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Recovering legal costs is an important consideration for any landlord faced with pursuing rental arrears following a tenant default. In the current economic climate, where financial pressures are increasingly impacting commercial tenants, enforcement action is becoming more common, and more costly.
While many landlords expect those costs to be recoverable, that outcome is not guaranteed. The ability to recover all legal expenses depends largely on how lease documentation is prepared, and whether key provisions are drafted with sufficient precision.
This article outlines practical considerations for landlords seeking to recover legal costs, including the role of solicitor-client cost clauses, the potential impact of the doctrine of merger, and recent guidance from the High Court.
Solicitor-client costs clauses are a crucial mechanism for landlords to protect their financial interests. These clauses enable landlords to recover costs incurred as a result of instructing a lawyer to assist with enforcing contractual rights under a lease.
A common example is tenant default on rental payments. In this situation, a landlord will often be left with no choice but to instruct a lawyer to pursue amounts owing, which may include commencing court proceedings. All legal costs incurred may be recoverable if the solicitor-client costs clause is appropriately drafted in the relevant deed of lease (DOL).
The starting point for recovering legal fees is rule 14.6 of the District and High Court Rules.[1] Under this rule, a party is entitled to indemnity costs where provided for in a contract or deed. Indemnity costs reflect the actual legal costs incurred in recovering a debt.
As a general rule, however, courts typically award only a portion of costs (often around two-thirds), being those considered “reasonable” in the circumstances. Rule 14.6 provides an important exception, enabling recovery of actual costs where an express indemnity clause is included in the DOL.
Despite the operation of rule 14.6, the doctrine of merger remains a potential hurdle to recovering all legal costs. This longstanding common law principle provides that contractual rights are merged into a judgment once it is obtained.
In practice, this means that a landlord’s contractual right to recover enforcement costs may be lost unless the lease expressly preserves that right through a non-merger clause.
The 2023 High Court decision of Re Fistonich, ex parte Calypso No 11 Ltd (Re Fistonich) provides a practical illustration of this issue. In that case, the landlord was not awarded the full legal costs incurred, despite the presence of an indemnity clause. The landlord had pursued the tenant through extensive enforcement action and incurred significant legal expense in doing so.
The Court confirmed that, unless expressly preserved, contractual rights to recover legal costs merge into the judgment. As a result, the landlord was limited to recovering “reasonable” costs, rather than the actual costs incurred.
This highlights a critical risk for landlords: an indemnity clause alone may not be sufficient to ensure full recovery of legal costs.
We regularly assist landlords in similar situations, where enforcement action can extend as far as bankruptcy proceedings in an effort to recover substantial debts. Without a non-merger clause, landlords are exposed to a real risk of not recovering the full extent of legal costs incurred, particularly where a tenant disputes liability and the matter becomes protracted.
We are increasingly advising landlords facing tenant defaults as a result of broader economic pressures on commercial entities. Where disputes arise, legal costs can escalate quickly, particularly if matters are contested or require formal enforcement action.
For this reason, it is important that lease documentation is reviewed proactively to ensure it appropriately protects a landlord’s position, including maximising the ability to recover legal costs where issues arise.
We regularly advise commercial landlords on tenant defaults, including reviewing and drafting lease documentation to strengthen protection and improve cost recovery outcomes where enforcement action is required.
If you require a review of your lease documentation, or are experiencing difficulties with a tenant, we recommend seeking advice early. Addressing issues at the outset can significantly reduce risk and improve recovery outcomes, including legal costs.
[1] The rules are identical under both courts’ rules.
Recovering legal costs is an important consideration for any landlord faced with pursuing rental arrears following a tenant default. In the current economic climate, where financial pressures are increasingly impacting commercial tenants, enforcement action is becoming more common, and more costly.
While many landlords expect those costs to be recoverable, that outcome is not guaranteed. The ability to recover all legal expenses depends largely on how lease documentation is prepared, and whether key provisions are drafted with sufficient precision.
This article outlines practical considerations for landlords seeking to recover legal costs, including the role of solicitor-client cost clauses, the potential impact of the doctrine of merger, and recent guidance from the High Court.
Solicitor-client costs clauses are a crucial mechanism for landlords to protect their financial interests. These clauses enable landlords to recover costs incurred as a result of instructing a lawyer to assist with enforcing contractual rights under a lease.
A common example is tenant default on rental payments. In this situation, a landlord will often be left with no choice but to instruct a lawyer to pursue amounts owing, which may include commencing court proceedings. All legal costs incurred may be recoverable if the solicitor-client costs clause is appropriately drafted in the relevant deed of lease (DOL).
The starting point for recovering legal fees is rule 14.6 of the District and High Court Rules.[1] Under this rule, a party is entitled to indemnity costs where provided for in a contract or deed. Indemnity costs reflect the actual legal costs incurred in recovering a debt.
As a general rule, however, courts typically award only a portion of costs (often around two-thirds), being those considered “reasonable” in the circumstances. Rule 14.6 provides an important exception, enabling recovery of actual costs where an express indemnity clause is included in the DOL.
Despite the operation of rule 14.6, the doctrine of merger remains a potential hurdle to recovering all legal costs. This longstanding common law principle provides that contractual rights are merged into a judgment once it is obtained.
In practice, this means that a landlord’s contractual right to recover enforcement costs may be lost unless the lease expressly preserves that right through a non-merger clause.
The 2023 High Court decision of Re Fistonich, ex parte Calypso No 11 Ltd (Re Fistonich) provides a practical illustration of this issue. In that case, the landlord was not awarded the full legal costs incurred, despite the presence of an indemnity clause. The landlord had pursued the tenant through extensive enforcement action and incurred significant legal expense in doing so.
The Court confirmed that, unless expressly preserved, contractual rights to recover legal costs merge into the judgment. As a result, the landlord was limited to recovering “reasonable” costs, rather than the actual costs incurred.
This highlights a critical risk for landlords: an indemnity clause alone may not be sufficient to ensure full recovery of legal costs.
We regularly assist landlords in similar situations, where enforcement action can extend as far as bankruptcy proceedings in an effort to recover substantial debts. Without a non-merger clause, landlords are exposed to a real risk of not recovering the full extent of legal costs incurred, particularly where a tenant disputes liability and the matter becomes protracted.
We are increasingly advising landlords facing tenant defaults as a result of broader economic pressures on commercial entities. Where disputes arise, legal costs can escalate quickly, particularly if matters are contested or require formal enforcement action.
For this reason, it is important that lease documentation is reviewed proactively to ensure it appropriately protects a landlord’s position, including maximising the ability to recover legal costs where issues arise.
We regularly advise commercial landlords on tenant defaults, including reviewing and drafting lease documentation to strengthen protection and improve cost recovery outcomes where enforcement action is required.
If you require a review of your lease documentation, or are experiencing difficulties with a tenant, we recommend seeking advice early. Addressing issues at the outset can significantly reduce risk and improve recovery outcomes, including legal costs.
