Train; Office; Train; Home – The Renaissance of the Commute is upon us!
Sometimes the commute can be a welcome break from having tasks to do – no reason to feel guilty about not cleaning the flat: you aren’t there. No need to ring anyone: train’s too busy anyway. No ability to do work – it is a simple time when you can be alone with your thoughts (although regular readers of my articles will know I always find time for quiet reflection with a cup of tea).
But why has mindset suddenly become an important, and potentially costly consideration for lessees and lessors?
Costs and Forfeiture
A question recently came before the Court of Appeal in No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119 where the Court were asked to consider whether a landlord was entitled to recover their legal costs arising from pursuing unpaid service charges (which were, for a portion, successfully challenged).
Many tenants will be familiar with clauses similar to:
To pay to the Lessor all costs charges and expenses incurred by the Lessor under or in contemplation of any proceedings under section 146 or 147 of the Law of Property Act 1925.
For those less familiar with it, Section 146 is the process under which a landlord will seek to forfeit a tenant’s lease.
This is the clause a landlord will generally (in the absence of some other form of recovery provision) seek to rely on when seeking to recover their legal fees, from a tenant, incurred in pursuing that tenant for some form of breach of lease (often say a failure to pay service charges).
It is worth noting here that with residential leases there is an added layer of protection to tenants regarding unpaid service or administration charges (rent is treated slightly differently), in that there must either be a determination of breach, or admission of breach before a landlord can seek to forfeit (“Section 81 HA 1996 conditions”) – as such there are several hoops for a landlord to jump through before they could forfeit, even if they wanted to.
Keen readers will have noted that the above form of wording does not require forfeiture to be an immediately available remedy for this mechanism to be activated, merely that it is being ‘contemplated’.
A landlord’s default position (if they are aware of forfeiture in principle) will be that pursuing any breach of lease is inherently a precursor to forfeiture and that forfeiture cannot be given further / proper consideration until after the Section 81 HA 1996 conditions have been complied with (and this was submitted to the Court of Appeal) – surely the Court cannot expect you to prove what you were abstractly thinking about the moment you became of even the first penny of arrears, can they?
The Judgment
Lord Justice Henderson, delivering the leading judgment in this case, at para 57 held (distinguishing a different case):
…it [is] not establish[ed], either expressly or by necessary implication, that legal costs are incurred by a landlord in contemplation of proceedings under section 146, in a clause similar to [the] clause …in the present case, merely because they are incurred in relation to proceedings before the FTT which could in theory be the necessary prelude to service of a notice under section 146. The words “in contemplation of any proceedings” in the clause … do in my view require an investigation of the landlord’s state of mind at the time when the costs were incurred, although any intention formed at that stage to serve a section 146 notice will of necessity be contingent upon the [Section 81 HA 1996 conditions] being satisfied.
For those familiar with these forms of clauses, and arguments, they will know that this is not a new position for the courts to adopt – it previously being taken by the Upper Tribunal in Barrett v Robinson [2014] UKUT 322 (LC).
What the judgment does do however is set a precedent that there is a clear, positive obligation on the landlord to prove that any step which was taken, for which they will later be seeking their costs, was taken in contemplation of forfeiture (no matter how many other steps may be required before forfeiture becomes available).
For the curious reader – the landlord did not prove in this case that the costs (circa £500,000) were incurred in contemplation of forfeiture; there was a finding of fact in the FTT that:
“…at no point has the [Landlord] ever evinced an intention to forfeit or to take proceedings for forfeiture…”
With that finding of fact not being challenged in either the UT of the Court of Appeal, it was not a point which could latterly be taken hand as such the landlord had not proven that this clause was activated such as to later be relied on.
What Next?
With the majority of leases being drafted on different terms to one another it is difficult to say that this issue is now settled and closed – although this is a fairly familiar form of wording. The Court of Appeal were also live to the fact that by whom proceedings were first issued, the specific wording, whether there was actually a breach by the tenant and the general circumstances surrounding any dispute may impact the enforceability of these forms of clauses.
What is clear however is that it is incumbent on the landlord to demonstrate that any costs incurred (which they are later intending to recover under this form of clause) were done so in contemplation of forfeiture.
It is unclear what the Tribunal will require as evidence of ‘contemplation’ – a constructive knowledge of the process? An innocuous statement inferring that it was considered? An express threat at a wholly premature stage? That will be the subject of other decisions yet to come.
For me, I will take the lesson that sometimes the old adage of ‘keeping your thoughts to yourself’ may not always be the best option (well, at least if that thought is the contemplation of forfeiture) and wait with interest to see how landlords seek to prove what they were actually thinking about on the 08.21 to Waterloo.
Charles Jamieson is an experienced solicitor in the Bishop & Sewell Dispute Resolution Department, taking instructions in Landlord & Tenant, Property, Commercial and Chancery disputes. If you would like to speak with Charles, or any member of the dispute resolution team, contact Bishop & Sewell by email to: [email protected].
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
