Thanet Lodge (Mapesbury Road) & Anor v Arun Mirchandani

This is an appeal from a decision by the First-tier Tribunal (“the FTT”) that certain legal fees and mediation costs were not recoverable by the appellant, which is a right to manage or “RTM” company, from the respondent leaseholder, Mr Mirchandani. It has been decided under the Tribunal’s written representations procedure.

The respondent holds a long lease of 29 Thanet Lodge, one of 43 flats in a five-storey block. The appellant RTM company was incorporated by the leaseholders in order to exercise the right to manage the block conferred by the Commonhold and Leasehold Reform Act 2002. The respondent is not a member of the appellant.

In October 2022 the respondent applied to the FTT for a determination under section 27A of the Landlord and Tenant Act 1985 as to whether certain service charges were payable. Some of the items charged were challenged by the respondent on the basis that costs were not reasonably incurred, in light of section 19 of the 1985 Act which provides that service charges are payable only insofar as the costs they represent were reasonably incurred. In respect of other charges the respondent argued that the terms of his lease did not permit the appellant to recover them.

The FTT’s determination covered five different types or groups of charges. The appellant sought to appeal the decision in respect of just one group, and has permission from this Tribunal to do so. The charges in question are for legal fees incurred by the appellant. The FTT decided that the terms of the lease did not permit the appellant to recover them by way of service charges. There was no challenge on the basis that the costs were not reasonably incurred, and therefore the FTT’s decision and this appeal are solely about the construction of the lease.

The costs claimed by the appellant were incurred in the period March 2020 and October 2019 and are as follows:

The amounts claimed range from £960 to £1838; if I have understood correctly those figures represent the total cost, which was then apportioned between the leaseholders.

The respondent’s lease, dated 15 June 1995, requires him to pay the Service Charge as provided in the Fifth Schedule; that schedule requires him to pay a specified percentage of the “Total Expenditure”, defined as follows:

Clause 5(4) of the lease, to which that definition refers, imposes obligations on the landlord (into whose shoes the appellant, as an RTM company, stands for these purposes) in sub-clauses (a) to (n) including the maintenance and repair of the structure of the building and of its common parts, and:

The appellant argued in the FTT, and on appeal, that the use of legal professionals and the incurring of legal fees falls within the expenditure described at clause 5(4)(g), and in any event with the definition of Total Expenditure and the words “any other costs and expenses reasonably and properly incurred in connection with the Building.”

The FTT set out the costs claimed and the relevant provisions of the lease, and referred to the principles of contractual construction set out in Arnold v Britton [2015] UKSC 36 and in particular to Lord Neuberger’s judgment at paragraph 15 where he said that the court must identify the intention of the parties by reference to:

The FTT the referred to Sella House Ltd v Mears (1988) 21 HLR 147 and said:

The FTT’s decision on this point was understandably brief, because the hearing and written decision were for the most part concerned with much larger amounts charged for work done to the building and with the provisions of the Building Safety Act 2022. For the reasons explained below I agree with the FTT about the outcome, but for the appellant the ability to recover legal costs from leaseholders is an important issue that may well recur in the future and so I take the opportunity to explain it in more detail.

The appellant’s primary argument is that taking legal advice falls within the scope of clause 5(4)(g). It relies on the FTT’s observation that the clause gives the landlord a discretion to employ professionals in connection with the meeting of its obligations, and says that all the fees concerned with one exception (item (a) in paragraph 5 above) related to claims in respect of damage to two flats in the building (the respondent’s and another leaseholder’s) which were said to be the responsibility of the appellant as a result of the landlord’s repairing covenants. The cost of the repairs was recoverable and equally, says the appellant, legal fees incurred in connection with them were recoverable.

Turning to the definition of Total Expenditure in the Fifth Schedule, the appellant argues that the wording is deliberately wide, and that the inclusion of legal fees of this kind would make commercial sense, given the proviso that costs have to be reasonably and properly incurred in connection with the building. The appellant says that there is nothing in Sella to compel a construction that it cannot recover legal fees, and that the FTT’s conclusion was contrary to the natural and ordinary meaning of the words in clause 5(4)(g) and the Fifth Schedule and contrary to the overall purpose of those provisions. Moreover the FTT’s conclusion fails to make commercial sense, because it leaves the original lessor, and the appellant as an RTM company, unable to get legal assistance or obliged to raise funds for it by way of voluntary contribution from its members.

The respondent relies on the reasoning in the FTT, and argues that the appellant’s construction of the relevant clauses would make them so wide as to be meaningless. He observes that the landlord, as a sophisticated property company, would have had legal advice when the lease was drafted, and if it was the intention that legal fees were to be recoverable the lease would have said so explicitly.

Although there appears to be one issue in the appeal, namely the recovery of legal costs, the first item in the list at paragraph 5 above is different from the rest and merits separate consideration.

The first item in the list of costs sought to be recovered was not incurred in connection with a dispute with a leaseholder. Instead it was about the membership of the appellant and about the convening of meetings (I take that description from the copy of the solicitors’ invoice in the bundle).

Such costs were not contemplated by the original parties to the lease, because in 1995 the right to manage legislation had not yet been enacted. It was not part of “the facts and circumstances known or assumed by the parties at the time the document was executed”, nor part of the “overall purpose of the clause or the lease” (see Arnold v Britton paragraph 10 above). Moreover, such costs benefit the RTM company, whose membership is a proportion – probably a majority, but in the present case not all – of the leaseholders, and there is no reason why the cost of the running of a company of which not all are members should be an expense charged to all.

