It’s been 9 years since the Court of Appeal decision in Freeholders of 69 Marina, St Leonards-on-Sea v Oram [2011] EWCA Civ 1258, (“69 Marina”) (see the Judgment here) a decision that was roundly criticised by many commentators at the time and was pronounced as one that would swiftly be overturned.

So, did that occur or is the decision, which was extremely favourable for Landlords, still good law?

69 Marina deals with the question of whether a Landlord can rightfully recover from a defaulting leaseholder legal and associated costs incurred in obtaining a determination in the, then named, Leasehold Valuation Tribunal (the ”LVT”), now known as the First Tier Tribunal, as to the amount of service charges payable by the defaulting leaseholder(s). The dispute was in respect of two distinct clauses in a lease.

Background

69 Marina in St Leonards-on-Sea is a converted block of six flats, five of which were long leasehold.

In 2005 works totalling £19,031.36 were undertaken at the property to remedy some water penetration. The Landlord sought to recover the costs via the service charge, but two of the leaseholders did not make payment.

The Landlord applied to the LVT for a determination that the service charges were payable and for dispensation from the consultation requirements (s.20 Landlord and Tenant Act 1985). The LVT determined that some £17,691.36 was payable and granted dispensation. The leaseholders did not pay the sums claimed and so the Landlord issued proceedings in the County Court and, within those proceedings, also sought an order for the costs of the LVT as well as those now being incurred in the County Court.

The District Judge and, on appeal, Circuit Judge, allowed the claim, including the legal costs as claimed. The Leaseholders appealed to the Court of Appeal.

Common forfeiture costs clauses

Most modern leases provide for the recovery of legal costs from defaulting leaseholders and it is rare to have no contractual costs recovery mechanism. However, cost recovery clauses vary and rarely provide that costs on a full indemnity basis should be payable by the defaulting leaseholder. Instead, the most common cost recovery provisions relied on by Landlords are either, or, a combination of the following:

“incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925”

or

“incurred in or in contemplation of proceedings under Section 146 or 147 of the Act.”

The relevant costs clause in question in 69 Marina contained both of the above.

The reference to s.146 of the Law of Property Act 1925 is a reference to steps preceding forfeiture. A Landlord cannot forfeit a lease for breach of a covenant (other than a covenant to pay rent) without serving a notice on a leaseholder in accordance with s.146LPA 1925. However, by section 81 Housing Act 1996 (as amended) no notice under s.146 may be served in respect of a failure to pay service charges unless the Court or Tribunal has determined that the amount is payable by the leaseholder (or the leaseholder has admitted the same).

The Appeal

The Court of Appeal held that the proceedings in the Tribunal and the County Court fell within the scope of “the preparation and service of” provisions of the cost covenant in the lease. This, they said, were necessary steps to enable service of a valid s.146 notice and, hence, fell within the terms of the covenant.

This was a very attractive outcome, as any other result would have left the Landlord (here a company owned by all/most of the leaseholders) would have had to cover most or all of the legal costs of debt recovery proceedings either via the service charge (where the lease allowed) or from its own pocket. Such an alternative outcome would have provided a ‘no win’ position in this and in future litigation as a defaulting leaseholder would not need to concern itself with costs even if it were to lose the claim made against it.

Conclusion

Leaseholders, or the less well informed advisers representing them, will often seek to dismiss claims for costs by reference to the Court’s limitation on costs (most arrears cases are for less than £10,000 and thus fall within the Small Claims Track in the County Court) or the lease terms and specifically the very type of covenant argued over in this case, the narrower wording of “preparation and service”, rather than the wider wording of “in contemplation”.

As a result of 69 Marina, and the fact that it still remains good law, we are often able to correct our opposition and early settlement is then achieved with full or substantially full costs recovered.

Advice should be obtained on the quality and strength of costs provisions in any lease either before or at an early stage of the recovery process. As experts in this field the KDL Law team are very happy to assist with such advice and/or action. We have seen in recent months a steady increase in the number of arrears cases across England and Wales and thus the need to enforce sadly continues to grow.

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