Contractual indemnity clauses and costs of service charge proceedings in the First-Tier Tribunal

14 Nov 2016

A landlord may rely on a contractual indemnity clause in a lease to claim as an administration charge the whole of the costs of service charge proceedings in the First Tier Tribunal (Property Chamber) even where it has already been awarded some of its costs under rule 13(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, as Martin Rodger QC, Deputy President, has held in 87 St George’s Square Management Ltd v Whiteside [2016] UKUT 438 (LC).

Rule 13(1)(b) allows the First Tier Tribunal to award costs in residential property and leasehold cases only if a person has acted unreasonably in bringing, defending or conducting proceedings, such power to be exercised as a matter of the Tribunal’s discretion. In Willow Court Management Company (1985) Ltd v Alexander [2016] UKUT 0290 (LC) Martin Rodger QC, Deputy President, recently set out guidance for litigants and tribunals on how and when rule 13(1)(b) will be engaged (see Hardwicke Property Newsletter July 2016), setting a high threshold for conduct to be deemed unreasonable and therefore reserving it in practice generally only for cases where conduct has been exceptionally egregious.

In 87 St George’s Square Management Ltd v Whiteside [2016] UKUT 438 (LC) at paragraph 29 the Deputy President confirmed the Willow Court Management Company (1985) Ltd v Alexander approach is threefold, in that: (i) although unreasonable conduct is an essential pre-condition of the power to award costs under the rule, once the existence of the power has been established its exercise is a matter for the discretion of the Tribunal; (ii) an order will not be appropriate in every case and may only be made where it would be fair and just to do so; (iii) the power is not constrained by the need to establish a causal nexus between the costs incurred and the behaviour to be sanctioned.

He then went on to consider the position where the landlord has a contractual entitlement to recover its costs of enforcement action, and chooses to pursue that entitlement by way of variable administration charge separately from any right to seek an award of costs under rule 13(1(b).

Paragraph 1(1) of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 defines an administration charge as an amount payable by a tenant of a dwelling as part of or in addition to the rent and which is payable in respect of a failure by a tenant to make a payment to the landlord in connection with a breach of covenant in the lease. A variable administration charge is a charge neither specified in the lease nor calculated in accordance with a formula specified by the lease. By paragraph 2 of Schedule 11 a variable administration charge is payable only to the extent that the amount of the charge is reasonable. In 87 St George’s Square Management Ltd v Whiteside the landlord decided not to accept the Tribunal’s determination that it was only entitled to 20% of its costs under rule 13(1)(b), instead seeking to recover all of its costs under its contractual entitlement as a variable administration charge under paragraph 5 of Schedule 11.

A party may be deprived of the right to pursue a course of conduct if, when faced with two alternative and inconsistent courses of action, he chooses one rather than the other and his election is communicated to the other party: see Stevens & Cutting Limited v Andersen [1990] 1 EGLR 95 per Stewart-Smith LJ. But the Deputy President confirmed that there is no inconsistency between a claim to enforce the contractual right to recover costs and an invitation to the First Tier Tribunal to exercise its discretionary power to award costs. The tests to be applied are separate: rule 13(1)(b) depends on satisfying the statutory test and condition of “unreasonable conduct” whereas any contractual entitlement will depend on whether the particular wording of the contract is satisfied, for instance, whether costs are properly for the purposes of enforcement of tenant covenants and whether they are reasonably and properly incurred.

The ability to pursue one route did not undermine the basis of entitlement to rely on an alternative route. It was also not a situation covered by the rule in Henderson v Henderson (1843) 3 Hare 100 whereby a later contractual claim for costs would be a new claim that ought properly to have been brought forward as part of the subject matter of the earlier dispute. On the facts of 87 St George’s Square Management Ltd v Whiteside there was no abuse of process or procedural estoppel in bringing a later claim for contractual costs where neither party had originally anticipated making submissions on the issue of costs during the earlier hearing and the rule 13(1)(b) application was made at the invitation of the First Tier Tribunal itself.

The decision is consistent with Chaplair Ltd v Kumari [2015] EWCA Civ 789, in which a landlord commenced proceedings in the County Court to recover unpaid rent and service charges and for an indemnity against the costs of proceedings pursuant to the terms of the lease. On transfer, the Tribunal refused an application under paragraph 10 of Schedule 12 to the Commonhold and Leasehold Reform Act 2002 (the equivalent of an application under rule 13(1)(b) at the time). The Court of Appeal held that when transferred back to the County Court the Judge had power to deal with costs of the Tribunal proceedings despite the earlier dismissal by the Tribunal of the application under paragraph 10. The reasoning given for this, consistent with the modern approach not to apply the rule in Henderson v Henderson mechanically but, as Lord Bingham held in Johnson v Gore Wood & Co [2002] 2 AC 1 at 31, to apply a broad, merits-based judgment, is that the Tribunal had not dealt with an order for payment of contractual costs and the landlord could not be estopped from claiming them in the County Court. The Tribunal could not have ordered it its costs under the terms of the lease. Accordingly, contractual costs in Chaplair Ltd v Kumari were awarded under the principles set out in Church Commissioners v Ibrahim [1997] 1 EGLR 13. They were not subject to any “unreasonable conduct” test, nor were they limited by the small claims fixed costs regime.

If the effect of Willow Court Management Company (1985) Ltd v Alexander was seen as unfair to represented landlords because of the high bar for unrepresented tenants’ conduct to be considered unreasonable so as to justify the exercise of the rule 13(1)(b) discretion, the Deputy President’s decision gives further comfort to landlords whose leases contain contractual entitlements allowing them to claim variable administration charges in the alternative. This is because not only can they pursue a rule 13(1)(b) application in line with the Deputy President’s guidance but, if that fails or is only successful in part, they may choose to pursue costs separately as administration charges. The bar is lower but requires a landlord to show its tenant has failed to make payment in connection with a breach of covenant in the lease. It would not work for instance where tenants have already paid and/or are not in breach for some reason. In 87 St George’s Square Management Ltd v Whiteside the landlord had not obtained dispensation from consultation requirements so the tenant could not have been in breach in respect of payment for major works, and it would presumably also apply against a landlord, for instance, where a service charge demand was invalid.

For tenants, there is no relief in an application under section 20C of the Landlord and Tenant Act 1985 to limit or restrict costs associated with service charge proceedings because that section only limits or restricts a landlord’s ability to recover those costs as service charges themselves. It does not prevent a contractual entitlement to those costs through a claim in the County Court or under paragraph 5 of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 (although this will change as and when section 131 Housing and Planning Act 2016 come in to force).

No argument was pursued in either Chaplair Ltd v Kumari or 87 St George’s Square Management Ltd v Whiteside by analogy with the amended section 81 of the Housing Act 1996 (no right of re-entry for forfeiture by a tenant to pay a service charge or administration charge unless finally determined or admitted) that there is no failure by a tenant to make a payment in connection with a breach of covenant until it is finally determined as payable by the Tribunal. The argument would have had merit to the extent that it would be fair to the tenant to incur a liability for costs only if, breach having been established through a failed reasonableness challenge, the tenant’s conduct fell within rule 13(1)(b) or the tenant continued to fail to pay. However, it is probable that the Court or Tribunal would have concluded that section 81 of the Housing Act 1996 as amended does not look to the moment of breach itself but only restricts the extreme consequence of re-entry to where breach is finally determined.

The effect both of Chaplair Ltd v Kumari and 87 St George’s Square Management Ltd v Whiteside should therefore be seen as favourable to landlords and as a partial challenge to the notion that service charge assessments operate within a restricted costs regime.


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