Recoverability of litigation costs via service charge provisions: Can landlords litigate at lessees’ expense?
Case study: Holland Park (Management) Limited v Dell (8 December 2023)
The Court of Appeal decision for the above case provides further guidance on whether legal and professional costs can be recovered through a service charge. The outcome from this case is important for landlords to be aware of because of its far reaching effect on whether landlords can litigate at the lessees’ expense.
The facts of the case
The appeal concerned whether the Landlord, 89 Holland Park Management Ltd, a lessee run management company which owns the freehold of 89 Holland Park (the Building), was entitled to recover service charges of £430,411 (the Disputed Costs) from Mr and Mrs Dell, the Respondent leaseholders of one of the flats in the Building.
The Landlord had incurred around £2.7m of legal and professional costs in litigation with Sophie Hicks, a neighbouring landowner, over restrictive covenants affecting land which she wished to develop (“the Land”), and in opposing her planning applications. The Landlord sought to recover those costs from the leaseholders of the Building.
At first, the leaseholders had agreed to oppose Miss Hicks’ plans but in 2014 Mr and Mrs Dell objected to paying anything more on the legal proceedings.
The Court’s decision
The Court of Appeal found in favour of Mr and Mrs Dell. In summary:
- The focus of the clauses relied on by the Landlord was on the management and maintenance of the Building and it would be too much of a stretch for the clauses to cover the Disputed Costs.
- The motivation for the litigation was to stop Ms Hicks’ development of the Land, rather than the maintenance or safety of the Building.
- The lease made express provision for the recovery of specific litigation costs which indicated that where litigation costs were to be recoverable from the lessees there would be specific provision in the lease. There was no such express provision in the lease to cover the Disputed Costs.
- The absence of an express clause for recovery of costs of litigation over the Land was telling where there was already a history of litigation over the Land which pre-dated the lease, so the potential for further litigation of that type was foreseeable;
- The Disputed Costs were not recoverable under the definition of ‘General Expenditure’ as the clause was too narrow.
Consequences
The Landlord is seeking permission to appeal but for now this decision is a warning for landlords who cannot assume that all costs are recoverable through the service charge.
This case places a limit on the use of sweeper clauses to recover costs which do not relate directly to the management of a building, and in the absence of express provision for specific expenditure, the potential for costs recovery will need careful consideration on a case-by-case basis.
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