Covenant for indemnity did not extend to own legal or surveyor’s fees

Where the only relevant tenant’s covenant (clause 4.1) is an obligation “to indemnify the Lessor against all actions proceedings costs claims and demands in respect of any breach non-observance or non-performance” of the tenant’s obligations under the lease and a tenant fails to pay a £50 instalment of ground rent is the landlord entitled to charge a further £50 for a letter demanding payment of the arrears?

In Fairhold Freeholds No.2 Ltd v Moody [2016] the Upper Tribunal (Lands Chamber) said “no”:

“The essence of a contract or covenant of indemnity is that it is a promise by A to protect B from B’s liability to C. For a liability to arise under a covenant of indemnity the party to be indemnified must have come under an obligation to a third party, to meet a claim or demand or to answer some action or proceedings or incur some costs. The question in any case where it is sought to rely on such a covenant is whether the lessor has come under an obligation to make a payment to someone else “in respect of’ some breach of obligation owed to the lessor by the lessee: has A’s breach given rise to B’s liability to C? If the lessor has come under such an obligation the covenant requires the lessee to indemnify the lessor against the cost it has incurred in meeting that obligation.

…………..The “costs” in question are of the same type i.e. the costs of a third party as a result of the lessee’s breach, for which the third party is entitled to look to the lessor for reimbursement. A covenant of indemnity is not the same as a covenant to reimburse the lessor’s own costs incurred in taking steps to enforce the lessee’s obligations……..

I am therefore satisfied that clause 4.1 does not enable the appellant to levy a £50 administration charge or to recoup the costs of its own solicitors in preparing to enforce the respondent’s obligation to pay the ground rent. To the extent that the appellant was under any obligation to make payments to its agent or solicitor as a result of those steps being taken such obligations were not the result of the respondent’s failure to pay the ground rent, but of the appellant’s own instructions.”

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.