In Fairbairn v Etal Court Maintenance Ltd [2015] UKUT 639 (LC), the Upper Tribunal (Lands Chamber) (“Upper Tribunal”) considered whether a landlord could recover through the service charge the sum it had paid to settle proceedings brought against it by a tenant, for the landlord’s failure to comply with its repairing covenants in a timely manner and the legal costs incurred in securing the settlement.
The landlord had not complied with its repairing covenants under the lease in a timely manner (the breach of covenant had occurred in 2010, the landlord admitted liability in November 2011 but did not actually remedy the breach until summer 2012). The tenant commenced proceedings against the landlord in March 2012 claiming specific performance of the landlord’s repairing obligation, damages and costs. The parties settled the claim with the landlord admitting its liability in January 2013. The landlord paid an amount in respect of the tenant’s legal costs and agreed to pay a sum in settlement of the claim (“Settlement Sum”). The landlord had not yet paid the Settlement Sum to the tenant.
The landlord sought to recover through the service charge payable by other tenants in the residential estate (comprising three blocks of flats) its own legal costs incurred in securing the settlement and the amount it had paid in respect of the individual tenant’s legal costs in the earlier dispute. One of the tenants objected. That tenant’s lease obliged the landlord “to do all other acts and things for the proper management administration and maintenance of the blocks of flats as the landlord in its sole discretion shall think fit”. The landlord could recover the costs of doing so through the service charge.
At first instance, the First-tier Tribunal (Property Chamber) (“FTT”) concluded that the Settlement Sum and the legal costs incurred in securing the settlement could be recovered through the service charge.
The Upper Tribunal overturned the FTT’s decision, deciding that a sum paid to settle a tenant’s successful claim for damages for a landlord’s breach of covenant did not readily fall within the scope of expenditure on proper management and administration of the buildings.
It further decided that such payments have nothing to do with the management and administration of the building. They were costs that the landlord had incurred to protect itself from the consequences of its own previous omissions. Therefore, the Settlement Sum and the legal costs incurred in securing the settlement could not be recovered through the service charge.
Whether the landlord could claim for the cost of the remedial work itself was not the issue in contention in this case (generally, whether landlords can depends on the drafting of the lease in question; it would be a defective lease if a landlord could not).
Whilst this decision is based on common sense, it is a stark reminder to landlords that legal costs will not always be recoverable from tenants despite the wording within the lease.
Michael is a senior associate in our dispute resolution team based in Exeter. If you would like to contact the team, then please call 01392 210700 or email drx@stephens-scown.co.uk.