Legal Update: Landlords’ successful appeal in clawing back lion’s share of costs serves as note of caution to tenants

15 June 2016

Sinclair Gardens Investments (Kensington) Ltd v (1) Paul Kenneth Charles Wisbey (2) Lesley Barbara Mary Wisbey [2016] UKUT 203 (LC)

The Appellant landlord appealed a decision of the First-tier Tribunal Property Chamber (the “FTT”) allowing it just £845 (plus VAT) of the £1,725 (plus VAT) it had claimed in costs for the granting of a lease extension to the Respondent tenants. The appeal resulted in 80% costs recovery.

Background and FTT claim

The Respondents lived in a property under a long lease and at low rent. In August 2014, they served a tenant’s claim to a new lease on the Appellant, pursuant to section 42 of the Leasehold Reform Housing and Urban Development Act 1993 (the “Act”). In October 2014, the Appellant served a counter-notice pursuant to section 45 of the Act, admitting that the Respondents had the right to acquire a new lease. In its notice, the Appellant proposed a premium on the new lease of £10,981. The terms of the new lease were agreed a few months later and the lease was completed on 12 March 2015. The remaining issue that was referred to the FTT concerned the Appellant’s costs in dealing with the matter.

Section 60 of the Act

Section 60 provides that, where notice is given under section 42, the tenant shall be liable for the reasonable costs of and incidental to the granting of the lease (section 60(1)(c)). Once the matter was referred to the FTT, the Appellant submitted a detailed statement of costs which dealt with three categories of work carried out in respect of the new lease, namely:

(a) The Appellant’s solicitor’s work in dealing with the notice of claim and valuation matters;
(b) The solicitor’s work in dealing with the grant of the new lease itself; and
(c) The work done by the valuer (for which costs of £600 plus VAT had been agreed and needed no further consideration).

In total, the Appellant asked for £1,725 – that was £1,350 (including VAT) in costs under sub-heading (a), and £720 (including VAT) under sub-heading (b).

In submissions to the FTT, the Respondents made a number of points, one of which was particularly pertinent: it observed that there had been a previous FTT decision concerning another property the Appellant owned in the same development, in which the Appellant’s solicitors were instructed. In this case, the Appellant had had its costs reduced from £1,725 to £845. The Respondents said that the two situations were “almost identical”. The Respondents further pointed out that there were 21 further lease extensions lodged in respect of other properties within the same development the Appellant owned and that given the repetitive element of work, it was unreasonable for the Appellant’s solicitors to “exploit their monopoly position in their fee charges”.

In the first instance decision, the FTT held that certain items of the Appellant’s solicitor’s work could not be levied to the Respondents as they did not properly fall within the meaning of section 60 of the Act. It said that because the Appellant was taking care of over 20 other applications for lease extensions within the same development, it should have negotiated, or attempted to negotiate, a fixed fee with the solicitors. Finally, the FTT said that it was not necessary for the solicitors to instruct “grade ‘A’ fee earner” to deal with the valuation point.

The FTT applied the same decision as it had done previously and found that costs of £845 plus VAT were reasonable.

Appeal to the Upper Tribunal Lands Chamber (the “UT”)

The Appellant’s submissions in the appeal centred around three main points:

1. That the FTT was wrong to exclude certain elements of the fees in their interpretation of section 60;
2. That it was wrong to say that Appellant should have sought a fixed fee agreement; and
3. That it was wrong to adopt the same conclusion as in the previous case rather than consider the individual facts of the Appellant’s case and the separate bill of costs that had been submitted.

In considering proper service of the counter-notice, the UT held that it was of great importance for the Appellant to instruct a solicitor to consider and properly advise on the Respondent’s claim for a new lease and the terms of the counter-notice. Failure to serve a proper counter-notice would have had serious adverse effects on the Appellant’s position as landlord. Taking these points into consideration, the UT said that it fell within the scope of section 60(1), i.e. the recovery of reasonable costs of and incidental to the matters within sub-heading (a), (b) and (c) above. Instructing a valuer, it said, was reasonable for the purposes of fixing a premium; furthermore, it was found reasonable to instruct a grade ‘A’ fee earner and solicitors with the requisite experience in this specialist area of law to do so.

However, given that this was not a one-off transaction, rather one in a possible series of new leases granted within the development, it could not be said that a reasonable amount of time had been spent on the work by the Appellant’s solicitors. It was found that there had been a clear opportunity to try to negotiate a fixed fee discount which was not taken up by the Appellant. Furthermore, the Appellant had put forward no evidence to show the contrary, nor had offered a good reason as to why it had not at least attempted to negotiate such arrangement. By omitting to do so, the Appellant could not discharge the burden of proving that its solicitor’s fees were reasonable in the circumstances.

In the first instance, the FTT had not made a finding as to an actual figure, or at least the extent of, a possible discount or fixed fee reduction that may have been negotiated if the Appellant had been personally liable for all such costs. Instead, the FTT assessed the costs by reference to the previous case (the sum of £845 plus VAT), and had moreover made a “substantial arithmetic error”. The UT judge therefore could not uphold the FTT’s decision as to what the reasonable costs should have been.

To alight upon a figure, therefore, the UT took into account the full amount of the costs claimed in respect of the solicitors and compared them to the amount of premium. Having taken off £75 in the costs of instructing a valuer, it was found that the Appellant could reasonably have been expected to obtain a discount of 20% of the costs that would have applied had the transaction been a one-off. The total amount of the reasonable costs which the Respondents had to pay, therefore, was 80% of £1,650 – a figure of £1,320 plus VAT.

Appeal allowed in part. Although the sums involved appeared rather modest, the decision could set a precedent for section 60 costs matters for landlords to rely on. Tenants would therefore be well advised to challenge landlords’ costs sensibly, however not push this point too far, as the landlord would likely to receive the lion’s share of its costs if it can show they fell within section 60.

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