Often we advise our landlord/RTM/RMC clients, when either faced with an application by a leaseholder challenging the payability or reasonableness of service charges or making such an application, that the First-Tier Tribunal (“FTT”) is a ‘no-costs’ jurisdiction. For the large part that is correct, as the FTT, unlike the Courts, has very limited jurisdiction to award one party its costs at the conclusion of the litigation. However, the FTT does have some jurisdiction when it comes to costs, meaning that it is not an entirely ‘costs neutral’ forum 

This Legal Update looks at the types of costs orders that can be made in service charges disputes before the FTT under Section 27A of the Landlord and Tenant Act 1985. Note that the same does not necessarily apply to other types of applications that the FTT has jurisdiction to hear, for example in enfranchisement claims under the Leasehold Reform, Housing and Urban Development Act 1993 or claims exercising the right to manage under the Commonhold and Leasehold Reform Act 2002, and specialist advice should be taken in respect of any specific applications.

Rule 13

Under Rule 13 of The Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, there are two instances when the Tribunal may award costs :-

1. Rule 13(1)(a) - the FTT may order the parties’ legal or other representative to pay any ‘wasted costs’.

   Wasted costs are costs incurred by a party as a result of any improper, unreasonable or negligent act or omission on the part of any legal or other representative, or which, in the light of any such act or omission occurring after they were incurred, the FTT considers it is unreasonable to expect that party to pay.

2. Rule 13(1)(b) - the FTT may order a party to pay costs to the other party, if a person has acted unreasonably in bringing, defending or conducting proceedings.

   The key case on ‘unreasonable costs’ is Willow Court Management Limited -v- Alexander [2016] UKUT 290 (LC), which held that ‘unreasonable’ behaviour includes conduct which is “vexatious” and “designed to harass the other side…the acid test is whether the conduct permits of a reasonable explanation…”.

Orders under either limb of Rule 13 are very rare.

Insofar as Rule 13(1)(a) is concerned, it goes without saying that a competent and experienced legal professional should not put themselves in a position where there have acted improperly, unreasonably or negligently, to give rise to an order for wasted costs against them.

Regarding unreasonable costs under Rule 13(1)(b), the Upper Tribunal in Willow Court  made it clear that orders should not be made too readily. We have reported on examples of where unreasonable costs orders have been made here, and where successfully appealed here.

Reimbursement of Tribunal fees

Under Rule 13(2), the FTT may order a party to reimburse the Tribunal fees paid by the other, such as the fee paid for issuing the application and the fee for the hearing.

The FTT has a wide discretion when deciding to make such an order, and that fact that a party has been successful in the litigation does not necessarily mean an order will/will not be made in their favour. The application will need to be considered on its own facts and merits.

Section 20C

Under Section 20C of the Landlord and Tenant Act 1985, the FTT may make an order that the costs of the proceedings are not to be regarded as relevant costs when determining the amount of service charges payable by the leaseholder party to the application. Note that, where a Section 20C order is made, generally that is only to restrict the ability to recoup costs by way of a service charge contribution from the leaseholder party to the application, and not all leaseholders in the block (see here) 

The application for a Section 20C order can either be made within the application (where the application is made by a leaseholder) or in response (where made by a landlord/RTM/RMC), or on the conclusion of the proceedings. It will be decided on the conclusion of proceedings.

The FTT has a wide discretion when it comes to making an order under Section 20C, taking into account what is just in equitable in all the circumstances. This will vary from case to case. Often the making of a Section 20C order will follow the decision in the substantive litigation, but it does not always follow that where the landlord/RTM/RMC has been wholly or partially successful in establishing that the service charges are reasonable and payable, that a Section 20C order would not be made. It is perfectly possible for an order to be made in such circumstances. However, the Upper Tribunal has confirmed that orders under Section 20C should not be made lightly, as the effect is to interfere with the parties’ contractual rights and obligations in the lease. In the case of Conway -v- Jam Factory Freehold Limited [2013] UKUT 592 (LC), the Upper Tribunal said that it is “essential to consider what will be the practical and financial consequences for all of those who will be affected by the order, and to bear those consequences in mind when deciding on the just and equitable order to make”.

Section 20C pre-supposes that the costs in question would be deemed service charge expenditure, under the terms of the relevant lease. Where the FTT declines to make a Section 20C order, this does not prevent a leaseholder from later challenging the reasonableness of the service charges under Section 27A, at a later date.

