Does agreeing to “reasonable costs” mean assessment on the indemnity basis?
Yes, held the Commercial Court.
In Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd  EWHC 3668 (Comm) the parties had entered into a lease which contained a clause that the Defendant (who was the lessee) was to pay all of the Claimant’s (the lessor’s) “reasonable costs and expenses” of litigation, including its legal costs.
The Claimant had successfully obtained summary judgment against the Defendant and sought costs on the indemnity basis (rather than the standard basis), which meant that their costs did not have to be proportionate. Moulder J commented in particular that the word “reasonable” did not mean that indemnity costs could not be sought.
It is a common clause in lease agreements that lessees agree to paying the lessor’s reasonable costs and expenses, which include legal costs in the event that action is needed to recover arrears of rent, for example. Often, a lessee will sign a lease agreement including this clause without realising the potentially catastrophic consequences.
It is important that before entering into a lease you seek advice in relation to its terms in order to protect your position.
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