In 2015, two landmark decisions of the Supreme Court (Arnold v Britton and others [2015] UKSC 36; [2015] EGLR 53 and Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2015] UKSC 72; [2016] EGLR 8) indicated a change in direction in the approach to be taken by the courts to the construction of contracts. These cases marked a departure from the court’s practice of assessing the meaning of words in accordance with commerciality and common sense, towards a stricter approach which prefers a construction that adheres closely to the actual words used by the parties.
Though there is much to commend an approach that upholds the parties’ own wording, it is fair to say that clauses providing for the recovery of legal costs under the terms of a lease have been under scrutiny ever since. Two recent cases of the Court of Appeal and the Upper Tribunal (Lands Chamber) demonstrate a trend towards a restrictive interpretation, preventing landlords from recovering legal costs in the absence of clear words that would permit them to do so.
The Court of Appeal
In London Borough of Tower Hamlets v Khan [2022] EWCA Civ 831, the landlord was seeking to recover costs incurred in obtaining a determination that service charges were payable, on the grounds that the determination was required as a pre-condition to the forfeiture of the lease and that the costs were therefore “incidental” to the service of notice under section 146 of the Law of Property Act 1925. Noting that costs “incidental to” proceedings were different from costs incurred “in contemplation” of those proceedings, the Court of Appeal focused in its decision on the precise meaning of the word “incidental” and held that its natural meaning was to suggest something subordinate.
In circumstances where no section 146 notice had actually been prepared, it was doubtful whether the costs of proceedings to obtain a determination that sums were payable were incidental to it. Moreover, to hold that the substantial costs involved in conducting these proceedings were incidental to the preparation and service of the notice would be “a case of the tail wagging the dog”: Contractreal Ltd v Davies [2001] EWCA Civ 928.
The Upper Tribunal
In Dell and another v 89 Holland Park (Management) Ltd [2022] UKUT 169 (LC); [2022] PLSCS 113, the relevant costs recovery clause was contained in the service charge provisions. The landlord, a lessee-owned management company, had been engaged in hotly contested litigation with its neighbour regarding the proposed development of the neighbouring plot. In so doing, the landlord had incurred £2.7m in legal fees and sought to recover a contribution towards those costs through the service charge.
The relevant provision allowed the landlord to recover the expenditure incurred in employing persons or taking steps as may be “necessary or advisable for the proper maintenance safety and administration of the Building”. The eventual service charge bill to the leaseholder appellant was an “eye-watering” £430,411.50. In one service charge year alone, the landlord had spent over 40 times as much on legal costs as on regular expenditure.
A clause using near identical wording had previously been held to permit the recovery of legal costs expended by a landlord in taking action against a neighbour for an injunction to restrain works to the party wall between two properties in the absence of an award under the Party Wall etc. Act 1996 (see Assethold Ltd v Watts [[2014] UKUT 537 (LC); [2014] PLSCS 359). This was a significant decision at the time given that the clause in question made no specific mention to legal costs. The deputy president held: “It seems to me to be wrong in principle to start from the proposition that, with certain types of expenditure, including the cost of legal services, unless specific words are employed no amount of general language will be sufficient to demonstrate an intention to include that expenditure within the scope of a service charge. Language may be clear, even though it is not specific.”
A number of commentators were of the view that Assethold had marked a shift in the approach to the recovery of legal costs, making it more likely that costs would be recoverable even when specific costs language was not used. Assethold was also felt to be compatible with the later decision in Arnold v Britton because of the dicta in that case that made it clear that service charge clauses were not subject to any special rule of interpretation requiring them to be construed restrictively.
However, a different conclusion was reached in Dell. Though there was no doubt in the Upper Tribunal’s mind that Assethold was correctly decided, the focus of the words used was clearly on matters of practical management and maintenance, not on ruinously expensive litigation. It was compelling that the lease in question did make specific reference elsewhere to legal costs that the lessees were obliged to pay for (such as the costs of enforcing covenants against other lessees) but did not refer to costs of defending litigation or responding to a neighbour’s planning application. Moreover, unlike in Watts, where litigation restrained the neighbour from causing actual physical damage to the party wall, in Dell there was no such imminent risk. Indeed, the Upper Tribunal held that it could not imagine any circumstances in which objecting to a neighbour’s planning application would fall within the costs clause concerned.
Clarity is key
Both of the clauses involved in the above cases are commonly found in leases. Though every lease must be construed against its own particular background, the above cases are certainly reflective of an increased requirement for clarity before legal costs will be recoverable. Furthermore, it seems that both cases indicate a return (for the time being at least) to traditional principles of construction.
Katie Gray is a barrister at Tanfield Chambers
