Hilary Ann Barrett v Mrs Anne Robinson [2014] UKUT 0322 (LC)

Ms Barrett was the long lessee of a flat above a shop in the Heather Ridge Arcade in Camberley. She shared liability to pay for the insurance of the building with the shop.

The lease contained some fairly standard provisions relating to the parties’ obligations to insure and pay for that insurance.

The tenant covenanted to pay the “insurance rent”, but the reddendum (the part of the lease reserving rent) did not reserve anything other than the ground rent as rent.

In Martin Rodger QC’s view, this meant that the cost of insurance was not technically rent. It was a variable service charge.

At the heart of the appeal was clause 4(14) of the lease, which was in a form appearing in leases as regularly as rain during Wimbledon fortnight.

By clause 4(14), the lessee covenanted:

“To pay all reasonable costs charges and expenses (including solicitors’ costs and surveyors’ fees) incurred by the Lessor in or in contemplation of any proceedings or the preparation of any notice under section 146 of the Law of Property Act 1925 notwithstanding forfeiture is avoided otherwise than by relief granted by the Court.”

As is generally the case, that covenant was supported by a forfeiture clause entitling the landlord to re-enter the demised premises and terminate the lease “if the said yearly or other rents or sums of money hereby reserved” are in arrear for more than 21 days.

In February 2012, Mrs Robinson demanded £324 as Ms Barrett’s half share of the insurance premium. Ms Barrett took the view that the apportionment should be different because there were greater risks associated with the shop than her flat.

She applied to the LVT under section 27A of the Landlord and Tenant Act 1985.

Before the hearing took place, Mrs Robinson discovered discrepancies in the sums demanded from Ms Barrett for insurance. Those discrepancies reduced Ms Barrett’s service liability for 2012-3 from £324 to £201. It transpired that her account with Mrs Robinson was in fact in credit by £65.

The figures are low. That is important for reasons which will become apparent.

The LVT hearing nonetheless went ahead, and the LVT:

• Determined that the 50/50 apportionment was reasonable, and
• Accepted the revised figures calculated by Mrs Robinson.

What it is

The variable administration charge is a child of the 2002 Act. It is defined in paragraph 1(1) of Schedule 11 as an amount payable by a tenant, amongst other things:

• As part of or in addition to the rent;
• Payable, directly or indirectly;
• In respect of a failure by the tenant to make a payment by the due date to the landlord, or
• In connection with a breach (or alleged breach) of a covenant or condition in her lease.

The dispute

When Mrs Robinson subsequently raised a demand for payment of her costs of the service charge dispute – totalling £6,250, some twenty times the amount in dispute – Ms Barrett applied under paragraph 5 of Schedule 11 to the 2002 Act for a determination of her liability to pay those costs as a variable administration charge.

The LVT determined that Ms Barrett was liable for the costs under clause 4(14).

It granted her permission to appeal on the ground that the first LVT proceedings had had nothing to do with forfeiture, so that the costs incurred in them could not properly be recovered under clause 4(14).

This is the dry stuff.

Provisions from four statutes are in play in this appeal: here they are, followed the abbreviations that I will use in this post and the key sections relevant to resolution of the appeal:

• The Law of Property Act 1925 – the “1925 Act” – section 146;
• Our old friend, the Landlord and Tenant Act 1985 – the “1985 Act’ – section 27A;
• The Housing Act 1996 – the “1996 Act” – section 81, and
• The Commonhold and Leasehold Reform Act 2002 – the “2002 Act”– sections 167, 168, 169.

Here is the text of those sections as it is relevant to this appeal.

In broad terms, section 146 prevents a landlord from forfeiting a lease unless a notice requiring the lessee to remedy his/her breach of covenant has been served on the lessee. That notice is normally described as a section 146 notice.

It is not required where the landlord intends to forfeit a lease for non-payment of rent.

