New Law Journal, 7 February 2014
Section 138 of the County Courts Act 1984 applies to a claim in the county court by a lessor for possession of land on the ground that the lease is forfeit due to rent arrears. Section 138(2) states: “If the lessee pays into court or to the lessor not less than five clear days before the return day all the rent in arrear and the costs of the action, the action shall cease, and the lessee shall hold the land according to the lease without any new lease.”
A lessee wishing to take advantage of this provision must act swiftly. The return day for these purposes is the first date fixed for the hearing of the claim: Swordheath Properties Ltd v Bolt  2 EGLR 68. The lessor need only serve the claim 21 days before that hearing (Civil Procedure Rules (CPR) r 55.5(3)), so the lessee may have as little as 16 days from service to make payment.
The crucial question is likely to be what sum the lessee needs to pay. The rent arrears should be easily ascertainable, since para 2.3 to PD55A requires the lessor to set out in the particulars of claim both the arrears at issue and a daily rate. But what of the costs of the action? On what basis are those costs to be determined? At present, I suggest there is no satisfactory answer to this question. For the purposes of this article, I assume that the lease does not contain a contractual right to costs.
If s 138(2) is to be of any use, it is essential that lessees be able to ascertain easily what costs they need to pay. This applies particularly to litigants in person, to whom the court process may be unfamiliar. They are likely to seek assistance from Form N7B (Notes for defendant—forfeiture of the lease (residential premises)), which should have been served with the claim form. The N7B prudently advises lessees to take action immediately. It then states: “Paying the arrears: If you pay all the arrears and costs and any rent due before the hearing, the claim will cease, the lease will continue unaffected and the hearing will be cancelled. Remember that you must include in your payments any rent which has become due since the claim was issued. The daily rate of rent is given at para 2(c) of the particulars of claim. You should add this amount for each day that has passed since the claim was issued to the arrears and costs already due. The date of issue is on the front of the claim form.”
The reference to para 2(c) of the particulars of claim is an error. Form N119 (Particulars of claim for possession (rented residential premises)) has no such paragraph. Rather, para 3(c) sets out the daily rate of rent, or charge for use and occupation, as appropriate. A litigant in person will probably be able to spot the error and ascertain what to pay for rent arrears. But the N7B provides no assistance in ascertaining what sum to pay in costs.
For s 138(2) to be effective, it would make sense for fixed costs to apply. The various sets of circumstances in which they apply are prescribed by CPR Part 45. Only two merit consideration: r 45 1(2)(c) and (d). They read as follows: “(c) the claim is for the recovery of land…and the defendant gives up possession, pays the amount claimed, if any, and the fixed commencement costs stated in the claim form; (d) the claim is for the recovery of land…where one of the grounds for possession is arrears of rent, for which the court gave a fixed date for the hearing when it issued the claim and judgment is given for the possession of land…and the defendant—(i) has neither delivered a defence, or counterclaim, nor otherwise denied liability; or (ii) has delivered a defence which is limited to specifying his proposals for the payment of arrears of rent.”
Neither of these provisions can be read as applying to s 138(2). Paragraph (c) cannot apply as it requires the lessee to give up possession; while under s 138(2) the lessee remains in possession under the lease. Paragraph (d) cannot apply because it requires the court to order possession; while under s 138(2) the claim simply ceases and no order is ever made. No provision in CPR Pt 45 can be construed so as to include s 138(2) without the court completely rewriting its terms.
If fixed costs do not apply, what must the lessee pay? The general rule in forfeiture claims is that a lessee must pay costs on an indemnity basis to obtain relief from forfeiture: Patel v K&J Restaurants Ltd  EWCA Civ 1211. However, the CPR do not provide a mechanism whereby a party can obtain an assessment of the other party's costs before the claim is heard. Even if the rules did so provide, it is hard to imagine any county court having the capacity or inclination to carry out such an assessment in the short timescale within which the lessee must make payment under s 138(2).
