Our RTM company has taken legal advice on a couple of matters over the past two years, including a dispute with one leaseholder and some advice about our own membership rules. Our accountant has now asked whether those solicitors' fees should have gone into the service charge at all. Can we recover legal costs from the leaseholders?
Only if the lease permits it. An RTM company cannot assume that legal costs can be paid from the service charge simply because they were necessary or reasonably incurred in managing the development. The starting point is always the wording of the leases. A lease may contain wording clear enough to permit recovery of particular legal costs, but general references to management or to professional persons will not necessarily be enough, and different categories of legal expenditure may need to be considered separately. Where costs are recoverable as variable service charges, reasonableness remains a separate question. Acquiring the Right to Manage does not create a contractual right to recover costs that the lease never provided for.
Service charges are creatures of contract. A leaseholder is only obliged to contribute towards costs that the lease requires them to contribute towards. An RTM company steps into the landlord's management shoes under the Commonhold and Leasehold Reform Act 2002, but it does not acquire wider recovery rights than the leases already contain.
That is why the question "can we pay the solicitor out of the service charge?" is not answered by asking whether the advice was needed. It is answered by reading the service charge provisions of the leases.
Two questions must be kept apart:
A cost can be entirely sensible and still be irrecoverable, because the lease never provided for it.
*Thanet Lodge (Mapesbury Road) RTM Company Limited v Mirchandani* [2024] UKUT 205 (LC) concerned a five-storey block of 43 flats. The leaseholders had acquired the Right to Manage and the block was managed by an RTM company.
A leaseholder applied to the First-tier Tribunal under section 27A of the Landlord and Tenant Act 1985 for a determination of what service charges were payable. One group of items was legal and mediation expenditure incurred by the RTM company:
The individual amounts were modest, ranging from around £960 to £1,838 before apportionment. The point of principle was not modest at all. There was no argument that the costs were unreasonably incurred. The appeal turned solely on the construction of the lease.
The lease, dated 1995, required the leaseholder to pay a percentage of "Total Expenditure", defined as the expenditure incurred in carrying out the landlord's obligations under clause 5(4), together with any other costs and expenses reasonably and properly incurred in connection with the Building, followed by a short list of specific items such as managing agents' costs.
Clause 5(4)(g) allowed the landlord to employ managing agents and chartered accountants to manage the building and collect rents and service charges, and to employ such surveyors, builders, architects, engineers, tradesmen, accountants or other professional persons as might be necessary or desirable for the proper maintenance, safety and administration of the building.
Neither provision mentioned lawyers, legal proceedings or legal costs. That silence was the heart of the case.
The FTT had held that none of the legal fees were recoverable. The RTM company appealed on that issue alone.
The Upper Tribunal (Judge Elizabeth Cooke) dismissed the appeal on 16 July 2024, agreeing with the FTT's outcome but giving fuller reasons because the recoverability of legal costs is an issue likely to recur. The conclusion was that none of the legal costs the RTM company wished to charge to the service charge were chargeable.
The Tribunal reached that result by dividing the expenditure into two categories.
The advice about the RTM company's membership and the convening of meetings was treated separately from the rest. It was not incurred in a dispute with a leaseholder at all.
Two points were decisive. First, such costs were not contemplated by the parties to a 1995 lease, because the right to manage legislation did not then exist. Second, the cost benefited the RTM company, whose members were only a proportion of the leaseholders - the respondent was not a member - and there was no reason why the cost of running a company that not everyone had joined should be charged to everyone. That claim, the Tribunal said, clearly failed.
The remaining items - advice about a dispute and settlement with another leaseholder, advice about mediation, and the mediation fee - were considered against both clause 5(4)(g) and the definition of Total Expenditure.
On clause 5(4)(g), the Tribunal did not accept the FTT's characterisation of the clause as authorising professionals to implement the landlord's other obligations. Sub-clause (i) enables the employment of managing agents and accountants to manage the building and collect income; it is not a general licence to employ professionals to perform other covenants. Sub-clause (ii) is broader, covering professional persons for maintenance, safety and administration, but the wording in that lease was identical to the clause considered by the Court of Appeal in *Sella House Ltd v Mears* (1988) 21 HLR 147, and the Tribunal found nothing in the facts justifying a different conclusion about identical words.
On the definition of Total Expenditure, the general words about other costs and expenses reasonably and properly incurred in connection with the building had to be read in context. Following *Holland Park Management Company Limited v Dell* [2023] EWCA Civ 1460 and the Tribunal's own decision in *London Borough of Tower Hamlets v Lessees of Brewster House and Malting House* [2024] UKUT 193 (LC), a definition clause is unlikely to have been intended to extend the service charge to something quite different from what the substantive provisions had already specified.
