What if a Tenant thinks the Landlord's legal costs are too high?

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CHH was a law firm which acted for a landlord. CHH entered into a cost agreement with the landlord in which it agreed to charge a fixed fee of $3,000 plus GST for each lease that CHH prepared for the landlord. As is the usual case, the lease provided that the tenant was to reimburse to the landlord the legal costs which CHH charged the landlord. The tenant objected to the amount of the costs it was asked to pay, but did not object to the payment of disbursements.

Under the Legal Profession Act a third-party, such as a tenant, has the right to have the costs which the landlord asks it to pay, assessed by a costs assessor. In this case the costs assessor determined that the fair and reasonable costs of the work done by CHH in relation to the lease were $2,050, not $3,000. Accordingly, the tenant was only required to pay the costs of $2,050. These costs were reduced by $1,200 which were the costs of the assessment.

The tenant also objected to paying GST on the costs. The costs were expressed to be "a fixed fee of $3000 plus GST". A costs assessor has power to assess costs that are "fees, charges, disbursements, expenses and remuneration". The court said that GST does not fall under any of these categories, and therefore the costs assessor did not have power to determine the amount of GST payable on the legal costs. The tenant therefore did not have to reimburse GST.

The case did not make it clear whether a landlord could still obtain payment of GST under a GST clause in the lease. That is yet to be tested.

The result

CHH charged the landlord $3,000, plus GST of $300. The landlord tried to recover that from the tenant but was only able to recover $850.00 being $2,050 less $1,200 for the costs of the assessment.

Comment

• Landlords should be aware that if the legal costs which they ask their tenants to reimburse are excessive, they run the risk of not only having the costs reduced but also paying the costs of the assessment.
• This decision opens the door for more tenants to take the opportunity to query a landlord's legal costs.
• If the costs are expressed to be GST exclusive, that is $X + GST, the GST will be not recoverable on assessment. To stand the best chance of recovering GST the costs agreement should clearly set out that the costs are GST inclusive.
• Leasing agents are to a certain extent taking the costs issue out of the hands of landlords.  It is becoming common for an agent (despite being agent for the landlord!) preparing a Heads of Agreement incorporating a standard clause stating that each party will pay their own costs. Note that landlords cannot pass on legal costs on retail leases.  They must bear that cost themselves.

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