7 August 2015 by Yezdan Izzet

Costs in service charge disputes after Chaplair Ltd v Kumari

We frequently advise both landlords and tenants in disputes relating to service charges and one of the major concerns for both parties is whether or not the landlord will be able to recover its reasonable legal costs in any proceedings.  Quite often the answer is no due to the restrictive costs regimes of the First-tier Tribunal (Property Chamber) and County Court small claims track which only allow landlords to recover very limited costs if they are successful.  The Court of Appeal in Chaplair Ltd v Kumari [2015] has now helpfully clarified the position for landlords looking to recover their costs based not on the Tribunal or Court’s costs rules but under the relevant contractual provisions in the lease. 

It is common for service charge claims to start life in the County Court where the landlord issues proceedings to recover unpaid service charges from the tenant, and often these charges are under the small claims threshold of £10,000.  It is also common for the matter to be transferred at the request of the tenant from the Court to the First-tier Tribunal, particularly where the tenant files a defence challenging the reasonableness of the service charges. The cost rules for proceedings in the Tribunal and the County Court are different. 

The Tribunal may only award ‘wasted costs’ where one of the parties or its legal representative has acted improperly, unreasonably or negligently, or where one of the parties has acted unreasonably in bringing or defending a claim.  However, most well-drafted modern leases will contain provisions which allow a landlord to recover its legal costs by way of the service charge. Tenants can apply for an order under section 20C of the Landlord and Tenant Act 1985 which, if granted, prevents the landlord from recovering its costs of the dispute as service charges under the lease.

In contrast, the County Court has jurisdiction to make an Order for costs in favour of either party except in small claims proceedings, where the value of the claim is less than £10,000, in which case the successful party cannot usually recover their legal costs but only certain fixed costs such as court fees.

So, can a landlord get around the unfavourable costs regimes of the Tribunal and the small claims Court by using the contractual costs provisions in the lease it has with its tenant? 

Most modern-day leases contain provisions allowing the landlord to recover its legal costs in proceedings relating to rent and service charge arrears.

In Chaplair Ltd v Kumari, the proceedings started life in the County Court and were later transferred to the Leasehold Valuation Tribunal (now the First-tier Tribunal (Property Chamber)).  The Tribunal decided the claim but did not make any cost orders. The case was then transferred back to the County Court on the issue of costs. In the County Court the Judge decided that the landlord’s costs should be limited to ‘fixed costs’ pursuant to the Civil Procedure Rules. The matter eventually ended up in the Court of Appeal where it was held that the Court has power to order a tenant to pay the landlord’s ‘contractual’ costs pursuant to the terms of the lease even if (1) the costs arose in related proceedings in the Tribunal and (2) the case was allocated to the small claims track. 

This is good news for landlords and a point for leaseholders to bear in mind when challenging service charge demands in the future.

If you require legal advice on any landlord and tenant issues, please contact us at info@boltburdon.co.uk

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