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

Lease costs clauses must be construed according to their particular wording. Costs of service-charge proceedings are not automatically incidental to the preparation and service of a notice under section 146 of the Law of Property Act 1925. The expression ordinarily suggests subordinate costs, and substantial litigation costs may be too remote, particularly where no notice has been prepared or served. A clause covering costs incurred in contemplation of forfeiture requires evidence of the landlord’s state of mind when the costs were incurred; that issue should not ordinarily be introduced for the first time on appeal. Where proceedings are transferred from the County Court to the First-tier Tribunal, the County Court’s statutory costs discretion does not extend to costs incurred in the Tribunal.

The Council brought County Court proceedings against Mr Khan for unpaid service charges under a long residential lease. The claim was transferred to the First-tier Tribunal to determine the reasonableness of the charges. The Tribunal found that the charges were reasonable and that Mr Khan had acted unreasonably, but declined to make a costs order, having regard to his disabilities, behavioural characteristics and genuine belief in his case.

The Council later obtained an order in the County Court for £20,000 costs, relying on a lease covenant covering costs connected with section 146 proceedings and, alternatively, section 51 of the Senior Courts Act 1981. The central issues were whether the lease covenant covered the County Court and Tribunal costs and whether the County Court could award the Tribunal costs under section 51.

1. Appeal allowed in part. The costs order was varied so that Mr Khan was liable only for the County Court element, to be assessed in detail on the standard basis if not agreed. No costs order was made in respect of the First-tier Tribunal proceedings.
2. Clause 3(9) did not create a contractual entitlement to the costs of the County Court and FTT proceedings as costs incidental to the preparation and service of a section 146 notice under the Law of Property Act 1925. Lease costs clauses are matters of construction, and differently worded clauses cannot be treated as having the same effect. The word incidental, especially in the established phrase of and incidental to, ordinarily denotes subordinate costs. The substantial costs of the litigation were too remote from the preparation and service of a notice which had never been undertaken.
3. The Council could not rely on the alternative wording concerning costs incurred in contemplation of section 146 proceedings. That case had not been advanced before the District Judge or positively advanced in the respondent’s notice. Allowing it on appeal could have deprived Mr Khan of the opportunity to challenge the Council’s evidence about what it had contemplated when the expenditure was incurred.
4. The Court of Appeal declined to treat Freeholders of 69 Marina, St Leonards-on-Sea v Oram as having been decided per incuriam. The clauses in that case and in Contractreal Ltd v Davies differed materially, and there was no necessary inconsistency between the decisions. The earlier reasoning in Contractreal about the limited meaning of incidental remained applicable.
5. Section 51 of the Senior Courts Act 1981 gave the County Court discretion over the County Court costs. The Council was the successful party, and the FTT had found that Mr Khan’s arguments had no merits. The costs should therefore be recoverable on the standard basis, there being nothing out of the norm to justify indemnity costs.
6. The County Court had no jurisdiction under section 51 to order payment of costs incurred in the FTT after the relevant proceedings had been transferred there under section 176A of the Commonhold and Leasehold Reform Act 2002. Section 29 of the Tribunals, Courts and Enforcement Act 2007 vested the costs jurisdiction for FTT proceedings in the Tribunal. In any event, it would not have been appropriate to award the FTT costs after the FTT had itself declined to make an order.

• Court of Appeal (Civil Division): The appeal from the County Court was allowed in part. The order was varied so that only the County Court element of the costs was recoverable, with detailed assessment on the standard basis if not agreed.
• County Court at Clerkenwell & Shoreditch: Deputy District Judge Paul ordered Mr Khan to pay the outstanding service charges and £20,000 costs assessed summarily, accepting that the lease permitted recovery on an indemnity basis and having regard to proportionality.
• First-tier Tribunal (Property Chamber): The service charges were found reasonable. The Tribunal found unreasonable conduct but declined to make a costs order under rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013.