Chaplair Limited v Kumari [2015] EWCA Civ 798, observations

Does the court has the power to order a tenant to pay costs to the landlord (with the amount to be assessed) under the terms of the lease where the case was allocated to the small claims track?

I cannot help thinking that the Court of Appeal’s answer to that question is rather muddled.

The French have an expression: “se mélanger les pattes” – literally, to mix up one’s paws. With all due respect to the Court of Appeal, I would apply that expression here.

These observations explain how I would distentangle those appellate feet.

A word of warning: they are quite long – the observations that is, not the feet.

Chaplair claimed its costs were claimed on two grounds:

1. Under the terms of the contract, ie the lease, between the landlord and tenant, effectively as a debt, and
2. Under the Civil Procedure Rules, and specifically, under CPR 27.14.

Chaplair pleaded its entitlement to costs in the body of the claim. So far, so good, but a claim to the costs of pursuing the service charge arrears which are also the subject of the claim should not work.

Why?

Because a claim to costs generally constitutes a variable administration charge within the meaning of paragraph of Schedule 11 to the Commonhold and Leasehold Reform Act 2002.

By virtue of paragraph 4 of that Schedule, the landlord must serve a summary of the tenant’s rights and obligations when demanding the costs, otherwise the tenant is entitled to withhold payment.

So far as I can tell, that had not been done in this case.

Mrs Kumari therefore had a good defence to Chaplair’s claim to costs, albeit only on a temporary basis because, as soon as Chaplair served a demand for payment, accompanied by the summary of the tenant’s rights and obligations, her liability would in principle have crystallised and she would have been obliged to pay Chaplair’s costs.

If she had not paid, on the Court of Appeal’s analysis, as the costs claimed were costs arising out of a small claim, Chaplair could then simply have issued a fresh claim for payment of its costs as a debt.

I do not however agree with that analysis. I do not think that all of Mrs Kumari’s boats would have been burnt by that demand, summary and fresh claim. Read on – or click here to jump for the lifeboat.

This is where life becomes more exciting – and where, to my mind, the Court of Appeal erred.

CPR 27.14(2)(g) provides that a party can only obtain an order for costs against the other side in the small claims track if the other side has behaved unreasonably.

There was no suggestion that Mrs Kumari had behaved unreasonably.

So, was the Court of Appeal correct here to say that costs could be awarded on the small claims track despite CPR 27.14?

I think that the answer lies in section 51 of the Senior Courts Act 1981, the Civil Procedure Rules, and in closer consideration of Gomba and Ibrahim. 

You can read the full text of section 51 of the Act here. For current purposes however, the key provision is the following:

(1)           Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

(a) the civil division of the Court of Appeal;

(b) the High Court;

(ba) the family court; and

(c) the county court,

shall be in the discretion of the court.

In other words, the court is empowered to make any order it chooses on costs, but the exercise of that discretion is bound by “rules of court”.

Were the great French writer Honoré de Balzac still with us, he would probably describe the Civil Procedure Rules 1998 as rules of court “dans toute l’extension du mot” – in the fullest sense of the word.

It would appear therefore that the court’s section 51 discretion is subject to the costs limitations of Civil Procedure Rule 27.14.

But if that is the case, how was the court empowered to make the orders it made in Gomba and Ibrahim?

Gomba was a case sparked by mortgage arrears.

Amongst other things, the mortgage provided that the borrower should pay the lender’s costs.

When the borrowers fell into arrears, the bank appointed receivers. The borrowers subsequently managed to raise enough money to satisfy their liabilities under the mortgage. The receivers were therefore discharged.

When presented with information about the bank’s costs, charges and expenses, including the receivers’ receipts, payments and remuneration, the borrowers claimed an account of the charges, which amounted to £1,800.000.00.

The Court of Appeal determined three issues, of which the third, for our purposes, was the most important by a country mile.

First, it decided that on its proper construction, the mortgage required the borrowers to pay the bank’s charges on an indemnity basis.

Second, it held that all charges, whether incurred in the course of litigation or outside litigation, should be assessed on that basis.

Third, it concluded that if a mortgage agreement provided that the lender was entitled to recover its costs, the court should exercise its power under section 51 of the Senior Courts Act 1981 in accordance with that contractual entitlement.

Notably, it did not decide that a contractual right overrode section 51.

Scott LJ, then identified a further question:

“If an order for payment of a mortgagee’s litigation costs, made as a matter of discretion, is less favourable than the mortgagee’s litigation contractual right under the mortgage deed, does the mortgagee have any residual rights in respect of the balance of the costs not recoverable under the order?”

In answering the question, he noted the following points about section 51 of the 1981 Act.

First, it only applies to litigation costs.

Second, it only applies to the determination of who is to pay how much of those costs.

Third, it need not impinge on the right of a party to litigation to recover his costs by means that do not involve payment.

Mortgages are a case in point: rather than have a costs order in its favour from the court, the lender might prefer to add its costs to the mortgaged property, and then recover them on redemption of the mortgage.

