First-tier Tribunal Allows Recovery of Landlord's Legal Costs in Service Charge Disputes

© CROWN COPYRIGHT 2025

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON00AG/LSC/2025/0642 Properties : Flats 6, 10 & 11, [NAME], [ADDRESS] [POSTCODE] Applicant : [redacted] : [NAME]. [COUNSEL]. [NAME] Respondent : [redacted] Company) [RESPONDENT]. Representative : [NAME]. [COUNSEL] [NAME] of application : Application for a determination of liability to pay and reasonableness of service and/or administration charges Tribunal : Judge Adrian Jack Date of Decision : 22nd September 2025

DECISION

2 Background 1. By an application dated 28th January 2025 the applicant tenant seeks a determination under section 27A of the Landlord and Tenant Act 1985 as to whether service charges are payable in respect of certain legal expenses incurred by the respondent landlord.

2. An oral case management hearing took place on 10th June 2025 at 10 [ADDRESS] [POSTCODE] attended by the applicant, his representative [NAME] [COUNSEL] [NAME], and the respondent’s representative, [NAME] [COUNSEL] [NAME]. It was agreed that the final decision would be made on the papers, which is what I have now done.

3. The application concerns legal costs incurred by the respondent in respect of separate legal proceedings brought by the applicant in the County Court in 2023 in respect of two commercial units in the building with case reference K00CL471. That case was due for trial on 5th August 2025 but it appears to have been adjourned. The total legal costs which the respondent seeks to recover through the service charge on the residential flats are set out in Appendix 2 of the applicant’s case and amount to £108,870.12, but there are presumably ongoing legal costs, so this amount is not final.

4. The directions note that at the case management hearing it was agreed that this application would be expressly limited in two ways.

5. Firstly, it was agreed that the application would be limited to the service charge years ending on 24 December 2023 and 24 December 2024 only.

6. Secondly, it was agreed that the only issue for the Tribunal to determine is that of whether or not the terms of the relevant leases permit the respondent to recover the legal costs they have incurred in the County Court proceedings referred to above through the service charge. The applicant expressly conceded that, if the Tribunal concluded that the lease did permit such recovery, the sums demanded by the respondent for legal costs in those years are both reasonable and payable.

7. In his Reply the tenant has sought to go behind this concession, but in my judgment he is not entitled to. He has not sought to amend his case and no evidence has been adduced about the reasonableness of the amount of legal expenses incurred. The facts 8. So far as relevant, there is very little dispute about the facts. The [NAME] consists of seventeen residential flats and two commercial units. Until 2005 the freehold was owned by the applicant. In that year the respondent was able to exercise its right to enfranchise and purchased the freehold. The terms were decided by a decision of (what was then) the Leasehold Valuation Tribunal dated 27th January 2025.

3 9. The applicant retained the two commercial units and flats 6, 10 and 11. Flats 6 and 10 have been joined together, so as to form one flat, known as Flat 10. Flat 11 and Flat 6/10 are each held on identical leases.

10. The leases grant a term of 999 years at a peppercorn rent. Clause 2(2) contains a tenant’s covenant to “pay and contribute to the [NAME] a sum equal to a fair and reasonable proportion of” various outgoings on the part of the landlord including “(ix) the fees of the [NAME] for the collection of the rents of the flats in the Building and for the general management thereof.” The service charge is not reserved as rent.

11. It is the landlord’s practice to divide expenses into two categories. The first are expenses born solely the residential tenants. The second are expenses borne by both the residential and the commercial tenants. The County Court proceedings are largely concerned with whether the categorisation adopted by the landlord is correct and as to whether the landlord is recovering more than 100 per cent of its outgoings. The current applicant, as claimant in the County Court proceedings, asserts that he has been wrongly charged. He also seeks rectification of the leases of the commercial units. The dispute has been ongoing since 2018. The applicant seeks to recover overpayments made by him in his capacity as the tenant of the commercial units since 2015. The respondent counterclaims for what it says are the outstanding service charges. The caselaw on the construction of the leases 12. Both sides relied on the Court of Appeal decision in [COMPANY] v Boakye [2021] EWCA Civ 1725 for the relevant principles and the previous caselaw. There the Court of Appeal said: “45. Paragraph 5 of the seventh schedule to Ms [NAME] lease provides for service charges to encompass: ‘The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building.’ 46. [NAME] contends that this provision allows it to recover its costs of the present proceedings and those of 2017 as service charges. The FTT, however, decided otherwise. After citing [COMPANY] v Mears (1989) 21 HLR 147 (“Sella House”), the FTT said in paragraph 101 of its decision: ‘While such questions of construction are very fact sensitive, the tribunal considers that both the clauses and the factual matrix in the present case are materially similar to Sella House. The tribunal does not consider that the language used in paragraphs 5 and 9 can be said to show a clear or unambiguous intention to extend to legal costs incurred in obtaining a determination of service charges.

