The ability of landlords to recover the costs of taking action against tenants for dilapidations or indeed any breach of covenant can be fraught. Far from being an automatic entitlement, it will depend upon the wording of the lease. Costs clauses in leases are many and varied – some rather better than others.

In Agricullo Limited v Yorkshire Housing Limited [2010] EWCA Civ 229, the Court of Appeal considered a costs recovery clause in a lease when the landlord was seeking compliance with the tenant’s repairing obligation. The costs recovery clause in this particular lease provided for the landlord to recover the costs it incurred in “connection with any steps taken in or in contemplation of, or in relation to any proceedings under section 146 of the LPA 1925”. In this the landlord served a section 146 notice but, as is often the case, subsequently negotiated a deal with the tenant regarding repairs.

The Court of Appeal held that:

  • Although agreement was reached with the tenant whilst the tenant was under the threat of proceedings, the work carried out by the landlord and its advisors in reaching that agreement, was not undertaken in connection with, or in contemplation of, proceedings. The landlord was, therefore, unable to recover its costs.
  • If the costs recovery clause had been drafted so as to entitle the landlord to recover any costs incurred in enforcing the tenant’s covenants, the landlord would have been able to recover its costs.

For landlords, therefore, the best costs clauses are the widest. Restricting costs recovery to circumstances where a section 146 notice is served is bad enough, but restricting it even further to steps taken in contemplation of proceedings is even narrower.

Many leases often have additional wording in costs clauses allowing a landlord to recover the cost of preparing and serving a schedule of dilapidations. A clause like this might have helped the landlord in this case and so might a well drafted indemnity clause where the tenant indemnified the landlord for any costs incurred as a result of any breach of the lease.

Of course, if you litigate because of a breach of covenant and are successful, you are entitled to recover the costs of the litigation under the rules of court, but even then, the costs incurred pre-litigation will be in the discretion of the court and you are very unlikely to recover a substantial amount of those pre-litigation costs.

So our message to landlords is not to assume full costs recovery even though the tenant is in breach and you are successful or negotiate a satisfactory settlement. Before embarking on an expensive course of action check the costs and indemnity clause as well as the financial strength of the tenant.

For further advice please get in touch with the authors or your usual contact at Reed Smith.