On Monday 22 November 2021, the Court of Appeal (Newey, Stuart-Smith & Andrews LJJ) handed down judgment in an important case in service charge disputes. David Peachey (led by Mark Warwick QC) appeared for the respondent landlord.
The case, Kensquare Limited v Boakye  EWCA Civ 1725, dealt with two main issues. The first issue was whether time was of the essence for an interim service charge demand, which had been served after the date for payment of the interim demand and, with respect to one demand, after the end of the relevant service charge year. The tenant succeeded on this point, meaning that the landlord will need to seek to recover the relevant service charges from this particular tenant by way of a final demand (time is not usually of the essence in final service charge demands).
The second issue asked whether a landlord can recover costs that it has incurred in previous litigation with the tenant, by using the provisions of the lease, as opposed to by way of a costs order by the FTT in those earlier proceedings. There were two limbs to this second issue – recovery from the individual tenant by way of administration charge, and recovery from the tenants as a whole through the service charge. This is a much-litigated issue, on which there have been numerous decisions on various wordings in previous leases.
The Court of Appeal held that, under this lease, the landlord could recover the relevant litigation costs from the individual tenant. However, the service charge provisions were not sufficiently wide to include the legal costs of pursuing that tenant for service charge arrears. The landlord could not, therefore, recover those litigation costs from the tenants as a whole through the service charge.
The relevant background
Ms Boakye was the long leaseholder of a flat in Kensington, pursuant to a 125-year lease executed in 1982. She did not pay the service charges due under the lease for a number of years. Pursuant to s.81(1) of the Housing Act 1996, a landlord cannot forfeit a residential lease for failure to pay service charges unless a court or tribunal has determined that the service charges are payable, or the tenant admits that they are payable. Ms Boakye did not admit that the service charges were payable. As such, in 2017, the landlord applied to the First Tier Tribunal ("FTT") for a determination that Ms Boakye's was liable for the service charges ("the 2017 proceedings"). This was to enable the landlord to enforce by way of serving a s.146 notice and, if necessary, to forfeit the lease.
At the conclusion of the 2017 proceedings, the FTT found that the relevant service charges were payable in full, but made no order for costs. The landlord served a s.146 notice with respect to the service charges but the tenant did not pay. Eventually, the tenants' mortgagee paid the outstanding service charges to the landlord.
Some time after the 2017 proceedings, the landlord demanded further interim service charges. However, the demands were made after the date on which the interim service charges were due to be paid, and in one case after the end of the relevant service charge year. The landlord also demanded, by way of administration charge, the legal costs that it had incurred in prosecuting the 2017 proceedings. The tenant refused to pay, and in late 2019 the landlord issued further applications in the FTT for determinations of the tenants' liability to pay the interim service charges and the legal costs of the 2017 proceedings.
The interim service charge demands
The FTT found that the service charge demands did not comply with the machinery of the lease. The landlord appealed to the Upper Tribunal ("UT") where the judge found that time was not of the essence with respect to service of the demand and that the relevant machinery had been complied with.
The tenant appealed to the Court of Appeal. Giving the court's judgment on 22 November 2021, Newey LJ held that the "the presumption against time being of the essence is displaced" by the service charge machinery in the lease.
Costs recovery by the landlord under the lease terms
This will likely be the more important issue for practitioners. The landlord relied on the following covenant given by the tenant ("the Costs Covenant"):
"To pay all costs charges and expenses (including Solicitors' costs and Surveyors' fees) incurred by the Lessor for the purpose of or incidental to the preparation and service of a Notice under Section 146 of the Law of Property Act 1925 notwithstanding forfeiture may be avoided otherwise than by relief granted by the Court..."
The FTT decided that the Costs Covenant only entitled the landlord to the costs of actually drafting the s.146 notice itself, a mere £192.20 out of the thousands claimed by the landlord with respect to the 2017 proceedings.
The lease also permitted the landlord to recover the following costs from the tenants as a whole, by way of the service charge ("the Service Charge Provision"):
"The cost of employing such professional advisers and agents as shall be reasonably required in connection with the management of the Building"
The FTT found that lawyers engaged by the landlord for the recovery of service charges were not "professional advisers... [engaged] in connection with the management of the Building". The overall consequence of the FTT's decision was that the landlord could not recover its legal costs, either from the defaulting tenant or from the tenants as a whole, even though it had won the 2017 proceedings.
The landlord appealed, successfully, to the Upper Tribunal on both points. The tenant, Ms Boakye, then appealed to the Court of Appeal.
The Court of Appeal's decision relating to costs
With respect to the Costs Covenant, the tenant pointed out to the Court of Appeal that, until 1996, there was no requirement for a determination of breach, and therefore no requirement for any FTT proceedings before a s.146 notice could be served. The tenant argued this meant she could not have covenanted to pay the landlord's costs of any FTT proceedings – such proceedings did not even exist when the lease was executed in 1982.
The landlord argued that the parties would have envisaged changes to the legislative framework during the 125-year term. Fundamentally, and irrespective of the legal framework in 1982, by 2017 FTT proceedings were necessary "for the purpose of" serving a s.146, because no s.146 notice could be served without such proceedings. The Costs Covenant should be given its plain English meaning.
Giving the judgment of the court, Newey LJ agreed with the landlord with respect to the Costs Covenant. He held that:
"[The landlord] had no choice but to bring [the 2017 proceedings] if it wished to serve a section 146 notice. It is true that, at the date of the lease, a landlord did not need to make an application to the FTT (or any other Tribunal or Court) before serving a section 146 notice. That requirement arrived years later... That does not matter, however. The parties to the lease agreed that the tenant should bear costs incurred for the purpose of the service of a section 146 notice, and the costs which Kensquare incurred in the 2017 FTT proceedings fit that description."
Regarding the Service Charge Provision, Newey J understood why the Upper Tribunal found its construction "difficult". However, "on balance" the Service Charge Provision focused on management rather than litigation. A finding that the landlord could recover legal costs under the Service Charge Provision would involve "bringing within the general words of a service charge clause [something] which does not clearly belong there"" (quoting Lord Neuberger in Arnold v Britton).
The landlord could therefore recover the costs of the 2017 proceedings from the tenant, Ms Boakye, but could not add those costs to the service charge payable by the tenants as a whole.
Regarding service charges, this case is notable because, on the particular wording of the lease, the Court of Appeal found that time was of the essence for the service of the interim service charge demand (which is not generally the case with final demands).
With respect to costs, the Court rejected the tenants' argument that the absence of express reference in the Costs Covenant to "proceedings" or "litigation" meant that the landlord could not recover litigation costs. Provided that the plain English meaning covers such costs, no specific words are required.
The Costs Covenant was intended to ensure a defaulting tenant indemnifies the landlord for steps taken to enforce covenants in the lease, even if those steps did not exist at the time of the lease. Therefore, unlike with the Service Charge Provision, recovery of the 2017 FTT costs under the Costs Covenant did not involve "bringing [in] something which does not clearly belong there."
As a general point, the Court of Appeal noted that "comparison with leases which have featured in other cases does not provide a reliable guide to how Ms Boakye's lease is to be construed". The Court of Appeal focused on the natural wording of the clauses in this case, and recorded the principle established in Arnold v Britton that clauses in leases are to be interpreted on their wording and context, just like any other contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.