4 On the contrary, on a natural reading neither clause appears to be intended to legal costs.’ 47. On appeal, Judge Cooke attached particular importance to [NAME] v [COMPANY] (1995) 27 HLR 196 (“[NAME]”). Differing from the FTT, she concluded in paragraph 95 of her decision: ‘Reverting to the clause in question in the present appeal, I find its construction difficult. The purpose in the relevant clause is the management of the building. Of the cases cited by counsel, it comes closest to the one in [NAME], although it is arguably wider because of the words “in connection with”. I do not think that the different form of the legal action in [NAME], involving a claim for an injunction, makes any difference to the construction of the clause as [counsel for Ms [COUNSEL]] argues. I take the view that the landlord’s legal costs incurred in the 2017 and 2019 proceedings were incurred in connection with the management of the building and are therefore recoverable as part of the service charge.’ 48. In [NAME], [NAME], with whom [NAME] and Waite LJJ expressed agreement, said at 201 that he was not able to derive any assistance from Sella House, the language of the relevant provision being very different from that in the case before him. The lease at issue in [NAME] referred to ‘all … costs properly incurred by the landlord in carrying out its obligations … under the covenants and conditions contained in the Head Lease … and in the proper and reasonable management of in and about [Broadwalk House]’. [ADDRESS] of Appeal held that the landlord was entitled to include in the service charges costs which it had incurred in litigation against the tenant in which the tenant had been largely successful. [COUNSEL] LJ said at 202: ‘[Counsel for the defendant landlord] in my opinion was right to submit that the definition of the landlord’s costs was not drawn by reference to the costs of successful (as opposed to unsuccessful) action taken by the landlord in its management of Broadwalk House. All costs properly incurred in the proper and reasonable management of the property were included and they will include costs of unsuccessful proceedings properly brought in managing the property. Throughout the defendant was acting with legal advice. A landlord faced with a tenant who had acted in flagrant breach of covenant is always likely to bring forfeiture proceedings against the tenant even if relief from forfeiture is likely to be granted on terms at the end of the day. I find it difficult to draw a satisfactory line between the costs of enforcing tenant’s covenants and of claiming an injunction on the one hand and the costs of forfeiture

5 proceedings on the other. All such costs may be described as costs incurred in managing the property, and it matters not whether the rights enforced are rights under covenants prohibiting certain acts by the tenant or rights conferred by the condition for re-entry …. The judge, although ruling against the defendant on most issues did not say that it had acted improperly or unreasonably in the litigation. I would therefore hold that the costs incurred by the defendant in the litigation were costs which are included in the landlord’s costs and so recoverable from underlessees by way of the service charge.’ 49. In Cannon v 38 [COMPANY] [2016] UKUT 371 (LC), Judge Bridge, in the Upper Tribunal, observed at paragraph 64 that [NAME] is ‘a decision which, with the benefit of judicial hindsight, now fits somewhat uneasily with the weight of other authority.’ 50. Turning to Sella House, on which the FTT relied, the landlord there sought to recover by way of service charge legal expenses incurred in pursuing other tenants for rent and service charges. The landlord argued that the expenditure arose from its fulfilling its obligations under clause 5(4)(j) of the lease, which required the landlord: ‘(i) To employ at the Lessors’ discretion a firm of Managing Agents and Chartered Accountants to manage the Building and discharge all proper fees salaries charges and expenses payable to such agents or such other person who may be managing the Building including the cost of computing and collecting the rents and service charges in respect of the Building or any parts thereof (ii) To employ all such surveyors builders architects engineers tradesmen accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building.’ [NAME] LJ, albeit after ‘certain hesitation’, ‘[o]n the whole’ came to the conclusion at 156 that ‘the judge was right in his view that the fees of solicitors and counsel are outside the contemplation of either limb of Clause 5(4)(j) of the lease.’ Agreeing, the other member of the Court, [NAME] LJ, said at 156: ‘I add only a few words on the issue whether legal fees can be included in the service charge under this lease. Nowhere in Clause 5(4)(j) is there any specific mention of lawyers, proceedings or legal costs. The scope of (j)(i) is concerned with management. In (j)(ii) it is with maintenance, safety and administration. On the respondent’s argument a tenant, paying his rent and

6 service charge regularly, would be liable via the service charge to subsidise the landlord’s legal costs of suing his co-tenants, if they were all defaulters. For my part, I should require to see a clause in clear and unambiguous terms before being persuaded that that result was intended by the parties.