In that event, no money is actually paid to the lender under section 51: the lender retains the money out of the proceeds of sale of the security pursuant to the terms of the mortgage deed. If the borrower disputes the amount retained, s/he claims an account of the lender’s charges.

Scott LJ continued his analysis by reviewing several cases which were “not entirely reconcilable”. He comforted himself however that none of them bound the Court of Appeal.

He then turned to the Court of Appeal’s decision in Seavision Investment SA v Evennett, The Tiburon [1992] 2 Lloyd’s Rep 26 and noted that, in that case, Parker LJ, with whom the other members of the court agreed:

“expressed the view that a contractual right of one party to an action to have the costs of the action paid by another party to the action could not override the discretion as to costs given to the court by the old procedure rules and section 51(1) of the 1981 Act, but that where an order for payment of the costs was sought, the discretion should ordinarily be exercised so as to reflect the contractual right”.

The proverbial cat and pigeons spring to mind.

Ibrahim and the long-winded old days

Ibrahim predates the Civil Procedure Rules: it was governed by the old, now repealed County Court Rules.

I toddled off to Lincoln’s Inn library to review those rules.

When Ibrahim was decided, Order 38, rule 18 of the County Court Rules 1981 provided that:

(1) Appendix B shall have effect for the purpose of showing the total amount which, in the several cases to which Appendix B applies, shall be allowed to the solicitor for the plaintiff as fixed costs without taxation, unless the court otherwise orders.

Part I of Appendix B has the following:

1. “The Tables in this Part of this Appendix show the amount to be entered on the summons in respect of solicitors’ charges – …

“(c) in an action for the recovery of property, including land, with or without a claim for a sum of money, for the purpose of Part II of this Appendix or of fixing the amount which the plaintiff may receive in solicitors’ charges without taxation in the event of the defendant giving up possession and paying the amount claimed, if any, and costs;…”

Part II of Appendix B read as follows:

“Where an amount in respect of solicitors’ charges has been entered on the summons under Part I of this Appendix and judgment is entered or given in the circumstances mentioned in one of the paragraphs in column 1 of the following Table, the amount to be included in the judgment in respect of the plaintiff’s solicitrs’ charges shall, subject to Order 38, Rule 3(4), be the amount entered on the summons together with the amount shown in column 2 of the Table under the sum of money by reference to which the amount entered on the summons was fixed”.

The Table referred to allowed for various fixed sums to be claimed by the plaintiff including in claims:

“(d) where judgment is given in a fixed date action for …

“(ii) possession of land suspended on payment of arrears of rent, whether claimed or not, in addition to current rent,

“and the defendant has neither delivered a defence, admission or counterclaim, nor otherwise denied liability.

The key phrase is in rule 18(1): unless the court otherwise orders.

That phrase allows the court a discretion to award costs in possession actions otherwise limited to fixed costs.

Bringing myself back into the twenty-first century, I reviewed the current Civil Procedure Rules.

In respect of the costs of possession claims, the rules are almost identical, and are contained in Part 45.

Rule 45.1(1) provides:

“(1) This Section sets out the amounts which, unless the court orders otherwise, are to be allowed in respect of legal representatives’ charges”.

Rule 45.1 goes on to quantify the limited costs that the court may award in the circumstances it describes, including where a possession order is made at the first hearing.

Again, the key phrase is unless the court orders otherwise.

That phrase does not appear in Part 27 of the CPR. To my mind “unless the court orders otherwise” allows for a greater discretion in the awarding of costs than Rule 27.14.

Patten LJ made the point that CPR 44.5 was not excluded from the small claims track, and that CPR 27.14 was therefore subject to CPR 44.5.

In his view, CPR 44.5:

• Gives statutory effect to the decision in Gomba, and
• Is not one of the rules excluded from the small claims track.

At first glance, Patten LJ’s reasoning may seem stack up, but I beg to differ.

Here is the text of the rule again:

“44.5 Amount of costs where costs are payable under a contract

“(1)  Subject to paragraphs (2) to (4), where the court assesses (whether by summary or detailed assessment) costs which are payable by the paying party to the receiving party under the terms of a contract, the costs payable under those terms are, unless the contract expressly provides otherwise, to be presumed to be costs which –

“(a)  have been reasonably incurred; and

“(b)  are reasonable in amount,

“and the court will assess them accordingly.

“The presumptions in paragraph (1) are rebuttable. (Practice Direction 44 (General rules about costs) sets out circumstances where the court may order otherwise.)

“(2)  …

On my reading of it, CPR 44.5 is not about deciding the liability to pay contractual costs, nor is it about contractual rights trumping the Civil Procedure Rules.

Instead, CPR 44.5 is about the process of assessing the amount of costs payable under a contract once the court has determined that the party claiming the benefit of the contractual entitlement is entitled to its costs.

CPR 44.5 is therefore not mentioned in the context of the small claims track because the court does not need to assess the amount payable by a party in that track unless that party has behaved unreasonably.

If a party has behaved unreasonably, the innocent party will not be relying on a contractual entitlement to costs – it will be relying on the paying party’s unreasonable conduct.

Accordingly CPR 44.5 has no role to play in the small claims track and there is therefore no need to exclude it.

