Landlords will need to proactively pursue arrears if they want to rely on any section 146 clause to recover their legal fees.

While most modern leases include an indemnity costs clause, older leases rarely have any cost provisions other than the standard section 146 clause entitling the landlord to recover any legal fees incurred in connection with the forfeiture of the lease. Until the Court of Appeal’s decision in 69 Marina, it was thought that the scope of section 146 clauses was limited to recovering the costs of serving a section 146 Notice; it would not, for example, cover the costs of obtaining a judgment for service charge arrears.

However, in 69 Marina the Court of Appeal took the view that since the landlord is required to obtain a determination of the breach before it can serve a section 146 Notice, the landlord should be entitled to rely on any section 146 clause in order to recover its costs of those determination proceedings. The Court of Appeal’s decision was therefore welcomed by landlords as finally a way to recover legal fees from tenants where there is otherwise no costs clause in the lease.

But the Upper Tribunal has now limited the scope of 69 Marina by requiring the landlord to evidence that it had forfeiture “in mind” if it is to have the benefit of recovering its costs under any section 146 clause.

In Hilary Ann Barrett v Anne Robinson [2014], the tenant sought a determination from the Tribunal that (a) the landlord’s insurance charges of £324 were unreasonable and (b) the apportionment between her and the commercial tenant was incorrect. The tenant successfully had the charges reduced to £205 but the Tribunal found that the tenant’s proportion of 50% was correct. The landlord subsequently demanded her legal fees of the action in the sum of £6,250 from the tenant pursuant to a section 146 clause in the lease. Not surprisingly, the tenant resisted.

The tenant argued that she had initiated the proceedings, not the landlord. The proceedings did not relate to the forfeiture of her lease and the section 146 clause did not therefore apply. The landlord argued that it made no difference whether the proceedings were commenced by the landlord or the tenant; the law required a determination and therefore section 146 would always apply whenever a tenant challenged the liability to pay a service charge. The Upper Tribunal disagreed.

The purpose of section 146 is to put the landlord back in the position it would have been but for the tenant’s breach. If there is no breach there can be no question of the landlord commencing any forfeiture action by the service of a section 146 Notice. In the present case, the tenant had already paid the £324; she was not in breach of her lease. The landlord had sought to defend those proceedings but had never at any time contemplated forfeiture action because there was no breach to pursue. The landlord was not therefore entitled to recover her costs pursuant to the section 146 clause in the lease.

Landlords must be able to demonstrate that they at least contemplated serving a section 146 Notice if they want to rely on a section 146 clause to recover their costs. This means being more proactive in pursuing tenants for arrears; an intention to forfeit is much easier to evidence if the landlord issues the proceedings. However, that is not to say that the landlord will automatically be precluded from relying on a section 146 clause where the tenant starts the action. The outcome in Barrett may have been different if the tenant had not paid all or some of the insurance charges when she applied for a determination.

The right to rely on any section 146 clause is also predicated on there being a right to forfeit. If the landlord loses its case or the breach has been subsequently waived then the right to forfeit, along with any costs, is lost. The right to forfeit also only arises where the debt is more than £350.

It is interesting that, in reaching its decision, the Upper Tribunal was keen to protect the tenant’s right to access justice through the Tribunal system but ironically this decision merely encourages landlords to sue tenants.

Key Points for Landlords:

Issue proceedings for the recovery of arrears before the tenant seeks a determination.
Preserve your right to forfeit by stopping demands as soon as a breach is identified.
Make sure any correspondence to the tenant refers to section 146 and an intention to forfeit.
Make sure the amount claimed is over £350.
If the tenant beats you to the post by issuing proceedings, consider whether it is appropriate to make a counter-claim.