The lessee could ask for details of the lessor's costs. But the CPR do not require the lessor to provide such details at least five clear days before the hearing. In any event, any sum demanded by the lessor would not necessarily be the sum that the lessee would be obliged to pay on assessment. Even on the indemnity basis, the lessor would only be entitled to costs reasonably incurred and reasonable in amount.
The parties might disagree as to the amount of costs to be paid. If the lessee paid less than the lessor demanded would the action cease? Or would the hearing have to proceed for the court to decide whether enough had been paid? The later course cannot be how Parliament intended s 138(2) to work.
A further difficulty arises because s 138(2) permits the lessee to pay the arrears and costs either to the lessor or into court. If the lessee chooses to pay into court, the court will need to be able to ascertain whether the hearing should be vacated. If fixed costs do not apply and the lessor's costs have not yet been assessed, the court will be unable to do so.
History provides some assistance in ascertaining how s 138(2) was intended to work in practice. The origins of the section are in s 52 of the County Courts Act 1856, which also provided that the action would cease if the lessee paid the arrears and costs at least five clear days before the hearing. The County Court Rules at the time provided a separate summons for forfeiture claims. Form 211 stated on its face that the action would cease if the lessee paid “to the registrar the rent in arrear, and the costs of this action, as stated at the foot of the summons”. It was therefore clear that the summons was intended to include a sum for costs and the lessee would be left in no doubt what needed to be paid.
The County Court Rules 1889 provided detailed scales of costs and set out sums that might be entered on the summons for solicitors' costs. The fixed costs regime did not yet exist, and the sums to be entered on the summons could apply to all claims, with the sum to be entered depending on the value of the amount claimed.
The present lack of clarity appears to have arisen in part due to the disappearance of the tailored forfeiture claim form (replaced by the generic Form N5 possession claim form) and in part due to the failure of those who drafted the first fixed costs provisions (in the County Court Rules 1936) to include a provision covering s 138(2). I suggest that the omission of s 138(2) from the fixed costs regime is more likely to have been an oversight than a deliberate decision. But, if so, it is an oversight that has remained uncorrected for almost 80 years.
Reported authority on s 138(2) is rare. Some assistance appears to be provided by Swordheath Properties. The Court of Appeal decided that the return day for the purposes of s 138(2) was the hearing date specified in the summons. In giving his reasons for this conclusion, Lord Justice Dillon said: “Moreover, I find it difficult to see why fixed costs should be recovered only, if the defendants seek, after the hearing date specified in the summons even though before a substantive trial of the action, to bring the proceedings to an end under s 138. There is no means for the defendants to get an order for taxation to find out what they need to pay for the purposes of s 138(2). But it is not fair, in my judgment, that the plaintiffs should be limited to their fixed court fee and fixed solicitors' costs specified in the possession summons no matter how many interlocutory applications there may be before there is an actual trial of the summons, if the defendants succeed not less than five clear days before the date of the actual trial to pay off all the arrears and the mere fixed costs of the action prescribed in the summons itself.”
This passage supports the argument that fixed costs apply to s 138(2). However, the lessor in that case had inserted a fixed costs figure in the summons and there is no clear indication in the judgment that the applicability of fixed costs was in issue. Further, the summons and court rules in use at the time were different. An unfortunate aspect of the judgment (given ex tempore) is that, after stating that two points were taken in support of the appeal, Dillon LJ appears only to address one of them. It leaves the reader to guess at what the other argument might have been.
In light of the above, I suggest that the present position is unsatisfactory. If fixed costs are intended to apply to s 138(2)—a sensible solution—then CPR Pt 45 should be amended to expressly provide for their application to s 138(2). The closest comparable fixed costs scenario in existence is r 45(1)(2)(c), and the fixed costs applicable to that rule could be applied to s 138(2).
If the lessee is to be required to pay assessed costs under s 138(2)—whether on the indemnity or standard basis—then the CPR should be amended to include a mechanism whereby the lessee can ascertain what sum in costs should be paid.
The present situation leaves plenty for lawyers to argue over, but little clarity for litigants.
N.L.J. 2014, 164(7593), 15-16
Winston Jacob / 7th Feb 2014
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