The Mayor and Burgesses of the London Borough of Tower Hamlets v Ali Jivaraj Khan

The Court of Appeal considered whether the landlord was contractually entitled under clause 3(9) of the lease to recover the legal costs it incurred in County Court and First-tier Tribunal (Property Chamber) proceedings as costs "of and incidental to the preparation and service of a notice under sections 146 and 147" of the Law of Property Act 1925, and alternatively whether the county court could award those costs under section 51 of the Senior Courts Act 1981. The court held that the District Judge was wrong to treat the totality of those litigation costs as "incidental to the preparation and service" of a s.146 notice. It refused to permit the landlord to run, belatedly on appeal, a new case that the costs had been incurred "in contemplation of" s.146 forfeiture proceedings. The court further held that costs incurred in proceedings transferred to the First-tier Tribunal are not within the county court's costs discretion under s.51 and that the FTT had exclusive jurisdiction to award costs of tribunal proceedings. The District Judge's order was therefore varied: the landlord was entitled to costs of the County Court element only, assessed on the standard basis; costs of the FTT phase were not recoverable from the tenant by the county court.

The appellant, Mr Khan, is the long lessee of a maisonette. The respondent, Tower Hamlets London Borough Council, brought proceedings in the County Court claiming unpaid service charges. Proceedings were transferred to the First-tier Tribunal (Property Chamber) to determine the reasonableness of the service charge. The FTT determined the charge was reasonable and, although it found that Mr Khan had acted unreasonably, it declined to make a costs order against him because of his personal circumstances.

The Council then applied in the County Court for an order requiring Mr Khan to pay the Council's legal costs of the County Court and FTT stages, relying on clause 3(9) of the lease (which obliges the tenant to pay costs "including … in or in contemplation of any proceedings in respect of this Lease under Sections 146 and 147 of the Law of Property Act 1925") and alternatively on the court's costs discretion under section 51 of the Senior Courts Act 1981 and CPR Part 44. The District Judge ordered the tenant to pay service charge arrears and assessed the Council's costs summarily at £20,000 on an indemnity basis, treating the costs as contractual and "incidental to" the preparation and service of a s.146 notice. The tenant obtained permission to appeal to the Court of Appeal.

Issues framed by the Court included:

• whether clause 3(9) covered the costs incurred in County Court and FTT proceedings as "incidental to the preparation and service" of a s.146 notice or as "in contemplation of" s.146 proceedings;
• whether the County Court could award costs relating to the FTT stage under s.51 of the Senior Courts Act 1981 when the FTT had jurisdiction over tribunal proceedings; and
• whether the landlord could raise a new "in contemplation of" argument on appeal that had not been advanced below.

The Court analysed earlier authorities (including Contractreal Ltd v Davies, Freeholders of 69 Marina v Oram, Barrett v Robinson, Willens, No.1 West India Quay, Kensquare and decisions concerning the interaction of county court and tribunal jurisdiction such as Avon and John Romans Park Homes Ltd v Hancock). It concluded that Contractreal was not incompatible with 69 Marina and that the proper construction of each lease clause depends on its wording. The Court held that (i) the phrase "incidental to the preparation and service of" implies a subordinate or ancillary connection and, on the facts, the sizeable litigation costs were too remote to be treated as "incidental" to the preparation and service of a s.146 notice which was never served; (ii) it would be inappropriate to permit the Council to advance on appeal a different factual and legal case (that the costs were "in contemplation of" forfeiture) when that was not pleaded or argued below; and (iii) costs incurred in proceedings transferred to the FTT are subject to the tribunal's costs jurisdiction and the county court lacks power to order the FTT's costs under s.51. Because the FTT had declined to award costs, it would be an improper second bite for the Council to recover those tribunal costs from the tenant via the county court. The Court therefore varied the District Judge's order so that it related only to County Court costs, to be assessed on the standard basis if not agreed.

The Court noted that the Council had not in fact served a s.146 notice and had instead sought a charging order over the lease. The FTT had found that the tenant's conduct was unreasonable but, due to his personal disabilities and genuine but misguided belief, declined to order costs.

Appeal allowed in part. The Court of Appeal held that the District Judge was wrong to conclude that the Council was contractually entitled under clause 3(9) of the lease to recover the costs of both the County Court and FTT stages as "incidental to the preparation and service" of a s.146 notice. The Court further held that it would not allow the Council to advance anew on appeal that the costs had been incurred "in contemplation of" s.146 forfeiture because that argument had not been run below. The county court may, however, award its own costs under section 51 of the Senior Courts Act 1981; accordingly the order for costs was to be limited to the County Court element of the litigation, to be assessed on the standard basis. Costs of the FTT proceedings are not recoverable from the tenant by the county court because the tribunal has jurisdiction over costs of tribunal proceedings and the FTT had declined to make a costs order.

Appeal from the County Court at Clerkenwell & Shoreditch (Deputy District Judge Paul; Claim No C0DE35P1). Proceedings began in the County Court (service charge claim issued 23 May 2016), transferred to the First-tier Tribunal (FTT) (order 2 December 2016), FTT decision on liability 9 May 2017, FTT costs application refused 8 June 2018, Upper Tribunal refused permission to appeal (1 December 2017 and 2 October 2018 as to permission applications), County Court application for costs heard 28 January 2019 (District Judge ordered costs), permission to appeal to the Court of Appeal granted 9 July 2020 (His Honour Judge Roberts) and transferred to the Court of Appeal. Final decision in this appeal: [2022] EWCA Civ 831.