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In possession proceedings, where one of the grounds of possession is arrears of rent – as it is in the majority of cases – if a defendant has filed no defence (other than an offer to pay), CPR 45.1(2)(d) limits the costs recoverable by the claimant to the rather curious sum of £276.75 (£150 court fee, £69.50 commencement costs and £57.25 costs on entry of judgment).

CPR 45.1(1) provides that these costs are all that are payable in respect of solicitors’ costs “unless the court orders otherwise”. No guidance is provided in the rules as to the extent of the court’s discretion in respect of costs and practitioners will be familiar with the widely varying approach of judges to the question.

The sum allowed for fixed costs will, in general, fall far below the costs actually incurred by the landlord in trying to obtain possession. It is therefore worth considering whether the landlord is able to bypass the fixed costs rules by adding to the tenancy agreement a provision entitling it to recover their legal costs from the tenant in the event of possession proceedings becoming necessary.

Mortgage lenders have long provided for the recovery of their legal costs from the mortgagor in the deed of mortgage. The question of the court’s approach to contractual provisions for the recovery of costs by a mortgagee was considered in Gomba Holdings (UK) Limited v Minories Finance Limited (No.2) [1992] 3 WLR 723.

The Court of Appeal held that, although an order for the payment of costs of proceedings by one party to another is always a discretionary order by virtue of section 51(1) of the Supreme Court Act 1981 (which, despite its title, applies equally to County Courts by s51(1)(c)), where there is a contractual right to costs, the discretion should ordinarily be exercised so as to reflect that contractual right.

Landlord’s right to recover costs under the tenancy agreement

The principle in Gomba Holdings is not confined to mortgage lenders. In Church Commissioners v Ibrahim [1997] 1 EGLR 13, the defendant was an assured shorthold tenant for a fixed term of two years. The tenancy agreement contained the following provision:

“To pay and compensate the Landlords fully for any cost expense loss or damage incurred or suffered by the Landlords as a consequence of any breach of the agreements on the part of the Tenant in this Agreement and to indemnify the Landlords from and against all actions claims and liabilities in that respect.”

The trial judge’s approach was that:

• the fact that a landlord of residential premises was usually in a position to dictate the terms of the agreement to the tenant, ought not to permit the landlord to specify the basis on which costs should be taxed;
• the landlord’s entitlement to costs under the tenancy agreement was simply a matter that the court could take into account in its discretion

The judge then awarded the landlord £225 in costs – the standard amount then applied by Central London County Court to undefended possession applications. In passing it is worth noting that this was a rather larger costs award than would now be allowed under CPR 45, despite price inflation in the intervening decade.

The court of appeal held that the principles in Gomba Holdings applied equally to possession proceedings brought by a landlord. The trial judge was therefore wrong in his approach and the landlord was entitled to its reasonable costs on the indemnity basis. The inequality of bargaining power between landlord and tenant was not something that should prevent the landlord from recovering its costs.

Lack of a consistent approach

Regrettably, the principle in Ibrahim does not seem to be well known. In its commentary on CPR 48.3 (dealing with costs payable under a contract), the White Book discusses Gomba Holdings and the remedies available to mortgage lenders, but does not mention Ibrahim. The Civil Bench Book, produced by the Judicial Studies Board, also fails to mention the right of landlords to their contractual costs, despite discussing the position of mortgage lenders at length.

This is a surprising omission, since mortgage lenders are usually in the position of having a security for the mortgagor’s debt and are able to deduct their costs from any sum recovered on the sale of a property, without obtaining an order from the court. A landlord is rarely in such a happy position as it will have to enforce the costs award.

Experience suggests that recovery of costs from tenants is rare, even where it is ordered. Nevertheless the right is still of some importance to landlords. There may be a solvent guarantor who can be asked to make good any costs award. The practice of seeking guarantors is becoming more common amongst letting agents.

The consequences of a County Court Judgment are now more significant for tenants. Anecdotal evidence suggests that letting agents are increasingly making a check against the Register of Judgments, Orders and Fines standard practice before signing a letting agreement, as a result of the easier online search facilities that are available from the Registry Trust.

Furthermore, the new Tribunals, Courts and Enforcement Bill will improve considerably the ability of a judgment creditor to pursue a judgment debtor and enforce the judgment. The relevance of an order for costs will become more, not less important.

The result of the lack of awareness and information appears to be that a significant proportion of judges take the view that they have the power, in an unexceptional possession claim, to disregard a landlord’s contractual right to costs and award fixed costs. An example of this sentiment is to be found in an article in the Association of District Judges Law Bulletin by District Judge Madge (as he then was) on the fixed costs rules, which were then contained in CCR 38. He writes:

“Many judges accordingly take the view that a provision for indemnity costs in a tenancy agreement may, depending on the circumstances be a reason ‘to direct otherwise’, although others leave claimant landlords to their contractual remedies.

