Introduction

The case of Mayor and Burgesses of the London Borough of Tower Hamlets v Khan ([2022] EWCA Civ 831) presents a pivotal examination of a landlord's right to recover legal costs from a tenant under specific lease clauses. The appellant, Mr. Ali Jivaraj Khan, contested an order for costs that favored the respondent, the Mayor and Burgesses of the London Borough of Tower Hamlets ("the Council"). This case delves into the interpretation of contractual clauses pertaining to cost recovery, particularly focusing on whether such costs are "incidental to" or "in contemplation of" the preparation and service of a section 146 notice under the Law of Property Act 1925.

The core issue revolves around clause 3(9) of Mr. Khan's lease, which obligated him to cover all costs incurred by the lessor in relation to lease proceedings, including those related to presenting notices under section 146 of the LPA. The litigation ascended through the County Court, First-tier Tribunal (FTT), and ultimately reached the Court of Appeal, raising profound questions about the boundaries of contractual cost recovery and the jurisdictional limits of tribunals in awarding such costs.

Summary of the Judgment

The Court of Appeal, presided over by Lord Justice Nugee and supported by Lord Justice Henderson and others, meticulously dissected the contractual and statutory provisions underpinning the case. The District Judge had initially ruled in favor of the Council, ordering Mr. Khan to pay £3,663.78 for service charges and £20,000 in costs, assessed summarily. Mr. Khan's appeal challenged both the contractual interpretation of clause 3(9) and the application of section 51 of the Senior Courts Act 1981 regarding cost recovery.

Upon review, the Court of Appeal concluded that the District Judge erred in accepting that the costs incurred by the Council were "incidental to" the preparation and service of a section 146 notice. The judgment emphasized that no such notice had been served, rendering the costs too remote from the specified purpose in the lease clause to be recoverable. Additionally, the Court addressed the Council's attempt to invoke section 51 of the 1981 Act to secure costs associated with the FTT proceedings. It was determined that the FTT lacks jurisdiction over County Court costs, aligning with precedents set in cases like Avon Ground Rents Ltd v Child and John Romans Park Homes Ltd v Hancock.

Consequently, the Court limited the costs order to the County Court proceedings, rejecting the recovery of costs related to the FTT. This delineation underscores a nuanced approach to cost recovery, emphasizing strict adherence to both contractual language and statutory jurisdictional boundaries.

Analysis

Precedents Cited

Several key precedents informed the Court of Appeal's decision:

• Contractreal Ltd v Davies [2001] EWCA Civ 928: Addressed the interpretation of "incidental to" in lease clauses, establishing that only costs directly related to specific proceedings fall within recovery.
• 69 Marina, St Leonards-on-Sea v Oram [2011] EWCA Civ 1258: Explored the necessity of serving a section 146 notice before forfeiture, even when service charges are treated as additional rent.
• Barrett v Robinson [2014] UKUT 322 (LC): Clarified that costs must be incurred with the actual contemplation of serving a section 146 notice to be recoverable.
• No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119: Reinforced that the landlord must demonstrate the contemplation of a section 146 notice at the time costs are incurred.
• Kensquare Ltd v Boakye [2021] EWCA Civ 1725: Affirmed that contractual clauses must be interpreted based on their specific language and context.
• Avon Ground Rents Ltd v Child [2018] UKUT 204 (LC): Determined that tribunals lack jurisdiction to award County Court costs.
• John Romans Park Homes Ltd v Hancock [2019]: Emphasized the separation of jurisdiction between courts and tribunals regarding cost orders.
• Contractreal, 69 Marina, and related cases consistently highlight the importance of context and precise language in lease clauses pertaining to costs.

Legal Reasoning

The Court meticulously analyzed the language of clause 3(9) of Mr. Khan's lease, which mandates the tenant to cover "all costs [...] incurred by the Lessors in or in contemplation of any proceedings [...]". The distinction between "incidental to" and "in contemplation of" was paramount. The Court observed that "incidental to" suggests a subordinate nature of costs directly tied to specific actions—in this case, the preparation and service of a section 146 notice.

