Tenants’ covenant “to pay to the Lessor all costs and expenses (including legal costs and fees payable to a surveyor) which may be incurred by the Lessor […]” entitled the Landlord in a dilapidations claim to have his costs assessed on an indemnity basis.

The recent Court of Appeal decision of Littlestone & Others v Macleish [2016] EWCA Civ 127 related to costs issues stemming from a main action.  The main action concerned a dilapidations claim by Macleish, as Landlord, against the tenants in relation to a lease of office premises in Snaresbrook, London.  At the 5-day trial, the Tenants were ordered to pay the Landlord’s costs of the proceedings, to be assessed on a standard basis, i.e. costs have to be proportionate.

The decision was appealed.  The Landlord appealed on the basis that costs should have been awarded on an indemnity basis due to a contractual entitlement (costs recovery clause) under the lease.  If costs are awarded on an indemnity basis, it is not a prerequisite for costs to be proportionately incurred or proportionate in amount and the paying party has the burden to demonstrate that the costs claimed are unreasonable.

The Court decided in favour of the landlord.  Although the costs recovery clause did not expressly refer to an indemnity, the Court held that it corresponded more closely with assessment on an indemnity basis rather than on a standard basis.  As noted, the Tenants covenanted to pay “all” costs and expenses which may be incurred by them.

Key aspects:

• Compared to indemnity basis costs, standard basis costs need to be proportionate
• Tenants of commercial properties should seek advice on their leases and interpretation as to  the cost liability for pursuing breaches of covenant
• Costs recovery clauses should be drafted and considered carefully:  if they are drafted imprecisely, courts may take a view and may determine that costs should be recoverable on an indemnity basis rather than on a standard basis
• Here the Lease was silent as to reasonableness. Note that no assistance was to be found for the Tenants under CPR 44.3(1) (where costs will not be allowed by the Court if unreasonably incurred or unreasonable in amount), as the Court looks at the underlying contract and if it concludes (as here) that the costs were recoverable under the Lease, they are presumed to have been reasonably incurred.