The Increasing Importance of Cost Recovery Clause

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Many commercial and residential leases contain clauses entitling the landlord to recover their costs in a variety of situations. For example, in serving a Section 146 Notice, dealing with any requests or consents and in the recovery of arrears. From our experience, the older the lease, the less comprehensive the cost recovery clause. Indeed some very old leases do not contain any cost recovery clauses at all.

Until recently, cost recovery clauses did not warrant much significance as costs were largely recoverable in the court process. However three factors have changed this thinking.

Factor One: relates to the Solicitors Code of Conduct. It is now regarded as improper conduct for a solicitor to send a letter before action and demand the costs of that letter as part of the debt. This is because the cost of writing the letter can only be recovered as part of any subsequent court proceedings and if proceedings are not issued, there are no recoverable costs for writing the letter.

Factor Two: concerns the small claims track. Only very limited costs can be recovered on the small claims track. It is worth noting that the upper limit of claims in the small claims track has been increased from £5,000 to £10,000 thus bringing more actions within this costs regime.

Factor Three: concerns changes to the litigation rules. When it came to assessing costs under the old rules, as long as they were “reasonable” then there was a realistic chance of recovering 80% to 90% of the costs. However the new rules state that the amount of any costs award must now be “reasonable and proportionate.” There is no guidance on what figure is “reasonable and proportionate” as it is up to each judge making a decision on each case but in our experience cost recoveries are now coming in at 50% to 60% of the costs incurred.

If a landlord is faced with a problem tenant who will not pay the rent or otherwise comply with the covenants in his lease (and the landlord does not want to forfeit the lease), we don’t believe the landlord should have to bear a large proportion of the legal costs simply to force the tenant to comply with his lease covenants. This is where a well drafted costs recovery clause can provide a solution. Costs recovery clauses in modern leases now contain a provision requiring the tenant to pay all the costs of the landlord in dealing with any breaches of covenant including the recovery or attempted recovery of arrears. This wording allows the landlord to recover the vast majority of its costs regardless of both the sum in dispute and the costs awarded in any court action.

Our advice for landlords is therefore, when contemplating action against a problem tenant, take a good look at the costs recovery clauses as this will have a considerable bearing on the cost economics of the exercise. On behalf of a landlord client we successfully enforced a costs recovery clause via a mediation and recovered 93% of the total costs incurred in a case.