In Bretby Hall Management Company Limited v Christopher Pratt  UKUT 70 (LC), a dispute arose over the reasonableness of the service charges imposed by the freehold landlord over the years and whether the landlord complied with its duty to consult over certain charges.
Also in dispute was a large bill related to Bretby Hall’s legal fees (totalling £11,100) racked up in a previous dispute with Mr and Mrs Pratt. Although that dispute never reached court, it still cost the landlord to respond to it.
At the First-tier Tribunal, the landlord relied on a general clause in the lease that allowed it to recover via the service charge:
All other expenses (if any) incurred by the Manager in and about the maintenance and proper and convenient management and running of the development including … 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…
The landlord argued that this clause was wide enough to cover threatened as well as actual legal proceedings and duly claimed the full legal bill for the previous dispute.
Mr Pratt argued that the legal fees fell within the Tribunal’s power to exclude costs in section 20C of the Landlord and Tenant Act 1985 and / or that the costs were unreasonable under section 19 of the same Act. The Tribunal agreed with Mr Pratt and allowed the landlord nothing. But in doing so it had misunderstood the nature of the landlord’s claim.
The Upper Tribunal granted the landlord’s appeal. It recalled the guidance on the construction of contracts given by Lord Neuberger in the UK Supreme Court case of Arnold v Britton  AC 1619:
When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd  AC 1101, para 14. And it does so by focusing on the meaning of the relevant words… in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions. (§ 15 of Arnold)
Taking all this to the facts in the case, the UT concluded that the relevant clause in the lease was wide enough to cover the costs of defending threatened legal actions. The tenant was unable to rely on section 20C of the 1985 Act to disallow the costs because that section only shields a tenant where proceedings are actually brought and where the costs that the landlord seeks to recover relate to those proceedings.
The case was sent back to the First-tier Tribunal to decide on what sums were ‘reasonable’ for the landlord to clawback, (as required in section 19 of the 1985 Act). The Tribunal refused to make an order
Bretby represents a stark health warning to tenants in leasehold properties that a legal disputes with the landlord can backfire with the unintended consequence of increasing service charges, particularly where the lease gives the landlord a general right to recover costs of defending intended legal action. Landlords and property managers should review the terms of their lease with care in order to assess how far the costs of dealing with any legal dispute can be recovered via the service charge (as opposed to other mechanisms).
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