Accordingly the appellant’s claim to be able to charge the first item in the list at paragraph 5 above clearly fails.

The rest of the items at paragraph 5 can be grouped together as “dispute resolution costs”, although they cover a number of different types of costs: advice about the settlement of a compensation claim by another leaseholder, advice about mediation of a claim by the respondent, and the appellant’s share of the mediation fee. The clauses on which the appellant relies make no express mention of legal advice, nor of legal professionals or mediators, and the question therefore arises as it has done in a number of other cases: are such costs nevertheless within the scope of clause 5(4)(g) or of the definition of “Total Expenditure” in the Fifth Schedule? It is convenient to look at those two provisions separately since slightly different legal considerations arise in respect of each.

The provisions of clause 5(4)(g) are set out at paragraph 8 above. The FTT said that it is “aimed at the employment of professionals for the purpose of implementing other obligations under the lease. It is wide enough to include lawyers but there has to be an obligation elsewhere in the lease for which such lawyers may be used.” The appellant therefore argues that the clause authorises the use of legal professionals in the implementation of its repairing covenant.

I do not agree that that is what the clause says or is “aimed at.” Clause 5(4)(g)(i) enables the landlord to employ managing agents and accountants in order to manage the building and collect the rent and service charges. It is not a licence to use professionals in order to carry out any other obligations and it is not about repairs or maintenance. Clause 5(4)(g)(ii) is in broader terms and authorises the employment of professional persons for the “maintenance safety and administration” of the building. Taken literally that might be said to encompass the taking of legal advice, but does it really go that far in the absence of a specific mention of legal professionals?

A number of authorities have considered the same issue in construing similar clauses. It is worth saying at the outset that the absence of a specific mention of legal advice is not fatal to the appellant’s construction; in Assethold Ltd v Watts [2014] UKUT 537 (LC) it was held that the landlord’s obligation to do “all works installations acts matters and things as in the reasonable discretion of the Landlord may be considered necessary or desirable for the proper maintenance safety amenity and administration of the Development” included the taking of legal advice about a neighbouring development which posed a threat to the structure of the building, serving notices under the Party Wall Act 1966 and obtaining an injunction. The Tribunal (the Deputy President, Martin Rodger QC) said at paragraph 58:

However, the purpose and context of the clause in question are critical. In Sella House the landlord sought to recover by way of service charge legal expenses incurred in pursuing other tenants for rent and service charges. The landlord argued that the expenditure arose from its fulfilling its obligations under clause 5(4)(j) of the lease, which required it:

That wording is identical to that of clause 5(4)(g) in the respondent’s lease.

Dillon LJ concluded that legal costs were “outside the contemplation of either limb of Clause 5(4)(j) of the lease". Taylor LJ, said at 156:

Identically worded clauses do not necessarily generate identical outcomes, but there is nothing in the facts of the present appeal to permit a different conclusion about identical words.

What is different is that items (c) to (e) of the list at paragraph 5 above are legal costs incurred by the appellant in disputes with this respondent. Does that make a difference? In both No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119 and in Kensquare Ltd v Boakye [2021] EWCA Civ 1725 the Court of Appeal had to decide whether a similarly worded clause encompassed a charge for legal costs incurred in a dispute with the tenant who contested the charges, and came to the same conclusion: a clause concerned with management, or with the provision of services, does not enable the landlord to recover through the service charge its legal costs in a dispute with any of its tenants.

It will be recalled that the Fifth Schedule defines the “Total Expenditure” that determines the amount of the service charge; the text is set out at paragraph 7 above. The appellants rely in particular upon the words “and any other costs and expenses reasonably and properly incurred in connection with the Building”.

Exactly the same words were considered by the Court of Appeal in Holland Park Management Company Limited v Dell [2023] EWCA Civ 1460, where the issue was whether the management company could recover through the service charge the costs of litigation against a third party in a dispute about a restrictive covenant and planning – obviously rather different costs from those in issue in this appeal, but again the Court of Appeal had to consider how far the definition of “Total Expenditure” could extend the leaseholders’ liability beyond what was contemplated in the rest of the lease (which did not enable the landlord to make that charge). Falk LJ at paragraph 64 said this:

Clause 4(4) in that lease set out the landlord’s covenants, as does clause 5(4) in the present appeal. Obviously the charge in issue here is a different one, as it relates to litigation costs incurred against leaseholders rather than third parties, and the amounts likely to be at stake are probably smaller. Nevertheless the relevant considerations are the same: the definition has to be looked at in the context of the rest of the lease and of the landlord’s obligations set out in clause 5(4); it is unlikely that the parties to the lease would have contemplated the extension of the service charge by this definition to include something quite different, namely legal and mediation costs, from what had already been specified.

A similar point arose in the Tribunal’s decision in London Borough of Tower Hamlets v Lessees of Brewster House and Malting House [2024] UKUT 193 (LC), where again the need to look at the definition clause in its context was emphasised.

I am mindful of the appellant’s concern that if legal costs are not recoverable through the service charge it will be deprived of legal advice, or will have to seek contributions from its members. That is the result of the absence on the lease of any clause enabling the recovery of such costs, and the members will indeed have to discuss whether they wish to take, and pay for, legal advice whenever the question arises. The landlords in Sella House, in No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd and in Kensquare Ltd v Boakye faced the same difficulty.

Accordingly I conclude that the appeal fails, none of the legal costs that the appellant wanted to charge to the service charge are so chargeable.