Recovery of legal costs arising out of threatened proceedings through service charges payable by tenants 

In Bretby Hall Management Company Limited v Christopher Pratt [2017] UKUT 70 (LC) the Appellant, Bretby Hall Management Company Limited, was responsible for the management of a country house consisting of 30 apartments, one of which was occupied by the Respondent, Christopher Pratt. The Appellant and the Respondent had a long-standing dispute causing the Appellant to incur substantial legal costs (amounting to £11,100) which it sought to recover from the Respondent as part of the service charge payable under the lease.

At first instance, when considering the recoverability of legal costs, the First-Tier Tribunal disallowed the claim for £11,100 in its entirety and noted that this issue was outside its jurisdiction. On appeal, Judge Behrens set aside the decision of the First-Tier Tribunal and clarified that there were two issues to be decided: (1) Was the £11,100 recoverable as part of the service charge under paragraph 16 of Schedule 6 of the lease? (2) Could the First-Tier Tribunal have disallowed these costs under section 20C of the Landlord and Tenant Act 1985?

(1) Was the £11,100 recoverable as part of the service charge under paragraph 16 of Schedule 6 of the lease?

Paragraph 16 of Schedule 6 of the lease allowed the Appellant to recover: “… including in particular but without prejudice to the generality of the foregoing… any legal or other costs reasonably and properly incurred… and otherwise not recovered in taking or defending proceedings (including any arbitration) arising out of any lease of any part of the Development”.

When considering the first issue, Judge Behrens held that the intention of the parties was clear and Paragraph 16 of Schedule 6 was wide enough to cover the costs of defending threatened proceedings.

(2) Could the First-Tier Tribunal have disallowed these costs under section 20C of the Landlord and Tenant Act 1985?

Pursuant to section 20C of the Landlord and Tenant Act 1985 a tenant may make an application for an order that any or all of the costs incurred or to be incurred by the landlord in connection with proceedings are not to be taken into account when determining the service charge payable to the landlord.

Judge Behrens however rightly held that the threatened proceedings in this instance did not materialise and the tenant was therefore not entitled to seek an order under section 20C of the 1985 Act.

Furthermore, the Judge pointed out that the Appellant had incurred substantial costs and its only income was the service charged payable by the tenants of the country house. The Appellant was therefore successful in its appeal, making the Respondent liable to pay its legal costs in full.

This decision highlights the importance for landlords to ensure service charge provisions in leases are broadly drafted to cover instances where proceedings are contemplated or threatened but not subsequently commenced. The wording of such provisions is particularly important where management companies are concerned, as they are often financially reliant on the payment of services charges.