Sweeping up the legal costs

Leases of residential property, flats particularly, commonly contain obligations on the part of the landlord to maintain and keep in repair the structure of the building and common parts and to recover the expenditure through service charge contributions from the individual tenants. Often the lease will contain a list of other services to be provided by the landlord, in addition to his repairing obligations, in connection with the day to day management of the building and will state that he can recover the fees incurred through the appointment of managing agents, surveyors, accountants and other professionals appointed to advise on necessary works, to oversee the service charge expenditure and to prepare the service charge demands and annual accounts.

It is difficult for a landlord to anticipate every eventuality and as failure to specify a particular service item could result in its cost not being recoverable, landlords will often include a general provision to the effect that they can recover the costs of doing whatever else they consider necessary, in their absolute discretion, for the benefit of the building, its management and the protection of the tenants’ interests. Such generally worded clauses, sweeping up clauses, have been the subject of many court actions where tenants have challenged the right of the landlord to recover the costs of unspecified (often unforeseen) items of expenditure by including them within the genus contemplated by the clause.

The tendency of the courts has been to interpret service charge clauses restrictively. They are, after all, drafted by the landlord whose opportunity it is to state what he wants. If the tenant is being obliged to pay, he must know precisely what he is being asked to pay for in advance of incurring liability. Generally worded clauses do not give the landlord carte blanche, to do whatever he wants. To be included in the service charge, the previously unspecified item claimed must be a service akin to those expressly provided for.

The courts have been particularly astute to limit or exclude the recovery of legal costs, solicitors’ fees and costs of proceedings, incurred by the landlord in disputes arising with individual tenants or others concerning the building and/or the leases. If there is no express right to recover them through the service charge or other specific mention in the lease, they would not be automatically recoverable through the general, sweeping up, clause. The benefit of any doubt would be given to the tenant from whom service charge was claimed . Even where the landlord could recover “professional fees” incurred in management of the building, the legal fees he incurred in the recovery of service charge from a defaulting tenant were disallowed. Because no express mention was made of them in the services he could charge for, the court would not consider them as fees falling within the class incurred in the management of the building. Legal fees were not management fees.

However, the climate has now changed. For some time the strict approach to interpretation of service charge clauses has been criticised as being based on outmoded rules. The restrictive approach should be relaxed and the notion that, because the landlord drafted the lease any doubt or ambiguity should go against him, should be rejected. In a recent Supreme Court decision, Arnold v Britton [2015], the court made it clear that service charge clauses should be interpreted in the same way as any other clause in a commercial contract and were not to be made subject to special treatment. As a result it is becoming clear in recent decisions that sweeping up clauses are being more generously interpreted in service charge cases. Where, formerly, a general service charge provision that the landlord could do any acts necessary to preserve the safety and amenity of the building would not be interpreted to include the legal costs involved in doing so, it is now open to the courts to give a wider meaning to such a clause, and if the legal fees and costs of proceedings were properly incurred in pursuit of such an aim then they can be properly recovered through the service charge in the absence of express provision.

The courts still exercise control over the interpretation of service charge clauses and will look first at the language used. There will still be cases where inclusion of legal fees and costs in the service charge is not permitted by the language of the lease. But where there is doubt, and where they were reasonably incurred in the proper pursuit of a general duty to do anything, to take any action, which the landlord considers necessary to protect the building and the interests of the tenants, the courts will now be more inclined to admit them to the service charge.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.