigation page for more details on our services.
James Holton is named as a “rising star” in the Legal 500 and is a landlord and tenant specialist. To contact James please email him at james.holton@dtmlegal.com or telephone 01244 354800.