However, the absence of an actual section 146 notice being served weakened the Council's claim. The Court referenced Contractreal to highlight that costs must be directly connected to the preparation and service of such notices, not merely to related proceedings like those in the FTT. Additionally, invoking section 51 of the 1981 Act was deemed inappropriate for FTT costs, as established in Avon Ground Rents Ltd v Child and John Romans Park Homes Ltd v Hancock, which clarified that tribunal costs fall outside the court's discretionary power.

The Court also addressed the concept of "per incuriam" declaratory principles, determining that 69 Marina did not override or negate the applicability of Contractreal in this context. The nuanced distinction in lease language and the specific circumstances of proceedings were critical in reaching the judgment.

Impact

This judgment significantly impacts how landlords can recover legal costs from tenants under lease agreements. It underscores the necessity for precise contract drafting, particularly distinguishing between costs that are "incidental to" versus those "in contemplation of" specific legal actions. Landlords must ensure that lease clauses clearly delineate the circumstances under which costs can be recovered, avoiding broad or ambiguous language that may lead to non-recovery of substantial legal expenses.

Moreover, the decision clarifies the jurisdictional boundaries between courts and tribunals concerning cost orders. It reaffirms that tribunals like the FTT do not possess the authority to award County Court costs, preventing landlords from circumventing traditional court processes to reclaim costs.

Future cases will likely cite this judgment when interpreting similar contractual clauses, emphasizing the necessity for explicit linkage between incurred costs and the preparatory actions for specific legal proceedings.

Complex Concepts Simplified

"Incidental to" vs. "In Contemplation of"

The crux of the legal debate hinges on the interpretation of phrases within the lease clause:

• Incidental to: Refers to costs that are directly related and subordinate to a primary action. For example, legal expenses incurred specifically for preparing and serving a notice under section 146 are "incidental to" that notice.
• In Contemplation of: Encompasses costs incurred with the intention or anticipation of initiating certain legal actions in the future. This is broader and less directly tied to specific preparatory actions.

In simpler terms, "incidental to" implies that the costs are a necessary and immediate consequence of conducting a specific legal action, whereas "in contemplation of" allows for costs incurred in planning or considering potential legal actions, even if those actions do not materialize.

Section 146 of the Law of Property Act 1925

Section 146 governs the procedures a landlord must follow to reclaim possession of a leasehold property for breach of lease conditions, such as non-payment of service charges. A landlord is typically required to serve a section 146 notice before initiating forfeiture proceedings, ensuring the tenant has an opportunity to remedy the breach.

Section 51 of the Senior Courts Act 1981

Section 51 grants courts discretion to award costs related to legal proceedings within their jurisdiction. However, this discretion is subject to other legislative provisions and the specific rules of tribunals or courts involved.

First-tier Tribunal (FTT) Jurisdiction

The FTT handles specialized cases, such as property disputes involving landlords and tenants. Importantly, the FTT does not have jurisdiction over costs that fall under the County Court's purview, limiting the scope of its cost-allowing powers to specific tribunal-related expenses.

Conclusion

The decision in Mayor and Burgesses of the London Borough of Tower Hamlets v Khan serves as a definitive guide on the limits of cost recovery under lease agreements. By meticulously dissecting the contractual language and aligning it with statutory provisions, the Court of Appeal has reinforced the necessity for landlords to ensure that their lease clauses are both precise and directly tied to the legal actions they intend to undertake.

The judgment highlights that broad or vague contractual terms may not withstand judicial scrutiny, especially when the anticipated legal actions (like serving a section 146 notice) do not materialize. Additionally, the clear demarcation of jurisdiction between courts and tribunals prevents unfair cost recovery practices and upholds the integrity of legal processes.

For practitioners, landlords, and tenants alike, this case underscores the importance of understanding the precise implications of contractual clauses and the statutory frameworks governing legal proceedings. Moving forward, parties engaging in lease agreements should exercise diligence in drafting and negotiating terms related to cost recovery to avoid similar disputes and ensure enforceability.