Who pays the costs of a statutory lease extension?

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A recent case in the Upper Tribunal (Lands Chamber) considered the legal position of the liability of costs under Section 60 of the Leasehold Reform, Housing, and Urban Development Act 1993 (“LRHUDA 1993”), following service of a Tenant’s notice for a lease extension under Section 42 of LRHUDA 1993.

The Upper Tribunal Judgment made it clear the statutory obligations that pass onto an assignee of a lease upon inheriting a Section 42 Notice. As such the Tribunal brought clarity to the matter of cost liabilities in leasehold extension matters, reinforcing the connection between assignment benefits and the obligations and/or liabilities that come with them under the LRHUDA 1993.

Background – Gray’s Inn Investments Ltd v Sally Claire Jolleys [2024] UKUT 2 (LC)

Gray’s Inn Investments Limited (the appellant) sought costs from Sally Claire Jolleys (the respondent), who was assigned the benefits and burdens of a Section 42 Notice for a lease extension following the sale of the property involved.

The original Section 42 Notice had been served by Mr Warburton who was selling his property to Ms Jolleys.  Upon his sale of the property the rights and obligations arising from the Section 42 Notice were assigned to Ms Jolleys.

Ms Jolleys did not pursue the lease extension, and under the LRHUDA 1993 the Section 42 notice was considered withdrawn.  This then led to Gray’s Inn applying for costs under Section 60 of LRHUDA 1993. The First-tier Tribunal (Property Chamber) ruled that Ms Jolleys was not liable to pay the Section 60 costs, which prompted the appeal by Gray’s Inn.

Legal Principles

The Upper Tribunal had to consider Sections 42, 43, and 60 of the LRHUDA 1993. 

Section 43 indicates that assignees inherit the liabilities associated with the Section 42 Notice (on the basis that assignees ultimately become the “tenant”). Section 60 outlines the tenant’s liability to pay the reasonable costs incurred by the landlord following service of a Section 42 Notice.

The FTT had incorrectly interpreted Section 60, ruling that the assignee’s liability to pay the landlord’s costs required an express stipulation in the Transfer agreement.

The Deed of Assignment between Mr Warburton and Ms Jolleys contained an indemnity clause, specifying Ms Jolleys’ undertaking to indemnify Mr Warburton against costs arising from the Section 42 notice.

Decision

The Upper Tribunal allowed the appeal, setting aside the FTT’s decision on the basis of a misinterpretation of sections 60 and 43 of LRHUDA 1993. The Upper Tribunal held that Ms Jolleys, as the assignee, was liable to pay Gray’s Inns’ costs under Section 60 up until the Section 42 Notice was considered withdrawn, except for those incurred within the FTT proceedings.

We have experience in supporting both landlords and tenants and can guide you through the process of extending a lease.  Please speak to a member of our specialist team who are affiliated with Association of Leasehold Enfranchisement Practitioners (ALEP), to talk through your options.

If you wish to discuss any of the topics in this article, please contact us or reach out to a member of the Commercial Property Department.

Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.

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