Landlord’s Legal Costs incurred “for the purpose of” Forfeiture Proceedings

In the recent case of Assethold Limited v Nelio Patricio Teixeira Franco, the Upper Tribunal reaffirmed the recoverability of the costs of First- tier Tribunal proceedings under a section 146 costs clause in a lease.

By way of background, Mr Franco, is the long-leasehold owner of a flat in a block known as 9, Oval Road, Dagenham. The freehold owner is Assethold Limited. In 2017, Mr Franco was in arrears of service charge under his lease to the tune of ￡5,282.09. The freeholder, therefore, brought county court proceedings for the debt.

The particulars of claim in the county court stated “The claimant has brought this claim as they require a determination of the outstanding sums for the purposes of section 81 of the 1996 Housing Act pursuant to an intention to serve a notice under section 146 of the Law of Property Act1925.”

Subsequently, the county court transferred the claim to the FTT for determination.

At the hearing, the FTT determined that the lease made no provision for payment of costs of the proceedings and, therefore, the sum of ￡2,040, was not payable by the leaseholder.

On appeal, the Upper Tribunal reversed the decision of the FTT for the following reasons:

1.????The lease contains a covenant by the leaseholder to pay all costs charges and expenses (including Solicitors’ costs) incurred by the Landlord for the purpose of or incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925.

2.????A section 146 notice is an essential precursor to forfeiture of a lease for breach of covenant. In relation to premises let as a dwelling, under section 81 of the Housing Act 1996, a landlord cannot forfeit a lease for failure by a leaseholder to pay a service charge or administration charge unless the amount is determined by a tribunal, court, or the leaseholder has admitted the debt.

Therefore, a landlord who wants to serve a notice under section 146 of the Law of Property Act 1925 in order to forfeit a lease for non-payment of service charges must first obtain a determination that they are payable.

In this case, the lease enabled the landlord to recover as an administration charge the costs of the county court and the FTT proceedings brought as a precursor to forfeiture, being “for the purpose of” the preparation and service of a section 146 notice, provided that the freeholder could show that the costs were indeed incurred for that purpose.?

?Lesson

While each case will always depend on the particular wording of the lease, where costs are incurred for the purpose of preparing a?s.146?notice, the freeholder must prove that it incurred the costs at a time when it had an intention of forfeiting the lease or serving a?s.146?notice. Any costs incurred in the FTT or the county court must be demanded as an administration charge. The leaseholder may apply to the FTT for it to determine if the administration charge is reasonable.?