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When incurring costs in respect of a property, landlords should consider at an early stage whether these will be recoverable through the tenants' service charges. A right to manage (RTM) company recently failed to persuade the Upper Tribunal (UT) that legal fees it incurred were recoverable from one of its tenants.
The tenant, who was not a member of the RTM company, held a long lease of a flat in a five-storey block. He applied for a determination under Section 27A of the Landlord and Tenant Act 1985 as to whether various service charges were payable.
In respect of charges for legal fees incurred by the RTM company, the tenant was successful. The First-tier Tribunal (FTT) found that a term in the lease referring to 'any other costs and expenses reasonably and properly incurred in connection with the building' had to be read in context. When creating the lease, the parties had sought to identify their respective liabilities, and the absence of any reference to legal costs suggested that the term was not meant to include them. They were therefore not recoverable under the terms of the lease.
The RTM company appealed that aspect of the FTT's decision. It argued that taking legal advice fell within the scope of a clause in the lease allowing it to employ professionals in connection with meeting its obligations, and that the term relating to other costs and expenses was deliberately wide. The tenant pointed out that the original landlord would have had legal advice when the lease was drafted, and claimed that if legal fees were meant to be recoverable, this would have been explicitly stated in the lease.
The UT noted that legal costs relating to membership of the RTM company and the convening of meetings had not been contemplated when the lease was entered into in 1995, before the RTM legislation had been enacted. Furthermore, there was no reason why the costs of running a company should be charged to all tenants when not all of them were members of it.
In considering whether the RTM company's legal fees in respect of disputes with tenants were recoverable, the UT noted that, in three similar cases, the Court of Appeal had concluded that clauses relating to management or provision of services did not permit the landlord to recover such costs. It made no difference whether the dispute was with the claimant tenant or another tenant. Dismissing the appeal, the UT also agreed with the FTT's conclusion on the term in the lease relating to other costs.