This is an important example for anyone involved in dilapidations or forfeiture cases. It involved a lease with fairly typical wording which allowed L to recover all costs:

‘In connection with any steps taken or in contemplation of, or in relation to, any proceedings under s146 or s147 LPA 1925 or the Leasehold Property (Repairs) Act 1938... even if forfeiture is avoided.’

T was in breach of repairing obligations and L served a schedule of dilapidations, along with an s146 notice (which had to include a reminder to T of its right to claim the benefit of Leasehold Property (Repairs) Act 1938). In response, T served a counternotice claiming the benefit of the 1938 Act. That meant that L could not forfeit the lease, or recover damages, without leave of the court. Following service of that notice, negotiations took place and eventually T carried out the works. At that stage, L sought recovery of its costs, relying on the clause above.

We suspect that the vast majority of readers would have assumed that L was entitled to his costs. But, he failed. Given the widespread use of similarly worded clauses, this is therefore a decision of great significance to all L&T practitioners.

The CA’s view was that once T has served a counternotice, claiming the protection of the 1938 Act, L could pursue forfeiture proceedings under s146 if it got the leave of the court. Since L had made no application to the court there were, therefore, no relevant ‘proceedings’ – and thus the steps taken could not be in ‘contemplation of’ such ‘proceedings’. In effect, L had shot itself in the foot by choosing to continue to negotiate with T; what L should have done was to apply for leave under the 1938 Act, or gone into the premises to carry out the works itself (relying on a clause that would have allowed it to recover its costs and expenses as a debt).

The key point in this situation is for T to take advantage of the 1938 Act, and serve a counternotice. As soon as that happens, the leverage that L has obtained by serving an s146 notice will be lost, and L will be at risk on costs unless it resorts to litigation. In short, the best advice for L in this situation is to consider going directly to court to make a ‘protective’ application for leave under the 1938 Act (even if the proceedings are then stayed while the parties negotiate). The alternative is to rely on a clause in the lease allowing L to enter the premises, carry out the works, and recover its costs as a debt (and so avoid being involved with the 1938 Act). Needless to say, neither of these is an attractive route for L in view of the costs involved, as well as the potential delay and the risks of litigation. In any event, even if L does litigate, it would still be advisable to make a CPR Part 36 offer when the court proceedings are served, in order to settle the matter (so bringing an automatic costs liability onto T in the event that T accepts the terms). But, even if L does this, T’s adviser might argue that the costs of negotiating an agreement and supervising works fall outside the court proceedings, and ought to be irrecoverable in the absence of a sufficiently clear contractual obligation in the lease.

See commentary on Agricullo v Yorkshire Housing [2010] EWCA Civ 229 (access free at www.practicalconveyaincing.co.uk) in [2010] NLJ 530; [2010] 249 PLJ 2.