Landlords often include litigation costs in service charge demands but the lease does not always expressly provide for this. When this happens, the landlord usually relies upon a catch-all ‘sweeper’ clause which inserts a general costs recovery clause into a lease.
Landlord and tenant specialist, James Holton, considers the recent appeal case of Dell v 89 Holland Park (Management) Ltd, where the Upper Tribunal decided whether the wording of such a clause allowed the landlord to recover its litigation costs under the service charge. The costs related to a dispute with a third party.
The Original Dispute
The owner of adjoining land had planned to build an underground mansion in Holland Park, Kensington, with 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.
The Court of Appeal found that the landlord 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 held that the landlord had acted reasonably in refusing consent on aesthetic grounds and because the building would extend beyond the rear building line of the landlord’s freehold title.
The Upper Tribunal Appeal
The appeal to the Upper Tribunal concerned whether the leaseholder was required to pay service charges in the sum of £430,411.50, said to be the appellant’s share of costs from the original dispute. As well as solicitor’s and counsel’s fees, these costs included reports on arboriculture, engineering, heritage and aesthetics. The Tribunal heard that the total costs incurred were over £2.7m.
The Lease
The landlord relied upon the service charge provisions of the lease whereby the leaseholder covenanted to pay as costs incurred by the landlord in carrying out its obligations. The landlord relied upon its following covenants:
“To employ all such surveyors builders architects engineers tradesmen solicitors accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building” and to
“do or cause to be done all such works installations acts matters and things as in the reasonable discretion of the Lessor may be considered necessary or advisable for the proper maintenance safety amenity and administration of the Building.”
The landlord argued that its litigation costs were incurred to protect the safety and amenity of the property so were recoverable under the service charge.
The Decision
The Upper Tribunal decided that the litigation costs were not recoverable under the above clauses. The judge concluded that, had the parties to the lease intended that the costs of contesting litigation against third parties were recoverable under the service charge, then they would have included express wording to this effect.
The decision does not mean that litigation costs against a third party can never be recovered as part of the service charge, but the lease should include specific wording to facilitate the same.
What does this mean for Landlords and Agents?
Landlords should review the drafting of precedent leases to ensure that the service charge provisions are sufficiently wide to allow for the recovery of conducting litigation against third parties.
Whilst undertaking this review, landlords should also review costs recovery clauses generally to ensure sufficient provision is made for legal and professional fees incurred because of breaches of a tenant’s obligations. Such fees which a landlord may seek to recover from a tenant include the recovery of rent and service charge arrears, forfeiture and dilapidations.
Agents should also be mindful of this case when heads of terms are agreed, or leases re-negotiated. Early collaboration between solicitors and the landlord’s wider professional team can mitigate the risk of litigation. Where litigation is unavoidable, well-drafted costs recovery and service charge provisions can be crucial to allow a landlord to recover their costs.
DTM Legal LLP
Our specialist landlord and tenant team are supporting clients and their professional advisors in the successful management of their portfolios including the drafting and renewing of commercial leases as well as in the management of residential leasehold property.
James Holton is named as a “rising star” in the Legal 500 and is a landlord and tenant specialist. For further details and advice on leases, recovering costs and sweeper clauses please contact James please email him at james.holton@dtmlegal.com or telephone 01244 354800.