Martin Rodger QC, who was at the helm of this decision, noted that:

• Section 81 of the 1996 Act applies to forfeiture for failure to make payments of service charges or administration charges;
• Section 167 of the 2002 Act relates additionally to forfeiture for non-payment of rent.
• Section 168 of the 2002 Act applies to the service of s.146 notices for breaches of other obligations.

This, conversely, is the juicy stuff, for rarely does a claim for possession on the grounds of forfeiture sashay across a lawyer’s desk without the shadow of 69 Marina looming large.

Here is a short summary:

• Service charges in the leases were payable “by way of further or additional rent”;
• The lessee covenanted to pay the legal expenses incurred by the landlord “incidental to the preparation and service of a notice under section 146 of the Law of Property Act 1925 or in contemplation of proceedings under section 146…”.

The issue was whether the legal costs of a section 27A application to determine the amount of service charge payable were recoverable under that covenant.

The dispute went all the way to the Court of Appeal.

The tenant argued that, as the service charges were effectively invested with the character of rent, the covenant to pay the landlord’s expenses did not bite because section 146 was not engaged where there had been a failure to pay rent. Therefore the landlord could not properly have been contemplating proceedings under section 146 when the application to the LVT was made.

The then Chancellor, Sir Andrew Morritt, gave the lead judgment.

He reviewed sections 81 of the 1996 Act and 168 of the 2002 Act. In the light of that review, he concluded that a section 146 notice was a pre-requisite to forfeiture proceedings even where the service charge was reserved as rent.

I think it is fair to say that his judgment was met with a degree of opprobrium only surpassed when he handed down judgment in Phillips v Francis [2012] EWHC 3650 (Ch).

This is what Martin Rodger QC had to say about the judgment in 69 Marina:

“69 Marina is high authority that section 81 of the 1996 Act requires that the enforcement by forfeiture of a tenant’s obligation to pay a service charge is subject to the provisions of section 146 of the 1925 Act, even if the lease treats the service charge as an additional rent recoverable as such…

“That conclusion came as a surprise to landlord and tenant practitioners. Earlier decisions of the Court of Appeal, in particular Escalus Properties Ltd v Robinson [1996] 2 QB 231, were not cited to the Court of Appeal in 69 Marina. In Escalus Nourse LJ explained that where a lease provides that a service charge is or is deemed to be additional rent, that service charge acquired “all the attributes of rent”.

“On that basis it had previously been understood that it was not necessary to serve a section 146 notice as a prelude to proceedings to forfeit a lease for non-payment of a service charge reserved as rent.  It followed that the costs of proceedings under section 81 of the 1996 Act or section 27A of the 1985 Act could not properly be regarded as being incidental to or in contemplation of the service of a notice under section 146.

“That reasoning was overturned by the Court of Appeal in 69 Marina, but without referring to Escalus, or to Khar v Delmounty Limited (1998) 75 P&CR 232, another decision of the Court of Appeal which confirmed that the jurisdiction to grant relief from forfeiture under section 146(2) could not be exercised where a service charge was reserved as rent.

“Escalus was also followed by the Court of Appeal in Mohammadi v Anston Investments Ltd [2003] EWCA Civ 981, a case decided after the enactment of the 1996 Act.  The tension between these relatively recent authorities and the decision in 69 Marina has been the subject of cogent criticism: see, for example the case note at [2012] 76 Conv 498 and the extended discussion in Rosenthal: Commercial and Residential Service Charges (2013) at paragraphs 45-38 to 45-40”.

The upshot of the two sets of LVT proceedings was that Ms Barrett had achieved a reduction of almost a third on her insurance contributions, resulting in her account being in credit, even if she had not managed to persuade the LVT to re-weight the apportionment of the insurance.

The credit meant that she was not in fact in arrears at all when she applied to the LVT.

Against that background, she now faced a bill for £6,250.

In Martin Rodger QC’s eyes, Ms Barrett’s predicament raised:

“a question of general significance to tenants seeking access to justice through the tribunal system. In what circumstances does a covenant for the reimbursement of costs of proceedings under section 146 render a tenant liable for costs incurred by their landlord in tribunal proceedings to determine the amount of a service charge or administration charge?”

