Recoverability of administration charges when serving a section 146 notice
A notice under section 146 of the Law of Property Act 1925 (“section 146 notice”) must be served on the tenant before the landlord can forfeit the lease for breach of covenant. However, no section 146 notice is required for non-payment of rent.
In a recent case before the Leasehold Valuation Tribunal (“LVT”), 19-21 Rendezvous Street – Shepway: Midland: Birmingham (Service Charges)  EWLVT CHI/LV/SVC/29UL/0140 (19 January 2012), the landlord had served a section 146 notice on the tenant in an attempt to recover unpaid service charge and administration costs. The tenant accepted that the service charge was due, so the LVT only had to determine whether the tenant was also liable for the administration costs.
The landlord was relying on the following tenant covenant in the lease in trying to recover the administration costs: “To pay all expenses (including solicitors’ costs and surveyors’ fees) incurred by the Landlord incidental to the preparation and service of notice under Section 146 of the Law of Property Act 1925 notwithstanding that forfeiture is avoided otherwise than by relief granted by the court.”
The LVT held that the administration costs were too remote to be considered “incidental to the preparation and service” of a section 146 notice. It also held that if the clause was wider in scope then the recovery of administration costs may have been possible. However, in this case the LVT held that the actual administration costs were not reasonably incurred, as the landlord should have commenced legal proceedings rather than spending money on instructing a debt collection agency.
Landlords need to carefully consider the construction of the costs and expenses clause in the lease when managing a tenant breach. Even if the clause is widely drafted, the costs must be incurred “in contemplation of proceedings”. Therefore landlords should also consider which course of action to take in order for any administration costs to be considered “reasonably incurred”.