Whether costs of threatened proceedings could be recovered under service charge
The Appellant management company was engaged in a service charge dispute with the Respondent tenants. The Appellant incurred the sum of £11,000 (inclusive of VAT) in legal fees in handling the dispute, although in the event no proceedings were ever issued by the tenants.
The management company wished to recover its legal costs through the service charge, with particular reference to the lease’s provisions:
“All other expenses…incurred by the Manager in and about the maintenance and proper and convenient management and running of the development including in particular but without prejudice to the generality of the foregoing any expense incurred in rectifying or making good any inherent structural defect…and specific in this Schedule any costs incurred by the Manager…and any legal or other costs reasonably and properly incurred by the Manager and otherwise not recovered in taking or defending proceedings (including any arbitration) arising out of any lease of any part of the Development…”
Referring to the specified provision, the management company argued that its legal fees, relating to the defence of proceedings which were threatened by the tenant, had been properly incurred and the lease’s wording was not exhaustive by inclusion of the wording ‘including in particular and without prejudice to the generality of the foregoing’.
The management company further argued that a reference to ‘proceedings’ was sufficiently wide to include proceedings that were threatened as well as those which had been issued and were active.
The Upper Tribunal held in favour of the Respondent management company. The lease wording could be interpreted to encompass proceedings which were threatened or intended, and the Upper Tribunal found that the parties’ intention had clearly been for the costs of management of the development to be recoverable under the service charge. There was no reason why the parties may have limited recovery to only issued proceedings.
JB Leitch’s Richard Owen comments on the decision:
“It is commonly agreed that the parties, at the outset of a lease, would intend for the service charge to cover the management company’s costs in managing as well as maintaining the property. This case is a useful authority when considering the issue of intended legal proceedings, and the judgment supports the view that there should be no distinction between intended and active legal proceedings when referring to costs recovery.”
The Upper Tribunal held in favour of the Respondent management company. There was no reason why the parties may have limited recovery to only issued proceedings.