In the first of what we expect to be many to come, the Upper Tribunal (“UT”) has recently decided an appeal and provided clarity on certain provisions of the Building Safety Act 2022 (“BSA”), as well as the circumstances in which costs conditions are imposed in dispensation applications.

Adriatic Land 5 Limited -v- Leaseholders at Hippersley Point [2023] UKUT 271 (LC)

The case concerned Hippersley Point on Felixstowe Road in Abbey Wood. The building is a 10-storey mixed use building over 18 metres in height, with commercial premises on the ground floor and 32 residential flats above.

Following investigations in 2020, the landlord established that the external construction of the building was in an unsatisfactory condition in terms of fire risk and substantial remedial works were required, as well as interim fire safety measures. The works were qualifying works for which the landlord was required to consult under Section 20 of the Landlord and Tenant Act 1985 (“LTA 1985”) (see here). However, due to the urgency of the works, the landlord instead applied to the First-Tier Tribunal (“FTT”) for dispensation from the consultation requirements (see here).

The FTT’s original decision and the reviewed decision

By its original decision made in December 2021, the FTT had little difficulty in deciding that dispensation should be granted. This was on the basis of the clear need for the landlord to undertake the works to make the building safe, and because it was said to be impossible to identify any prejudice suffered by the leaseholders by the failure to consult as no comparative estimates had been provided by the leaseholders. The FTT decided that dispensation should therefore be granted on an unconditional basis. The FTT did, however, make an order under Section 20C of the LTA 1985, preventing the landlord from recovering any of its costs for the dispensation application from the leaseholders. This is a common consequence of dispensation being granted.

The landlord appealed the Section 20C order made by the FTT, and the FTT undertook a review of its original decision. In June 2022, the FTT made its reviewed decision, overturning the Section 20C order on the basis that no parties had actually made an application for such an order. However, the FTT instead made the grant of dispensation conditional upon the landlord not recovering its costs for the dispensation application from the leaseholders (“the Costs Condition”). In other words, a Section 20C order was made through the back door. The landlord appealed this part of the FTT’s reviewed decision to the UT.

Considerations before the UT

Primarily the UT had to decide whether the FTT’s reviewed decision to impose the Costs Condition could be upheld. However, given the time that had passed throughout the litigation, the UT also identified a secondary issue as part of the appeal; namely whether the recovery of the landlord’s costs of the dispensation application were affected by the leaseholder protections contained in Para 9 to Sch.8 of the BSA which came into effect on 28 June 2022 and so after the two decisions above.

Issue 1 - Could the FTT’s decision to impose the Costs Condition be upheld? 

The UT decided that the FTT’s decision on the Costs Condition could not be upheld. This was primarily on procedural grounds, as the parties had not been given any opportunity to make submissions on whether the Costs Condition should be imposed, prior to the FTT’s reviewed decision. Nor had either party sought the imposition of the Costs Condition; something which the FTT had recognised when setting aside the Section 20C order in its original decision. The UT therefore found it was not open to the FTT to impose the Costs Condition, without the parties first having the opportunity to comment on the same. This was a procedural error of the FTT, sufficient to vitiate the exercise the FTT’s discretion, and amounted to an error of law 

The UT also found the FTT’s Costs Condition was also wrong as a matter of substance. This was not a case where the landlord was seeking to avoid its responsibilities. Instead, this was a prospective (as opposed to retrospective, after the event) application and the FTT had found no prejudice suffered by the leaseholders. The UT said that the landlord was “as blameless as it could be” and was seeking to ensure that an unsafe building was made safe as quickly as possible. The UT could not see why it was said to be unfair for the landlord to seek to recover its costs of the dispensation application from the leaseholders; such costs the UT said might legitimately be described as “essential expenditure for the benefit of the building and the safety” of the leaseholders.

The UT found that, whilst the FTT’s reviewed decision did not articulate any express principle, it appeared to depend on the existence of a principle that the imposition of a costs condition is appropriate whenever an application for dispensation is made. The UT stressed that no such principle exists or was intended when Lord Neuberger set out the guiding principles for the grant of dispensation in the leading case of Daejan -v- Benson [2013] UKSC 14.

Issue 2 - Is the recovery of the landlord’s costs affected by Para 9 to Sch.8 BSA?

This issue required consideration of both whether the costs for dispensation fell within the ambit of Para 9 to Sch.8 of the BSA, and also whether those provisions had retrospective effect, given that the BSA had not yet come into force when the dispensation application had been made by the landlord.

Para 9, Sch.8 of the BSA is part of the leaseholder protections and provides that :-

“No service charge payable for legal or professional services relating to liability for relevant defects

(1) No service charge is payable under a qualifying lease in respect of legal or other professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect.

(2) In this paragraph the reference to services includes services provided in connection with—

(a) obtaining legal advice,

(b) any proceedings before a court or tribunal,

(c) arbitration, or

(d) mediation.”

The UT said that the relevant liability or potential liability in Para 9 is one which is incurred as a result of a relevant defect, and in principle that can include anyone subject to the liability or potential liability, although the most obvious example was a landlord who is obliged to remedy a relevant defect.

The UT confirmed that the liability or potential liability under Para 9 is open ended, and may include liabilities arising under the BSA as well as liabilities from other sources. But the real question was the identification of the “legal or other professional services” referred to in Para 9. Those must be “relating to” the liability or potential liability. The UT recognised that those words are very wide. As such, it was difficult to see how a relationship could not exists between the costs of a dispensation application made by a landlord in relation to works to remedy a relevant defect, and the liability for that landlord to remedy the relevant defect. The UT said that this relationship was an obvious one and, as such, in the circumstances the costs of the dispensation application in principle fell within the costs contemplated by Para 9.

In terms of Para 9’s effect, the UT recognised that it did not expressly have retrospective effect (unlike some other provisions of the BSA). However, given the wording of Para 9, the UT said it was difficult to see how it would not apply where the costs of the relevant services were incurred prior to 28 June 2022 when the provisions came into force. Para 9 is drafted on the basis that no service charge is payable under a qualifying lease for the costs of those services, and it does not matter when the costs were incurred. That was, the UT concluded, consistent with the overall scheme of the provisions of the BSA including the leaseholder protections in Sch.8. The UT said “What might be seen as unfair results are, it seems to me, simply a reflection of life in the new world of the 2022 Act.”

The effect was, therefore, that as from 28 June 2022 no service charge is payable in respect of such legal and professional costs relating to the liability or potential liability of any person incurred as a result of a relevant defect, regardless of when the costs for those services were incurred, and regardless of when the relevant service charge actually became due for payment.

The UT was not required to identify which leaseholders had the benefit of the protections in Para 9, but once those qualifying leaseholders were identified they would have the benefit of the protections insofar as the landlord’s costs of the dispensation application were concerned.

Conclusion

The UT’s decision provides helpful clarify in many respects.

Firstly, it should not be assumed that a costs condition or Section 20C order should be the automatic consequence of dispensation being granted, and the FTT should consider whether it is appropriate in all the circumstances for such an order or condition to be made.

Secondly, the UT has clarified that Para 9, Sch.8 of the BSA is wide in scope and has the potential to protect leaseholders with qualifying leases from a wide-ranging description of legal and professional costs, even if incurred prior to 28 June 2022 when those provisions came into force.

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