The Housing and Planning Act 2016 (HPA 2016) received royal assent on 12 May 2016, with a proposed clause that will be of interest to managing agents and leaseholders alike. Lydia Anderson, property management expert at Brady Solicitors explains.

In addition to the freeholder’s right to submit a Section 146 Notice and take forfeiture proceedings against a leaseholder, most leases also include a costs clause that enable those legal costs to be recovered from leaseholders through the service charge.

A good costs clause usually puts an obligation on the leaseholder to pay the freeholder ‘all costs incurred by the freeholder in connection with or in contemplation of  a notice served under Section 146 of the Law of Property Act 1925 notwithstanding that forfeiture is otherwise than by relief granted by the Court’.

Although there are rare cases in which a lease does not contain the costs clause referred to above, in most cases a lease shall contain a costs clause of this wording, or a clause simply allowing a freeholder to recover all legal costs incurred, even if no action in contemplation of a Section 146 Notice has been taken.

The Housing and Planning Act 2016 will bring in widespread changes to housing policy and planning. It also includes a clause that will enable leaseholders to make an application to prevent legal costs being put through the service charge as administration charges.

Freeholders can charge administration costs under Schedule 11 of the Commonhold and Leasehold Reform Act 2002. Administration charges are payable by a leaseholder to the extent that they are reasonable.

Legal costs are usually claimed as part of the contractual claim for breach of obligation to pay both service charge and costs. Where a Section 20C order is made, this will prevent costs being claimed as part of a service charge, however legal costs can currently be charged to the defaulting leaseholder and claimed within court proceedings as an administration charge.

Section 131 Housing and Planning Act 2016

The proposed Section 131 of the HPA 2016 will insert a new paragraph into the current Schedule 11 CLRA 2002 stating the following:

‘A tenant of a dwelling in England may apply to the relevant court or tribunal for an order reducing or extinguishing the tenant’s liability to pay a particular administration charge in respect of litigation costs’.

In effect, what this section seeks to do is give the leaseholder the right to apply for an Order reducing or preventing administration charges in respect of legal costs – ie: having the same effect on legal costs as a Section 20C order.

So what should managing agents do?

Managing agents should expect leaseholders to challenge attempts to put litigation costs through the service charge.

Ensure your service charge team understand the proposed legislative changes and, importantly, review all leases to ascertain which have a costs clause.

Even where there is an effective costs clause, the proposed changes to Section 131 in the Housing and Planning Act will provide leaseholders with the opportunity to prevent claims for legal costs as an administration charge.

No commencement date has yet been given for the new regulations. We shall of course keep readers of the Brady Solicitors blog updated with the Act as it progresses.

For expert advice on any aspect of service charge arrears recovery, contact the property management specialists at Brady Solicitors on 0115 985 3450 or click here to email us.