Understanding resi liabilities

Litigation ensued, resulting in unrecoverable legal fees in excess of £430,000, which the freeholder sought to recover in service charges. The freeholder relied on one ’sweeping provision’, which allowed it to recover costs “necessary or advisable for the proper maintenance safety and amenity of the building”.

In its judgment in July 2022, the Upper Tribunal found in favour of the leaseholders, upholding that the wording of the lease did not tell how far the landlord’s obligations extended but would not naturally include litigation or planning objections against third parties.

When considering the wider implications of this decision, we may ask how the management company now intends to pay the incurred legal costs. Being a company with a single asset and the sole purpose to manage the freehold, there will be no other stream of revenue.

If the freehold was owned by a professional freeholder or property investment company, the circumstances may have been different. Potentially, the respondent management company may be forced into liquidation, which is likely to cause the leaseholders further troubles.

Should this case change our approach to drafting wide-ranging, catch-all provisions? Very few leases will contain provisions that allow the recovery of legal costs against third parties. Possibly, it is beyond the reasonable expectations of what should be asked of a freeholder.

The freeholder should ensure they can recover costs through service charge before commencing any action. More likely, this case demonstrates an educational need for inexperienced directors of resident-run management companies to understand their potential liabilities or they should have support to understand what leaseholder requests should be considered.

Hayley Bruce is a practice support lawyer in residential property at law firm Irwin Mitchell