It is quite clear from Ibrahim that this is wrong in principle. In particular, it ignores the fact that the landlord’s “contractual remedy” is quite unlike the mortgagee’s remedy under the mortgage deed.

What must a landlord do?

In order to take advantage of Ibrahim it is obviously essential for there to be a provision in the tenancy agreement permitting the landlord to recover its reasonable costs. Surprisingly, many agents use standard agreements which do not include any such clause, or only do so for tenancies that are not covered by the Housing Act 1988. Many of the agreements freely available for download on the web also lack such a clause.

Secondly, the contractual provisions must be sufficiently clear. It should expressly provide that the tenant must pay on the indemnity basis the landlord’s reasonable costs incurred in bringing possession proceedings, or other proceedings for breach of the agreement. This is important, both because a tenancy agreement will normally be construed against the landlord, but also because the judicial reluctance to award other than fixed costs may be reflected in a very careful scrutiny of any contractual provision. All too many tenancy agreements lack a clause of sufficient clarity to ensure recovery of costs under this head.

In Ibrahim the landlord had pleaded the costs provision in the tenancy agreement and had included its contractual costs in its prayer. Although N119 (and the forms on Possession Claim Online) both ask the court to order that the defendant “pay the claimant’s costs of making this claim”, there is no statement that the costs are claimed under a provision of the tenancy agreement and the form might need to be adapted to expressly plead the term of the contract relied on.

Basis for taxation of landlord’s costs

Whatever the terms of the contract, the landlord will not be able to recover more than the costs they have actually or reasonably incurred. It is clear there is some confusion on this point. For example, in advising on terms of tenancy agreements that it would consider objectionable, the Office of Fair Trading states:

“Other kinds of penal provisions which may be unfair are damages and costs clauses stating that the landlord or agents can claim:

…

• their legal costs on an ‘indemnity’ basis, not just those reasonable costs reasonably incurred, as this could allow the landlord to incur unreasonable legal costs (for example, by serving a notice on the tenant when this is not legally necessary) and pass them on to the tenant. The words ‘indemnity’ and ‘indemnify’ are also objectionable as legal jargon (see Chapter 5, Group 19).”

As Hobhouse LJ makes clear in Ibrahim, this is an incorrect understanding of the nature of the indemnity basis:

“Under both bases the claimant at the end of the day may only recover reasonable costs. The difference relates to the grey area where there is room of doubt on the one side or the other.” Of course, under the CPR, there is an additional difference, namely that costs on the standard basis are also subject to the principle of proportionality. This does not mean that costs may be awarded on the indemnity basis where they are incurred unreasonably or negligently, and even with a clear statement entitling the landlord to its costs on an indemnity basis will not allow it to avoid taxation of those costs.

A second problem with the Office of Fair Trading’s advice is that “indemnity basis” is a term of art. Where a landlord wishes to express that they are entitled to recover all their reasonable costs on an indemnity basis, it is hard to see how else that might be expressed as clearly and unambiguously in a tenancy agreement.

Is there a defence for residential tenants?

So far I have discussed settled law on the subject. There remains a completely neglected consideration. Where a landlord is relying on the terms of its contract for the recovery of legal costs incurred as a result of managing the property – which will include sums spent bringing proceedings against a tenant – those costs will be a service charge under section 18 of the Landlord and Tenant Act 1985.

Most residential tenancies are covered by the service charge provisions of the Landlord and Tenant Act 1985, with the notable exception of local authority tenancies other than those let to long leaseholders. While the service charge provisions are normally invoked before a Leasehold Valuation Tribunal by long leaseholders, they apply equally to assured shorthold tenants.

It is unclear whether section 19 – which requires that service charges be reasonable in amount – adds very much to the law on recoverability of costs, since only the landlord’s reasonable costs may be recovered whatever the basis of taxation. One difference may be that section 19(1)(b) provides that relevant costs may only be taken into account in determining the service charge payable to the extent that they are to a reasonable standard. It may then be possible to challenge the costs for poor service by a solicitor, though that is a matter which is likely to be taken into account on taxation in any case.

What appears to have been ignored to date, is that section 20 of the 1985 Act requires that a landlord consult with a tenant or tenants before incurring any costs. The consultation requirements are detailed. Failure to carry out the proper consultation will prevent a landlord from recovering any sum in excess of £250 from the tenant.

Landlords may apply to a leasehold valuation tribunal for a dispensation for failure to carry out the consultation process, but since 30 October 2003 (30 March 2004 in Wales) such an application may only be made to a tribunal and not to a court.

If this approach is correct, a landlord who wishes to rely on a contractual costs provision would have to comply with the consultation provisions of section 20, which includes giving tenants an opportunity to suggest contractors – in this case a legal firm – from whom the landlord should obtain a quotation for the work to be done. As things stand it is unlikely that most landlords will comply with these provisions, so tenants may have a means of avoiding the effect of Ibrahim.