The Tribunal acknowledged the practical difficulty this creates for an RTM company, but held that it is the consequence of the lease containing no clause enabling recovery of such costs.
Not automatically, and not never. This is the part of the judgment most often oversimplified.
The Upper Tribunal expressly confirmed that the absence of a specific mention of legal advice is not fatal to recovery. It cited *Assethold Ltd v Watts* [2014] UKUT 537 (LC), where a broadly worded obligation covering acts and things considered necessary or desirable for the proper maintenance, safety, amenity and administration of the development was held to include legal advice about a neighbouring development that threatened the structure, party wall notices and an injunction. As the Deputy President put it there, language may be clear even though it is not specific.
What matters is the purpose and context of the clause, read with the rest of the lease. In *Sella House*, legal costs of pursuing other tenants for arrears fell outside a management and maintenance clause; Taylor LJ said he would require a clause in clear and unambiguous terms before accepting that leaseholders who pay on time must subsidise the landlord's costs of suing defaulters.
So there is no universal rule that "other professional persons" includes or excludes lawyers. There is a rule that the clause must be interpreted as a whole, in its documentary and commercial context, applying the ordinary principles of construction in *Arnold v Britton* [2015] UKSC 36.
Yes. "Legal costs" is not a single category, and treating it as one is the mistake that produces unrecoverable expenditure.
Different purposes may attract different contractual answers, for example:
Thanet Lodge is a good illustration: the constitutional advice failed for reasons that had nothing to do with why the dispute resolution costs failed. Each category should be tested against the lease separately.
Where the legal costs arise from a dispute with a leaseholder, the Court of Appeal has twice held that a service charge clause concerned with management or the provision of services does not enable the landlord to recover its legal costs of a dispute with a tenant through the service charge: *No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd* [2021] EWCA Civ 1119 and *Kensquare Ltd v Boakye* [2021] EWCA Civ 1725. The Upper Tribunal applied that reasoning in Thanet Lodge.
That does not mean litigation costs can never be recovered. It means they are unlikely to be recovered under a clause that was not written with them in mind.
One practical lesson from Thanet Lodge is worth isolating.
The costs of managing the building and the costs of running the RTM company as a corporate entity are not the same thing. Advice about membership, directors, meetings, the articles or company procedure relates to the company, not to the fabric or administration of the building, and it may benefit only those leaseholders who have joined the company.
Where the lease permits expenditure connected with management, maintenance and administration of the building, corporate costs of that kind are difficult to bring within it. Directors of RTM companies and RMCs should keep the two budgets conceptually separate, and should expect to justify any corporate expenditure charged to the service charge. Our answer on whether an RTM company can change the service-charge budget looks at the budgeting side of the same discipline.
This distinction matters, and confusing the two leads to charging the wrong people.
Route 1 - through the service charge. The company treats the legal expenditure as a general building expense shared between all leaseholders. That requires appropriate wording in the service charge provisions, as discussed above.
Route 2 - directly against the leaseholder in breach. Many leases contain a separate covenant requiring an individual leaseholder to pay the costs incurred by the landlord in connection with their breach, or in contemplation of forfeiture proceedings. That is a different contractual route, it is directed at one leaseholder rather than the whole block, and a charge of that kind may be an administration charge rather than a variable service charge, with its own statutory framework and its own reasonableness test.
This answer does not analyse administration charges in detail; that is a topic in its own right and one we intend to cover separately. The immediate point is that failing under Route 1 does not necessarily mean there is no Route 2, and using Route 1 where Route 2 applies spreads one leaseholder's costs across neighbours who did nothing wrong. Recovery against a leaseholder in arrears is considered further in our answer on recovering service-charge arrears.
Section 19 of the Landlord and Tenant Act 1985 provides that relevant costs are taken into account in determining the amount of a variable service charge only to the extent that they are reasonably incurred, and where works or services are involved, only if they are of a reasonable standard.
Section 19 operates on costs that the lease already allows to be charged. It cannot supply contractual authority that the lease does not give. Thanet Lodge makes the point neatly: nobody argued the RTM company's legal costs were unreasonably incurred, and they were still irrecoverable.
Any leaseholder or tribunal considering legal costs in a service charge is therefore asking two questions in sequence:
A yes to the second does not cure a no to the first.
Section 20C of the Landlord and Tenant Act 1985 allows a leaseholder to apply for an order that all or part of the costs incurred by the landlord in connection with proceedings before a court or tribunal are not to be regarded as relevant costs in determining the service charge. Applications are commonly made at the end of tribunal proceedings about service charges.
Contractual recoverability and section 20C are separate considerations. A lease might contain wording clear enough to permit litigation costs to be charged, and the tribunal may still be asked to make a section 20C order limiting that recovery in the particular proceedings. Equally, a section 20C order is not needed where the lease never permitted the recovery in the first place.
