The terms of the new lease for a residential lease extension have been agreed and after much negotiation so has the premium. However, the landlord’s recoverable costs under the Leasehold Reform Housing and Urban Development Act 1993 (“the Act”) often proves to be a source of great contention. Landlords feel that they should be fully reimbursed for their expenses while tenants often wonder what the justification for the amount claimed is.
The statutory position as to what a landlord can recover from their tenant is by the wording of S60(1) and (2) of the Act:
“(1) Where a notice is given under section 42, then (subject to the provisions of this section) the tenant by whom it is given shall be liable, to the extent that they have been incurred by any relevant person in pursuance of the notice, for the reasonable costs of and incidental to any of the following matters, namely—
(a) any investigation reasonably undertaken of the tenant’s right to a new lease; (b) any valuation of the tenant’s flat obtained for the purpose of fixing the premium or any other amount payable by virtue of Schedule 13 in connection with the grant of a new lease under section 56; (c) the grant of a new lease under that section;
(2) For the purposes of subsection (1) any costs incurred by a relevant person in respect of professional services rendered by any person shall only be regarded as reasonable if and to the extent that costs in respect of such services might reasonably be expected to have been incurred by him if the circumstances had been such that he was personally liable for all such costs”.
The case of Metropolitan Property Realisations Ltd v Moss  UKUT 0415 (LC) succinctly highlighted the balance sought in recoverability of costs between landlord and tenant:
“Part I of the Act is expropriatory, in that it confers valuable rights on the tenants of leasehold flats to compel landlords to grant new interests in those premises whether they are willing to do so or not. It is a matter of basic fairness, necessary to avoid the statute from becoming penal, that the tenant exercising those statutory rights should reimburse the costs necessarily incurred by any person in receipt of such a claim in satisfying themselves that the claim is properly made, in obtaining advice on the sum payable by the tenant in consideration for the new interest and in completing the formal steps necessary to create it.
On the other hand, the statute is not intended to provide an opportunity for the professional advisors of landlord to charge excessive fees, nor are the tenants expected to pay landlords’ costs of resolving disputes over the terms of acquisition of new leases. Thus the sums payable under section 60 are restricted to those incurred by the landlord within three categories… and are further restricted by the requirement that only reasonable costs are payable”
The wording of the Act created debate regarding what costs were incidental to the works listed in section 60 and what level of costs were reasonable.
The Upper Tribunal (Land Chamber) in the case of Sinclair Gardens v Wisbey 2016 [UKUT] 203 (LC) has provided further clarity as to recoverable costs.
The Tribunal confirmed that the following three heads of costs were recoverable:
- Preparation and service of a Section 45 Counter-Notice – A failure of a landlord to serve a counter-notice can have serious adverse effects on the landlord’s position. It was held to be reasonable for a landlord to instruct a solicitor, experienced in this specialised area of law, to consider the tenant’s claim and advise as to the terms of the counter-notice. This category of work was considered to form part of works incidental to any investigation undertaken of the tenant’s right to a new lease and is therefore recoverable.
- Considering the valuer’s report – Calculations used for residential lease extensions are complicated and it is therefore reasonable to instruct a solicitor to review the calculations and be involved in the process. These works are incidental to any valuation to the tenant’s flat obtained for the purpose of fixing the premium and are therefore recoverable. However, the act of instructing the surveyor is an administrative act and is therefore not recoverable.
- Grade A fee earner time – In such a specialist area of law, it would be reasonable for the person liable for the costs to instruct a solicitor of experience rather than using some lower grade fee earner.
This case helpfully clarifies works which will likely be considered recoverable by the landlord from the a tenant exercising their right to a lease extension but the case also serves as a useful reminder of the requirement that the landlord’s costs must be reasonable and that the burden of showing that costs are reasonable falls on the landlord.
In this case the Upper Tribunal held that landlords undertaking several lease extensions in the same block are reasonably expected to negotiate a discount/fixed fee arrangement. In this case a 20% discount was applied in circumstances where there was no evidence of a discount being sought.
In summary, the position has been greatly clarified as to exactly what a landlord can recover from its tenant. Perhaps one of the most notable clarifications is that the Upper Tribunal considered that it was reasonable and perhaps necessary to instruct specialist solicitors who had considerable experience in this area of law, as the consequences of failing to adhere to the Act can be severe.
Ronald Fletcher Baker LLP has a specialist property litigation team specialising in lease extensions and collective enfranchisement. For further information, please contact 0207 467 5757.