Freeholder Cost Recovery
In terms of costs, if the freeholder is going to pursue non-payment of service charges for example then that freeholder is going to be responsible for the initial outlay.
Many old leases (i.e. written before 1996) will not contain a specific clause applicable in this situation. Some, such as my own simply state that the Lessee is ‘to pay the Lessor all costs, charges and expenses (including legal costs and fees payable to a Surveyor) which may be incurred by the Lessor in (or in contemplation of) any proceedings under s146 and s147 of the Law of Property Act 1925’. It is also arguable that issuing a claim for the payment of the service charges and ground rent is a precursor to forfeiture proceedings. Whilst it might not be a strong argument, an attempt to recover such costs could be made to see if they are challenged but this must be given careful consideration as this could not only increase costs but forfeiture may ultimately prove to be unfeasable.
However under s146(3) of the Law of Property Act 1925 an obligation is imposed on all leaseholders to pay the “reasonable costs and expenses properly incurred by the lessor in the employment of a solicitor and surveyor or valuer or otherwise in reference to any breach giving rise to the right of re-entry or forfeiture”. This obligation is regardless of whether the lease allows the recovery of legal costs from an individual leaseholder or not.
Technically such costs are classed as administration charges and providing that recovery is reasonable then they can be recouped from the individual. This is not to be confused with costs recouped as a service charge paid on an apportioned basis by all leaseholders.
In cases where the lease reserves the service charge as rent and provides that it is recoverable as rent, there is no need to serve a section 146 notice as a precursor to forfeiture proceedings in the event of non-payment. Such service charges nevertheless fall within the statutory definition of “service charges” under s18(1) of the Landlord and Tenant Act 1985 and are therefore subject to statutory protection. Consequently, forfeiture of the lease for a non payment of service charges reserved as rent is subject to restrictions on forfeiture that are imposed by s81 of the Housing Act 1996. These largely mirror the requirements of s168 of the 2002 Act. This same section also contains provisions allowing recovery of the Landlords costs, specifically ‘a lessor shall be entitled to recover as a debt due to him from a lessee, and in addition to damages (if any), all reasonable costs and expenses properly incurred by the lessor in the employment of a solicitor and surveyor or valuer, or otherwise, in reference to any breach giving rise to a right of re-entry or forfeiture which, at the request of the lessee, is waived by the lessor, or from which the lessee is relieved, under the provisions of this Act’.
CONTROLLING THE FREEHOLDER’S COSTS
The Tribunal does have some powers to control the landlord’s costs under s20C of the Landlord and Tenant Act 1985 (limitation of service charges: cost proceedings). The Tribunal can make a ruling limiting the right of the landlord to pass his costs back to the leaseholders through the next year’s service charge. However, this award is made at the Tribunal’s discretion, depending on the outcome of the case. The leaseholder generally has to win a not inconsiderable amount of the case in order to have a chance of getting the landlord’s costs limited.
This power to limit costs doesn’t apply a) where the landlord is entitled to some of their costs by statute, and b) where the landlord initiates the action for breach of the lease. In the latter case, the landlord can argue that their costs are “administration costs” rather than service charges so the Tribunal’s powers under s20C disappear and the leaseholder is obliged to pay the landlord’s costs to the extent that they are “reasonable”.