Section 20C orders deserve their own explanation, and we plan to publish one. For present purposes, RTM and RMC directors contemplating tribunal proceedings should assume the point will be raised and factor it into the decision to litigate.
This is the honest difficulty the Upper Tribunal acknowledged. A resident-led company may genuinely need legal advice in circumstances where the leases make no provision for the cost.
Necessity does not create recoverability. Depending on the circumstances, directors may need to consider:
What directors should not do is charge the cost anyway and hope no one challenges it. A determination under section 27A can be sought later, and unrecoverable expenditure charged in error tends to become a credit owed back to leaseholders, on top of the cost of the dispute.
Many leases in blocks now managed by RTM companies and RMCs were drafted decades before resident-led management was contemplated. The lease at Thanet Lodge was granted in 1995, seven years before the Commonhold and Leasehold Reform Act 2002.
The result is a structural mismatch: a resident-controlled company carrying full management responsibility under a document that never anticipated it, and which may lack recovery mechanisms for costs that modern management genuinely involves. Where that gap affects every lease in the block rather than one, the answer is usually a considered look at whether the leases themselves should be varied, which we discuss further in our guidance on RTM companies and unsatisfactory leases.
We manage blocks for RTM companies, RMCs and resident-led boards, and much of the value in that work is upstream of a dispute: reading the leases properly, budgeting within them, and telling directors clearly when a proposed cost sits outside the service charge mechanism.
If you are weighing up legal advice and are unsure whether the cost is recoverable, our RTM company management and service charge management services are the right starting point. We are managing agents, not solicitors, and where recoverability is genuinely arguable we will say so and point you to specialist advice rather than guess.
Thanet Lodge is a reminder that service charge recovery is a contractual question first and a fairness question second. The practical work happens before the solicitor is instructed, not after the invoice arrives.
"We needed the solicitor, so the service charge must pay"
Necessity does not create contractual recoverability. In Thanet Lodge nobody argued the costs were unreasonably incurred, and they were still irrecoverable because the lease did not provide for them.
Assuming "other professional persons" covers every legal cost
The clause must be read as a whole and in context. In Sella House Ltd v Mears identical wording did not extend to legal costs, although broader wording has been held sufficient in other cases.
Treating all legal expenditure as one category
Corporate advice, building management advice, litigation and enforcement costs can have different contractual bases. Thanet Lodge analysed the constitutional advice separately from the dispute resolution costs.
Charging everyone when the cost may belong to one leaseholder
Check whether the lease contains a direct enforcement or forfeiture costs covenant against the leaseholder in breach before spreading the cost across the block.
Ignoring section 19
Even a contractually recoverable legal cost can be challenged as not reasonably incurred or unreasonable in amount.
Ignoring section 20C during tribunal proceedings
A leaseholder may apply for an order restricting recovery of litigation costs through the service charge, separately from any question of what the lease permits.
Most questions on this topic are management questions rather than legal ones, and the two are worth separating. A managing agent can tell you how something works day to day and what it will cost. A solicitor tells you what your rights are and how a Tribunal is likely to view them.
East Valley Properties provides management expertise, not legal advice. Where a matter turns on the wording of your lease or on formal proceedings, we will say so and work alongside your solicitor.
The official material behind this guide. We summarise it in plain English rather than reproducing it.
The Upper Tribunal (Lands Chamber) decision of 16 July 2024, on the National Archives Find Case Law service.
Limits variable service charges to costs reasonably incurred and, for works and services, of a reasonable standard.
Allows a leaseholder to apply for an order limiting the recovery of litigation costs through the service charge.
The jurisdiction under which the tribunal determines whether a service charge is payable.
Court of Appeal authority relied on in Thanet Lodge concerning legal costs of a dispute with a tenant.
Court of Appeal decision to the same effect on service charge clauses concerned with management and services.
Considered the same "other costs and expenses" definition wording relied on in Thanet Lodge.
Not separately available as a free primary text; the relevant passages of Dillon LJ and Taylor LJ are set out at paragraphs 24 to 26 of the Thanet Lodge judgment.
Secondary commentary from a firm of solicitors, offered as further reading alongside the primary material.
Clear budgets, designated client accounts and year-end accounts leaseholders can actually follow. We can review your current arrangement at no cost.
Answered by Romain Maillard - Director, East Valley Properties
Romain manages residential blocks and estates for RTM companies, residents' management companies, share of freehold developments and freeholders across East London and Essex.
Published
This answer has been anonymised. Personal details, addresses and company names have been removed. Guidance is general and does not replace advice from a solicitor or surveyor on your specific block. East Valley Properties is a managing agent, not a firm of solicitors or legal advisers.
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