Although Martin Rodger QC held that there were two reasons why the costs claimed by Mrs Robinson could not fall within clause 4(14), he resolved the appeal by considering eight points:

1. The LVT’s power to award costs;
2. The interface between that power and contractual provisions about costs in Christoforou v Standard Apartments Ltd [2012] UKUT 0586 (LC);
3. Whether a section 27A application could also be a section 168 determination;
4. The same in respect of section 81;
5. The construction of clause 4(14);
6. The evidence required to satisfy clause 4(14);
7. The limits of 69 Marina, and
8. The impact of the prescribed sum regulations.

Here goes.

Martin Rodger QC noted that the LVT had – and still has in Wales where it continues to exist – only limited power to award costs, as set out in paragraph 10 of Schedule 12 to the 2002 Act.

Paragraph 10 of Schedule 12 to the 2002 Act does not however preclude a party to LVT proceedings recovering costs under a contractual indemnity covenant in a lease. This was explained (by Martin Rodger QC himself) in Christoforou v Standard Apartments Ltd [2012] UKUT 0586 (LC).

Clause 4(14) in Ms Barrett’s lease was narrower than the indemnity covenant in Christoforou, which rendered the lessee liable for all costs and expenses arising directly or indirectly out of any breach.

Ms Barrett’s clause 4(14) was concerned solely with costs incurred in contemplation of proceedings or in the preparation of any notice under section 146 of the Law of Property Act 1925.

Mrs Robinson argued that the first set of LVT proceedings, brought by Ms Barrett, the lessee, under section 27A of the 1985 Act, also constituted a determination under section 168 of the 2002 Act.

Therefore:

• The costs incurred before the LVT were incurred in or in contemplation of proceedings or the preparation of a notice under section 146 of the 1925 Act and so
• Were recoverable under clause 4(14).

Martin Rodger QC did not agree:

• If a lessee is in breach of covenant by failing to pay service charges, section 168 is not the correct gateway to service of a section 146 notice. That much is provided for in section 169(7);
• When section 168 is the correct gateway, it requires the FTT to have made a determination of breach as a result of an application by the landlord (section 168(4)), and
• In this case, it was the lessee, Ms Barrett, who had made the application. That application was accordingly not an application by the landlord and so could not be a section 168 determination of breach.

Section 81 required the LVT to determine the amount of the service charge payable as a precondition to Mrs Robinson serving a section 146 notice on Ms Barrett for failure to pay a service charge – in this case, her portion of the insurance premium.

Martin Rodger QC determined that an LVT decision on a section 27A application could satisfy the requirements of section 81. Section 81 does not require the application to be made by the landlord.

No general indemnity

Taking it from the top, Martin Rodger QC noted that the lease did not contain a covenant on the part of the lessee to indemnify the landlord against all and any costs incurred in connection with him/her.

The wording of clause 4(14) allowed Mrs Robinson to recover costs incurred only:

• In proceedings under section 146 of the 1925 Act,
• In contemplation of such proceedings,
• In the preparation of any notice under section 146, or
• In contemplation of the preparation of any such notice…

He reminded himself that:

“where a forfeiture is avoided by relief granted by the court, the terms of relief reflect the principle that the landlord should be put in the position it would have been in but for the forfeiture (i.e. if the tenant had not committed the breach of covenant on which the forfeiture was based) (see Woodfall: Landlord and Tenant, para 17.169; Egerton v Jones [1939] 2 KB 702).

“That principle will normally require that the tenant reimburse any costs incurred by the landlord in serving the required section 146 notice and in bringing the proceedings”.

Clause 4(14) therefore resonated with that principle.

…“notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court.”

These were the concluding words of clause 4(14).

They indicated that even where the landlord’s claim for possession on the ground of forfeiture does not reach court, the clause entitled the landlord to recover his/her costs.

