[2025] EWHC 2751 (Admin)

The Law Commission addressed the obligation of tenants to pay non-litigation costs in chapter 13 of its Consultation Paper. Tenant consultees criticised the amounts they had been required to pay and their unpredictability. The risk of having to pay such costs as well as compensation could encourage tenants to accept terms at an early stage, despite issues as to the reasonableness of the amounts involved. There were also concerns about the costs that would be incurred in challenging a cost bill. Such costs may be uneconomic. A landlord may have greater financial resources and therefore be in a stronger negotiating position (paras.13.35 to 13.36).

At that stage the Law Commission did not put forward a proposal for reform as it considered the arguments for and against any reform to be finely balanced (paras.13.49 to 13.54). Instead, the Law Commission put forward suggestions as to how landlords’ costs could be controlled should tenants continue to be liable for those costs, such as fixed costs and capping.

In chapter 12 of its Enfranchisement Report (No.392), the Law Commission returned to this subject which it considered in detail. After summarising the views of consultees, the Law Commission put forward its views on reform (para.12.27 et seq). It noted that parties to an open market transaction normally pay their own transaction costs. Neither party expects to be paid any part of those costs by the other. The price agreed in the open market will reflect the practice that each party pays its own costs [12.27]. The compensation payable under the enfranchisement code is based on market values which do not take account of the code’s requirement that the tenant should also pay the landlord’s non-litigation costs. Accordingly, the landlord is over-compensated [12.28]. If the tenant’s statutory liability to pay the landlord’s costs were to be removed, the landlord’s compensation would still be based on market value, which would already have factored in an allowance for transaction costs [12.29].

The Law Commission acknowledged the point made by landlords that enfranchisement involves a compulsory purchase of the landlord’s interest at a time which is not of his choosing, and which may be when the market is weak. Landlords contended that there is an analogy to be drawn with the legal rules for a compulsory purchase under UK law which require an acquiring authority to pay a landowner’s costs [12.30].

However, the Law Commission concluded that the compulsion on a landlord to sell in an enfranchisement claim was insufficient to justify a legal requirement for a tenant to pay the landlord’s non-litigation costs. A tenant is under some compulsion to seek enfranchisement in order to prevent the expiration of his time-limited asset. As the lease becomes shorter the cost of enfranchisement is likely to increase. The term remaining may be unmortgageable or otherwise difficult to sell. “An enfranchising tenant leaseholder is therefore acting with a degree of compulsion that is inherent in the nature of the leasehold interest that he or she holds” [12.31]. It is not an answer to say that a tenant chooses to buy a lease. Often a tenant would have had little or no choice as to the form of tenure available when he bought the property in the first place, as in the case of flats or maisonettes [12.32]. Landlords are aware of the compulsion operating on tenants and know that they are able to exercise enfranchisement rights at any stage. “Indeed, many landlords purchase freeholds and other reversionary interests because of the prospect that a leaseholder will decide to seek a lease extension (and pay a price to the landlord for doing so) sooner rather than later” [12.33].

The Law Commission recommended that if landlords should continue to receive a price for a lease extension or freehold referable to the open market value of the landlord’s asset, tenants should not be required to make any contribution to their landlord’s non-litigation costs [13.35]. But if it should be decided that the price for enfranchisement should not be calculated by reference to open-market value, then the existing obligation of a tenant to pay those costs should remain [12.36].

The Law Commission went on to consider exceptions to the costs reform they had recommended. They also addressed mechanisms such as fixed costs and costs-capping in order to control the level of a landlord’s non-litigation costs, should it be decided that compensation should not relate to open market value.

The IA estimated that a requirement for landlords to pay their own non-litigation costs would cost landlords, and save tenants, £599m, split between £222m for business tenants and £377m for non-business tenants. The derivation of those figures is explained in Annex 2 to the IA. The IA considered that the Cost Recovery Reform would incentivise landlords to reduce their own costs, for example, through improved efficiency as well as the increased transparency and simplicity of the code which would follow from the reforms effected by the LFRA 2024.

With regard to the aims and justification of the Costs Recovery Reform, the IA followed the approach of the Law Commission (para.36 and Annex 2 para.18). The reform would reduce an imbalance between landlords and tenants. The former would have to pay their own non-litigation costs, as they would do if selling on the open market.

The ECHR Memorandum addressed the Costs Recovery Reform at [66]. The document stated that the new rules are compatible with A1P1 because they pursue the legitimate aims of addressing the historic imbalance between landlords and tenants, ensuring fairness for tenants and helping to make the enfranchisement process less complex and expensive. Removing the requirement for tenants to pay landlords’ costs would remove a significant barrier to the bringing of enfranchisement claims, would encourage landlords to complete the process more quickly and efficiently and would incentivise landlords to reduce their own costs.

The submission to Ministers on non-litigation costs dated 13 December 2022 essentially endorsed the reasoning of the Law Commission in recommending this option.

The schedules of Hansard material agreed between the parties show that Parliament debated the issue regarding the recovery of non-litigation costs by landlords.