The long and the short of Chaplair’s second pedal is that a landlord with an appropriately worded lease now has a much better prospect of recovering contractual costs in the small claims track.

I am however with District Judge Watson, the first instance judge inChaplair.

To my mind it was correct to say that Chaplair Ltd was confined to recovering only fixed costs under the small claims track regime.

Unfortunately, the Court of Appeal does not appear to have actually considered the wording of section 51 of the 1981 Act, despite a number of references to it, nor did it review the nature of the court’s costs powers in small claims compared with possession and other actions.

Had they done so, I would like to think that they would have come to a decision quite different to the one they actually made.

Only the Supreme Court has the power to make that different decision now.

While we wait, and back on planet Law and Lease, what would my disagreement with the Court of Appeal mean in practical terms?

I venture to suggest that a landlord should not be entitled to recover its costs in a small claim:

• Section 51 of the Senior Courts Act 1981 allows the court a discretion subject to rules of court, of which CPR are the paradigm;
• Chaplair was a small claim, and was governed by CPR Part 27;
• CPR rule 27.14 therefore applied, and expressly limited recoverable costs.

The authorities do not support the Court of Appeal:

• Neither Gomba nor Ibrahim were small claims. There was no procedure rule prohibiting the recovery of costs in the actions to which those costs related;
• Parker LJ in The Tiberon was of the opinion that parties could not by agreement override the exercise of the court’s discretion under section 51;
• It would therefore appear that section 51 is the starting point, and that a contractual entitlement to costs is merely a factor, albeit a significant one, to be fed into the exercise of the discretion.

Therefore, whilst a court should “ordinarily” exercise its discretion in favour of a contractual entitlement, if there is a rule of court which limits recoverable costs, the court is not entitled to exercise its discretion on costs: it simply does not reach that point in section 51.

Substantive claims for costs

“Aha!” I hear you cry, “even if the above is right, the landlord can recover his/her costs by bringing a fresh claim for payment of the costs as a debt”.

I cannot answer that battlecry in detail without spending (another) unquantifiably large number of hours in the effort.

I will however say that if CPR 27.14 limits the recovery of costs of a small claim, there must be an argument somewhere that it is an abuse of process to bring a claim for payment of those costs as a debt.

My colleague Cecily Crampin, riding to my rescue as I risked spending the rest of 2015 thinking about this case, suggests that the answer is in Gomba: any claim for costs as a debt would be treated as a claim for an account, where section 51 and its limiting provisions would be engaged.

I reckon that stacks up.

Adding the costs to the lessee’s account

Cash flow considerations aside, I wonder whether this is one method by which a landlord might recover its costs in the long term. It came to mind as the service charge equivalent of a lender in a mortgage case adding the costs of a possession action to the mortgage security.

The difficulty is however that the equivalence is far from true. A landlord does not have security in the same way that a lender does, and mortgages operate in a different way to service charges.

I turned to another mortgage expert colleague, Tim Polli.

Reviewing Gomba, we noted Scott LJ’s fifth principle:

“A mortgagee is not, in our judgment, to be deprived of a contractual or equitable right to add costs to the security merely:

• “By reason of an order for payment of costs made without reference to the mortgagee’s contractual or equitable rights and
• “Without any adjudication as to whether or not the mortgagee should be deprived of those costs”.

Those two factors, Tim pointed out, are cumulative.

Removing the double negatives, I read Scott LJ to be saying that a lender loses the right to add those costs to the security if either:

• A costs order referring to the contractual rights has been made, or
• There has been a decision about whether the lender should be able to recover its costs.

This explains why lenders rarely seek costs orders on possession claims resulting from mortgage arrears, preferring to add the legal costs to the mortgage debt, effectively thereby placing the onus of taking legal action to challenge the costs on the borrower.

By analogy, could a landlord simply add the costs to a lessee’s service charge account and positively decline to seek an order for costs in the claim?

If s/he could, on the day when an account of those costs was finally taken, it seems to me that Cecily’s point about the engagement of section 51 would apply.

The lessee would argue that the costs related to a small claim allows only limited costs and that the account should accordingly limit the assessment of the costs on an account to the small claims level.

For now, I bow out on this one.

La cousine Bette

The expression “dans toute l’extension du mot” comes from Balzac’s “La Cousine Bette”, often translated, in a rather ungainly but apposite fashion, as “Cousin Betty”.

Bette/Betty is one of the characters populating La Comédie Humaine, the series of novels written by the great man in the mid-nineteenth century.

“La Cousine Bette” was one of the central texts of my first year at university. Set in Paris, it has it all: romance, envy, beauty, corruption, fidelity, infidelity, probably syphilis, and the eponymous Bette, one of the most bitter and vengeful characters to, er, grace the pages of fiction.

Balzac, a keen phrenologist, died in 1850, allegedly from overwork and excessive caffeine consumption.

This is a wonderfully imaginative article from The New Yorker on the great man’s thoughts after each of the fifty cups of coffee he is said to have drunk every day.

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Click here to read the Court of Appeal’s judgment in full on the Bailii.org website.