They nullified the general reality that, if a dispute does not reach court, neither side is entitled to claim reimbursement of its costs from the other.

This is relevant where a landlord is considering forfeiture action, because the purpose of a section 146 notice is to allow a lessee who is in breach of covenant the opportunity to remedy the breach.

“Where a breach has been remedied within a reasonable time, the notice will have been complied with and the landlord will have no continuing cause of action, nor any reason to commence proceedings to forfeit the lease”, observed Martin Rodger QC.

He noted however that even where a breach is remedied in accordance with a section 146 notice, a landlord may have spent a substantial sum reaching that stage.

With a clause containing those closing words, even if court proceedings were out of the question, the landlord had the comfort of knowing that the money spent was recoverable as a matter of contract under the lease.

Genuinely avoiding forfeiture

Clause 4(14) could not be invoked however, unless forfeiture had been genuinely avoided.

The clause would not be engaged if, for example:

• The tenant was not in breach, because there would never have been an opportunity to forfeit, or
• The right to forfeit had previously been waived by the landlord, because the opportunity to forfeit would have been lost.

Concluding his observations on the wording of clause 4(14), Martin Rodger QC said:

“In principle such a clause is obviously capable of giving a landlord a contractual right to recover costs incurred in proceedings before the LVT or the First-tier Tribunal, but whether in any particular case such an entitlement exists will depend on the language of the particular clause, on the existence of a breach of covenant and on the nature and circumstances of the proceedings”.

Logic dictates that if a clause is engaged where the landlord brings, contemplates bringing or preparing a section 146 notice, that landlord will need to evidence that action.

In some cases that may be very straightforward, but in others not so.

For example, section 81 of the 1996 Act and section 27A of the 1985 Act cover the same ground. Martin Rodger QC observed:

“A landlord may or may not commence proceedings before the first-tier tribunal with a view to forfeiture; a landlord may simply wish to receive payment of the sum due, without any desire to terminate the tenant’s lease, or may not have thought far enough ahead to have reached the stage of considering what steps to take if the tenant fails to pay after a tribunal determination has been obtained”.

Here then is the test. I have split into bullet points, but the words are Martin Rodger QC’s:

• “Costs will only be incurred in contemplation of proceedings, or the service of a notice under section 146,
• “If, at the time the expenditure is incurred,
• “The landlord has such proceedings or notice in mind as part of the reason for the expenditure.
• “A landlord which does not in fact contemplate the service of a statutory notice when expenditure is incurred, will not be able to rely on a clause such as clause 4(14) as providing a contractual right to recover its costs”.

Mrs Robinson having adduced no such evidence, it could not be said that her costs of £6,250 had been incurred in or in contemplation of proceedings, or the preparation of a notice, under section 146.

Like a holidaymaker in Scotland nibbled by the midges, Martin Rodger QC returned to 69 Marina as if to a troublesome itch.

In his judgment, the second LVT had considered itself bound by 69 Marina – and had not looked at the lease before it in sufficient detail. To coin a Springsteenian phrase, it had perhaps been blinded by the light.

Martin Rodger QC was not so dazzled.

Having carried out as brutal an analysis of 69 Marina as judicial neutrality probably allowed, he gritted his teeth and accepted that:

“If a service charge or administration charge is reserved as rent the decision of the Court of Appeal in 69 Marina is binding authority that a determination by the First-tier Tribunal is nonetheless a pre-condition to the service of a notice under section 146”.

He was clear however that 69 Marina is not authority that a landlord is always entitled to recover his/her legal costs if the lease contains a clause such as clause 4(14). The Tribunal must always:

• Consider the terms of the particular clause, and
• Whether any relevant contemplation or anticipation existed in fact in the circumstances of an individual case.

Towards the head of this post I noted that the sums involved in this case were low. It is now that the importance of those low sums enters, stage left.

To recap: on 24 February 2012, Mrs Robinson’s solicitors alleged that Ms Barrett was liable to pay Mrs Robinson £301.91.

