In July 2015, the Court of Appeal ruled on a case concerning a dispute between a landlord and its tenants. Not only will the case be of interest to real estate lawyers but the ruling should also be of some significant interest to businesses and practitioners who are trying to recover debts that are under £10,000 in value and so fall within the small claims regime.
For these claims, it is well known that, save for very small sums, costs are usually not recoverable. This case provides clients with a way of recovering their legal costs in circumstances where the recovery is expressly provided for in their contracts.
A case of interest
In this case, there were two questions that the Judges had to deal with at the Appeal and, for the purposes of debt recovery claims or any type of contract claim, it is the second question they presided over that is of relevance. In the case, the Court had to decide the following:
Does the court have 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?
Considering the terms
In dealing with the question, Lady Justice Arden considered the terms of the lease that expressly stated that the landlord was entitled to recover all legal costs, charges and expenses from his tenants in circumstances where legal action is instituted.
Having established that there was an express right to recover costs within the lease (which was not an issue) she turned to the decision made by the Judge in the lower court who had paid regard to the cases of Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2)  Ch 171 and Church Commissioners v Ibrahim  EGLR 13. In the former case, it was established that mortgage lenders could recover costs from borrowers if a contractual term existed and, likewise, in the case of Church Commissioners, it was established that landlords could also recover costs from their tenants.
Here, the tenant’s lawyer argued that the costs incurred in the small claims proceedings should be limited to fixed costs only, stating that this principle applies even if a landlord has a contractual claim for costs. The lawyer stated that , by virtue of the terms of Part 27 of the Civil Procedure Rules1998, the court cannot award more than fixed costs.
The lawyer for the landlord disagreed, stating that Part 27 cannot extend to varying the terms of a contract that parties to litigation had made. The lawyer made the point that the rules were made to govern practice and procedure and were not designed to trump basic rules of contract law. In addition, it was noted that rule 44.5 already enabled the court to assess costs in circumstances where there is a contractual claim, indicating the significance of this type of contractual provision.
The outcome - dismissed
The Judge agreed with the landlord’s lawyers, stating that costs could be recovered in full, subject to an assessment of the costs. The Judge stated that the correct principle was as set out in the Church Commissioners case and further stated that this principle applies to all contracts that expressly provide for the recovery of costs. Consequently, the Appeal was dismissed.
This is a very useful case for businesses that provide less than £10k credit to their customers. In an age where businesses are being challenged by disproportionate rises in court fees and increases in the small claims limit (£5k to £10k in the small claims court in April 2013), which naturally have a negative impact on net recovery rates, it is this kind of decision that will help enormously to ease the burden when credit controllers are deciding whether to litigate. If contracts are properly drafted and claims properly pleaded then at least success will mean that a greater proportion of costs can be added to each Judgment debt.