Accordingly, I agree with my Lord that the terms of paragraph (j) of clause 5(4) do not extend to cover legal costs in the service charge.’ 51. A similar issue arose recently in [COMPANY] v [NAME] [COMPANY] [2021] EWCA Civ 1119 (“[NAME]”). The landlord was there seeking to recover from a tenant a proportionate share of costs which the landlord had incurred in litigation with the tenant. The landlord relied on, among other things, service charge provisions referring to: ‘The reasonable and proper fees and disbursements … payable by the [NAME] to procure the proper management of the Residential Premises as contemplated by the provisions of this Underlease, the provision of services, the calculation of service charges and the provision of service charge accounts ….’ The Deputy President [of the Lands Chamber of the Upper Tribunal] considered that “[t]he language is directed towards the provision of management services, not litigation”, and Henderson LJ, with whom Underhill and Dingemans LJJ agreed, said that he was satisfied that the Deputy President had been right. Henderson LJ thought it ‘apposite … to have regard to’ Sella House, ‘where it was held that generally worded provisions in the service charge machinery contained in a residential long lease of a flat in Central London did not include litigation costs incurred by the landlord’ and, after quoting [NAME] LJ’s judgment in that case, Henderson LJ said in paragraph 71: ‘I consider that, mutatis mutandis, the same points may be made about the provisions with which we are now concerned.’ 52. It is also relevant to note the guidance as to the interpretation of service charge provisions which was given in Arnold v Britton [2015] UKSC 36, [2015] AC 1619. Lord Neuberger, with whom Lords Sumption and [NAME] agreed, said in paragraph 23: ‘… [R]eference was made in argument to service charge clauses being construed “restrictively”. I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. Even if (which it is unnecessary to decide) a landlord may have simpler remedies than a tenant to enforce service charge

7 provisions, that is not relevant to the issue of how one interprets the contractual machinery for assessing the tenant’s contribution. The origin of the adverb was in a judgment of Rix LJ in [NAME] v Earl Cadogan [2010] HLR 412, para 17. What he was saying, quite correctly, was that the court should not “bring within the general words of a service charge clause anything which does not clearly belong there”.’ Accordingly, service charge provisions are not subject to any special rule of interpretation, but the Court should not ‘bring within the general words of a service charge clause anything which does not clearly belong there’.” 13. [ADDRESS] of Appeal held that the wording in that lease was not sufficiently broad to permit the landlord to recover the legal costs.

14. I was also referred to [COMPANY] v Howard [2025] UKUT 232 (LC), but in my judgment the wording of the lease there is too different to the wording of the two leases in issue here for the case to be applicable here.

15. The case of [COMPANY] v Takeda [2005] 3 EGLR 45 was also cited. The wording of the lease there was similar to that in the current case and supports the landlord’s argument. However, it is merely a decision of the County Court.

16. The tenant also relied on [ADDRESS] ([ADDRESS]) RTM Co [COMPANY] v Mirchandani [2024] UKUT 205 (LC), a decision of the Upper Tribunal. The clause there permitted the landlord “(i) To employ at the Lessors’ discretion a firm of Managing Agents and Chartered Accountants to manage the Building and discharge all proper fees salaries charges and expenses payable to such agents or such other person who may be managing the Building including the cost of computing and collecting the rents and service charges in respect of the Building or any parts thereof [and] (ii) To employ all such surveyors builders architects engineers tradesmen accountants or other professional persons as may be necessary or desirable for the proper maintenance safety and administration of the Building.” 17. In that case, the “wrap-up” clause did not refer to legal expenses and Judge Cooke held that a general clause allowing recovery of employees could not be widened to include legal costs.

18. Judge Cooke followed the Court of Appeal decision in 89 [COMPANY] v Dell [2023] EWCA Civ 1460, [2024] EGLR 10, which held (reading from the headnote):

8 “Clause 4(4)(g)(ii) of the lease obliged the landlord, if it considered it necessary or advisable, to employ professionals for the proper maintenance of the building. That included taking specialist advice. The question was whether those general words, and clause 4(4)(l), included instructing legal professionals and expert witnesses in litigation against a third party, or in connection with an objection to a third party's planning application. Clause 4(4)(l) was a sweeper clause and should not be regarded as extending the range of what the landlord could do, or construed to bring into the service charge expenses that could not otherwise have been included. The FTT was correct to conclude that the disputed costs were not recoverable under clause 4(4)(g)(ii) or (l).” Conclusion 19. I have to stand back and construe the term “the fees of the [NAME] for the collection of the rents of the flats in the Building and for the general management thereof” against the facts. There is an oddity in the reference to the “collection of the rents”, since the rent reserved was merely a peppercorn and the service charges were not reserved as rent. However, the express reference to “the fees of the [NAME]’s… Solicitors” clearly shows that recoverability of legal expenses through the service charge was something within the contemplation of the parties to the leases. Since there could not be legal expenses in connection with the collection of rent, the legal expenses which would have been in contemplation must have been in connection with the “general management” of the Building.

20. If that is right, then it is necessary to consider what would have been envisioned as falling within the category of “general management”. The most obvious forms of management which might involve legal expenditure by a landlord are breaches of covenant and service charge disputes. Unlike some of the cases cited above where recoverability was refused, therefore, clause 2(2)(ix) envisages litigation costs being incurred.

21. The County Court proceedings in the current case are in my judgment a quintessential form of service charge dispute.

Accordingly, the landlord’s costs of those proceedings are recoverable under clause 2(2)(ix). Costs 22. The Tribunal has a discretion as to the costs payable to the Tribunal. These comprise the application fee of £110 paid by the applicant. Since he has lost, in my judgment I should make no order for costs in respect of those costs.

DECISION (1) None of the legal costs in dispute are disallowed.

9

(2) No order in respect of the fees payable to the Tribunal.

Signed: [NAME] 22nd September 2025