Section 167(1) of the 2002 Act prohibits a landlord from exercising a right of forfeiture in respect of rent, service charges or administration charges unless the unpaid amount exceeds the prescribed sum.

The prescribed sum is £350, pursuant to the Rights of Re-entry and Forfeiture (Prescribed Sum and Period) (England) Regulations 2004.

The insurance rent which Mrs Robinson claimed to be entitled to recover from Ms Barrett was therefore below the statutory threshold created by section 167(1) and could not in any event provide grounds for forfeiture.

Mrs Robinson could not therefore legitimately have contemplated the service of a notice under section 146, nor could the first LVT proceedings ever have been a prelude to forfeiture.  The sum involved was simply too small for forfeiture to have been an option.

Ms Barrett was not liable to pay Mrs Robinson’s costs.

My observations could be said to be binary – in hommage to the appeal, being as they are practical and dustily lawyerly.

The practical

Hush! I hear the sound of landlords’ fingers on keyboards amending template service charge arrears demand letters.

It strikes me that landlords wanting to recover their costs as a variable administration charge under Schedule 11 to the 2002 Act will now rattle their section 146 sabres at the first opportunity.

On the landlord’s side, I wonder whether one way of securing a first blush contemplation to forfeit for non-payment of service charges may be to issue an application under section 81 of the 1996, rather than an application under section 27A of the 1985 Act.

Equally however, it strikes me that “contemplation” is itself a word which admits of a number of alternatives: I can contemplate doing one thing and its opposite, whereas I cannot, for example, intend to do both. I often contemplate cycling to Chambers at the same time that I contemplate going in on the Tube.

The devil will be in the detail of the evidence. Here are a couple of thoughts for starters:

• Does the lease contain a viable forfeiture clause?
• Has the breach been waived – for example by acceptance of ground rent?

The practical effect of this decision may be prolonged hearings while the FTT probes mind and actions of the landlord.

The dustily lawyerly

On first reading this decision, I wondered whether Martin Rodger QC was going to hold that 69 Marina had been decided per incuriam – ie without having all relevant case law cited to him. He appears however to have peeped over the edge of that cliff and drawn back.

I have never been a fan of 69 Marina, as my audience at the Property Litigation Association conference discovered when I gave a residential landlord and tenant update talk in 2012.

Leaving aside the question of whether the case was decided without full citation of the relevant authorities, it strikes me that as a matter of statutory construction, our former Chancellor erred in his judgment in 69 Marina.

Here are my reasons for disagreeing (again) with the former Chancellor.

In paragraph 12 of his judgment, Sir Andrew Morritt held that “given that the definition of service charge [in s.18 LTA 1985] includes “an amount … payable as a part of … the rent”, the evident intention [of the legislation] is that the s.146 procedure, as modified, is to be applicable in cases of non-payment of a service charge even when such charge is recoverable as rent”.

This statement of principle does not, in my respectful submission, hold water:

a) None of the legislation cited expressly requires a landlord to serve a section 146 notice for arrears of service charges reserved as rent;

b) There are plainly circumstances in which a section 146 notice will be required before a landlord can exercise a right of re-entry/forfeiture, those being primarily where the service charge is not reserved as rent;

c) The definition of service charges in section 18 includes service charges payable as rent so as to avoid landlords arguing that service charges reserved as rent have only one character i.e. that of rent, and therefore do not fall within the meaning of section 18;

d) If my analysis of section 18 is correct, section 81(2) of the 1996 Act (i.e. no service of a section 146 notice before a determination that the amount is payable) sets out the correct sequence of events for the obtaining of a determination and the service of a section 146 notice (if a section 146 notice is required), and

e) Section 81(4A) (references to the exercise of a right of re-entry/forfeiture include references to the service of a section 146 notice) is no more than a subsection providing a definition of the meaning of the exercise of a right of re-entry/forfeiture.

The service charge world needs another excursion to the Supreme Court. I can make myself available…

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