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Recovery of costs in the Small Claims Court.
A very popular method of collecting service charge arrears is for a landlord to issue a claim in the County Court for damages. On many occasions, the leaseholder will not respond and so a judgment in default is obtained. This can be relied on as a determination that there has been a breach of the lease pursuant to s168 of the Commonhold and Leasehold Reform Act 2002, thereby paving the way for forfeiture proceedings. There is, however, some debate about whether a default judgment can amount to a final determination.
Standard practice is for a landlord to plead for recovery of the costs of the County Court action as a contractual debt under the lease. If a default judgment is obtained, the costs are generally also included in the judgment sum. However, if the claim is defended by the tenant, the question of costs becomes somewhat tricky.
Recovery of costs in service charge proceedings is not a new topic. Indeed, there is a wealth of authorities that support the assertion that relying on a contractual right to costs overrides or displaces the relevant rules. However, these decisions all relate to the recovery of costs in the First-tier Tribunal (Property Chamber) and its predecessor, the Leasehold Valuation Tribunal.
One of the most popular authorities for the recovery of costs in the Tribunal is that of Freeholders of 69 Marina v Oram  EWCA 1258. The Court of Appeal held that the costs incurred in obtaining a determination that there had been a breach of the lease were recoverable as they were incidental to the service of a section 146 notice. Other authorities, including Christoforou & Diogenous v Standard Apartments Ltd  indicate that the Tribunal is unwilling to interfere with contractual entitlements to costs.
However, the recovery of costs in the County Court is viewed differently. The majority of service charge recovery claims involve sums less than £10,000. This means that the claims will be fought on the small claims track. The recoverability of costs on the small claims track is governed by CPR rule 27.14, which limits circumstances in which costs can be awarded. The main exception to this is where a defendant has behaved unreasonably.
Many District Judges view there to be a clear distinction between the specialist jurisdiction of the Tribunal and the general jurisdiction of the County Court. The purpose of the small claims track is to prevent inequality of arms between the parties and so to allow contractual costs to be awarded would defeat this purpose. Indeed, this was the reasoning given by HHJ Maloney QC in Graham v Sand Martin Heights Residents Company Ltd  (Southend County Court).
There is, however, one authority which may assist in the recovery of costs on the small claims track: Robert Shaw v Nine Regions Ltd  EWHC 3553 (QB). This matter concerned monies owed under a loan agreement. This agreement gave a contractual right to recover costs in the circumstance of court proceedings. The claim was brought on the small claims track (although attempts had been made to re-allocate to the fast track). The creditor pleaded his entitlement to contractual costs in his statement of case and dealt with the arguments in his skeleton argument. The judge appears to have overlooked these and made no order as to costs. On appeal in the High Court, Mr Justice Roderick Evans overturned the judge’s decision on costs and awarded the creditor these. This authority therefore supports the contention that the County Court can depart from rule 27.14 where contractual costs are being dealt with.
A landlord seeking to recover service charges from a leaseholder is faced with a choice. The County Court seems the most suitable option if the leaseholder is not going to defend the proceedings; as a default judgment can be used subsequently to commence forfeiture proceedings. However, if a leaseholder is likely to defend the claim, the landlord needs to consider whether it may be more appropriate to issue a claim in the Tribunal.
If the County Court is chosen, it is important that the contractual right to costs is pleaded in the statements of case. In addition, and as suggested by HHJ Maloney QC in Graham v Sand Martin Heights Residents Company Ltd, the landlord should request a the allocation questionnaire stage that the claim be assigned to the fast track so that the question of costs can be dealt with more easily.
This article is for information purposes only and is not legal advice. It should not be acted or relied upon and legal advice should be sought before applying any of the information in this article to any facts or circumstances.