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New limits on recovery of landlord's costs

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By Simon Burdett-Dixon

As of 6 April 2017, courts and tribunals have new powers under section 131 of the Housing and Planning Act 2016 which gives them discretion to restrict landlords of long residential leases from recovering their legal costs from lessees.

By virtue of this new legislation, courts and tribunals have a very wide power: Section 131 states “the relevant court or tribunal may make whatever order on the application it considers to be just and equitable.”

Some leases allow a landlord to recover relevant litigation costs within the court proceedings by means of indemnity clauses. It is common to see a clause which states that costs are recoverable where they are “incidental to” or “in contemplation of” section 146 and 147 notices and associated proceedings, or simply in the event of lessee’s breach.

If a lessee makes a successful application to the court or tribunal to reduce or extinguish these costs it may still be possible to put them through the service charge account. However, this will face similar difficulty as the Courts have an equivalent discretion in relation to legal costs claimed through a service charge under section 20C of the Landlord and Tenant Act 1985.

The judicial application of this new legislation remains to be seen. We would expect the courts to adopt the overarching principle that the unsuccessful party should pay the successful party’s costs as a starting point and thereafter, having regard to all the circumstances of the claim (e.g. conduct of the parties, etc.), decide whether or not the landlord should be awarded their costs under an indemnity clause.

Accordingly, landlords of long residential leases should ensure that they have reasonable prospects of success before issuing court proceedings if they hope to recover their legal costs under indemnity clauses contained in the lease.

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