Para 5A, Schedule 11

The Housing and Planning Act 2016 introduced a new Paragraph 5A into Schedule 11 to the Commonhold and Leasehold Reform Act 2002 such that, from 2017, a leaseholder can make an application for an order reducing or extinguishing their liability to pay a particular administration charge in respect of litigation costs.

Such administration charges would include legal (solicitors/Counsel’s) fees, fees paid to issue the application/for the hearing, and any other costs incurred in the proceedings (such as managing agent’s costs), to the extent that the landlord/RTM/RMC would be entitled to demand such costs under the terms of the lease.

So whilst the FTT does not have the jurisdiction to order the leaseholder to pay litigation costs (save for under Rule 13, or cases where the judge is ‘double-hatting’ - see below), it can make an order preventing the landlord/RTM/RMC from later demanding such costs as an administration charge under the lease, or an order reducing such charges. As with Section 20C orders, the FTT must be satisfied that it is just and equitable to make the order.

Again, Para 5A, Schedule 11 presupposes that the relevant lease includes an obligation on the leaseholder to pay administration charges in the particular circumstances. Where the FTT declines to make an order, this would not prevent a leaseholder from later challenging the reasonableness of the administration charges under Schedule 11 to the Commonhold and Leasehold Reform Act 2002.

‘Double-hatting’

As is explained above, the FTT generally does not have jurisdiction to order a leaseholder to pay litigation costs. Therefore, a landlord/RTM/RMC faced with litigation, having either commenced an application for a determination as to the payability and reasonableness of service charges or responding to such an application, would generally look to demand such costs from the leaseholder in question as an administration charge, where the lease allows, on conclusion of the litigation. The downside being a delay in recovering such costs and, potentially, further costs if the leaseholder were to challenge the costs under Schedule 11 to the Commonhold and Leasehold Reform Act 2002.

It is for this reason that, when acting for a landlord/RTM/RMC in seeking recovery of unpaid service charges, our standard advice is to commence that claim in the County Court, which will have jurisdiction to make an award of costs either under the terms of the lease or the Civil Procedure Rules on conclusion of the proceedings, subject to the general rules on costs as set out below. The Court will be able to assess the costs and make an order, saving the time and potential costs for the landlord/RTM/RMC otherwise seeking to recover the costs following conclusion of the litigation by demanding the costs as an administration charge.

However, in some instances the claim will nonetheless be transferred to the FTT to determine the payability and reasonableness of the service charges, as a specialist tribunal to decide such issues, either at the instigation of the leaseholder or the County Court. A disadvantage of a transfer to the FTT in these circumstances has often been that the case would not be fully concluded within the FTT, as the case would have to be remitted back to the County Court to make an assessment of costs.

In a steer away from such problems, the FTT has adopted a more dynamic judicial deployment in recent years. Judges of the FTT are also judges of the County Court, and as a result can deal with matters that would ordinarily be reserved to the County Court, such as the award of costs. As such, in cases where the claim has commenced in the County Court but been transferred to the FTT, it is possible for the FTT to make an award of costs at the conclusion of the proceedings in the usual way, by sitting as a judge of the County Court in that action. Case law has established that the judge needs to be clear when sitting in his/her capacity as a judge of the FTT and when sitting in their capacity as a judge of the County Court during the proceedings, to avoid any later challenge. With such cases, any request for the judge to ‘double-hat’ in the litigation should be made early on, preferably at the initial case management conference.

General rules on costs

Notwithstanding the advice above, there are some general rules on costs that all parties to litigation should be alive to from the very outset.

Costs are always at the discretion of the Court or FTT (where there is an ability to award or determine costs), meaning that a party may be awarded all, only some, or none of their costs. Whilst generally speaking costs ‘follow the event’ in litigation meaning that the successful party will be awarded (or be able to make a demand for) their costs, but that is not always the case. Even then, costs are subject to assessment. Some costs may not be claimable and proportionality principles will be applied. A party granted a costs award would expect to be awarded somewhere between 60-80% on assessment, but in some cases the award could be a lot more or a lot less. The bottom line being, any party to litigation should only go into it with their eyes wide open to the possibility that they may not be able to recover all or any of their costs.

If you have any queries whatsoever, please get in touch with a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

This legal update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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