LAW REPORT: Court costs not part of charge

Iperion Investments Corporation v Broadwalk House Residents Ltd.

Court of Appeal (Lord Justice Staughton, Lord Justice Waite and Lord Justice Peter Gibson).

23 November 1994.

The court's power, under section 20C of the Landlord and Tenant Act 1985, to direct that costs incurred by a landlord in litigation with his tenant were not to be recoverable from the tenant by way of a service charge, could properly be exercised where the tenant had won the case, notwithstanding that the costs were reasonably incurred by the landlord and could legitimately have been recoverable under the terms of the lease.

The Court of Appeal dismissed an appeal by the landlord, Broadwalk House Residents Ltd, against part of an order made by Mr Bruce Mauleverer QC, sitting as a deputy official referee ([1992] 2 EGLR 235) whereby he directed that certain costs incurred by the landlord in litigation with the tenant, Iperion Investments Corporation, were not to be included in the tenant's service charge.

Simon Berry QC (Donne Mileham & Haddock, Brighton) for the landlord; David Neuberger QC and Stephen Jourdan (Collyer-Bristow) for the tenant.

LORD JUSTICE PETER GIBSON said the defendant landlord was a company the shares in which were held by residents of Broadwalk House. The plaintiff, a Liberian corporation, was one of these tenants.

Following earlier disputes over an ingress of water to the tenant's flat and alterations planned or carried out by the tenant in breach of covenant, in the course of which the landlord sought an injunction and re-entry to the flat, the tenant applied for(i) an order for possession, (ii) a declaration that its lease had not been forfeited, (iii) damages for wrongful re-entry and (iv) an order under section 20C of the 1985 Act directing that the costs incurred by the landlord in connection with the proceedings were" not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant".

The landlord claimed that such costs constituted part of the" proper costs or management" of the building, of which, under the lease, the tenant was required to pay a proportion, even though the tenant had been substantially successful in the litigation.His Lordship agreed.

But section 19 of the 1985 Act prevented a landlord recovering by way of a service charge any costs unreasonably incurred. And section 20C (inserted by section 41(1) and para 4 of Schedule 2 to the Landlord and Tenant Act 1987) went further, apparently granting the court a discretion to direct that litigation costs be excluded from a service charge, even if those costs passed the section 19 test in having been reasonably incurred.

The obvious circumstance which Parliament must have had in mind was a case where the tenant had been successful in litigation against the landlord and yet the costs of the proceedings were within the service charge recoverable from the tenant.

It was unattractive that a tenant who had been substantially successful against his landlord, and had been told by the court not merely that he need pay no part of the landlord's costs but also that he had an award of costs in his favour, should then find himself having to pay part of the landlord's costs through the service charge.

The landlord should not "get through the back door what had been refused by the front" (see [ital-] Holding & Management Ltd v Property Holding & Investment Trust plc [1989] 1 WLR 1313 at 1324, per Nicholls LJ).

In this case, the tenant's reprehensible conduct (in acting deliberately and dishonestly in breach of covenant when carrying out unauthorised alterations) had already been reflected in a lower award of costs in its favour than it would have got had it behaved unexceptionably throughout. That being so, it was just and equitable to make an order under section 20C.

LORD JUSTICE STAUGHTON and LORD JUSTICE WAITE concurred.

Paul Magrath, Barrister.