Recovering Costs from Leaseholders
If the freeholder is going to pursue non-payment of service charges (which is highly likely) then they are going to be responsible for the initial outlay which technically is classed as an administration charge. Providing that recovery is ‘reasonable’ then they can be recovered from the individual or if the legal costs incurred by the freeholder are included in the list of services that they provide, they can be recouped as a service charge and apportioned across all leaseholders.
However, many old leases (i.e. written before 1996) will not contain a specific clause applicable in either 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 (restrictions on and relief against forfeiture of leases and under-leases) and s147 of the Law of Property Act 1925′ (relief of notice to effect decorative repairs).
Note: Forfeiture is the right of the freeholder to take back the lease (and subsequently the property) due to breaches committed by the leaseholder and before the natural expiry of the unexpired lease terms.
Under s146(3) of the Law of Property Act 1925 an obligation is however 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.
However, whilst it may be arguable that issuing a claim for the payment of the service charges and ground rent is a precursor to forfeiture proceedings, using it as an argument for recovery must be given very careful consideration as a) it may be challenged which will increase costs and b) forfeiture may ultimately prove to be unworkable.
More on forfeiture can be read here.
LIMITING FREEHOLDER COSTS
The First Tier Tribunal (FTT) has some powers to control landlord costs under s20c of the Landlord and Tenant Act 1985 (limitation of service charges: costs of proceedings) such as making a ruling limiting the right of the landlord to pass his costs back to the leaseholders through the next year’s service charge, this is made at the Tribunal’s discretion. The leaseholder generally has to win a considerable amount of a case in order to have a chance of getting the landlord’s costs limited.
This power to limit costs doesn’t however apply where the landlord is entitled to some of their costs by statute, nor does it apply in many cases 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. In such cases the Tribunal’s powers to limit costs under s20C become immaterial and the leaseholder is obliged to pay the landlord’s costs to the extent that they are ‘reasonable’.