Many (incorrectly) consider the First Tier Tribunal to be a ‘no costs’ jurisdiction and thus that no order will be made against them to pay the other sides costs - win or lose.  Whilst the Tribunal can order that either party (landlord or leaseholder) must pay an amount of the costs incurred by the other (as set out in our previous Legal Update here), it is fair to say that such orders are far from the norm.  This is in part because, for the most part, the circumstances where the Tribunal can make such an award really require the party facing that order to have behaved unreasonably in bringing, conducting or defending the proceedings, or where there have been wasted costs - Rule 13(1) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013.

What is more common though is to see the Tribunal include at the end of a matter an Order pursuant to section 20C of the Landlord and Tenant Act 1985 (“s.20C”). 

A different type of costs order - s.20C

S.20C provides that a leaseholder may ask the Tribunal, on making its final decision in respect of the application, that it also orders that all or any of the costs incurred (or to be incurred) by the landlord/RTM/RMC in connection with the proceedings are not to be recoverable via the service charge payable by the tenant or any other person or persons specified in the application.

By s.20C(3), the Tribunal may make such order as it considers just and equitable in the circumstances of the case.

There are numerous decisions of the First Tier and Upper Tribunals where, whether or not the tenant has succeeded on its own claim or opposition of a claim by the Landlord/RTM/RMC, a section 20C Order has been made.  In this update we focus on the Upper Tribunal case of Firstport Property Services Ltd v Various Leaseholders of Switch House [2023] UKUT 219 (LC) and the question of when the Tribunal is right to make a s.20C order and, perhaps, when it isn’t.

The FTT’s decision in Firstport Property Services Ltd v Various Leaseholders of Switch House [2023] UKUT 219 (LC)

A number of the leaseholders of Switch House sought a determination in the First-Tier Tribunal (“FTT”) as to the reasonableness of certain service charge costs.  The costs arose as a result of a major works programme necessary for the maintenance of the building. The works were required as a result of the management company’s obligations under the leases. The management company had raised a demand for £69,136.85.

The FTT, having considered the claim, discounted £3,161.85 of the total sum of the demand - the reduction of 4.5% of the demanded sum.

Additionally, the FTT determined that the management company had breached the lease provisions relating to the reserve fund (failure to keep it in a separate account), albeit that this had caused no financial prejudice to the leaseholders.   However, as a result of those breaches, the FTT made an order under s.20C prohibiting the management company from recovering its legal costs as a service charge.

The appeal to the Upper Tribunal

The management company appealed to the Upper Tribunal (“UT”) against the s.20C order. The management company pleaded that the failings in respect of the reserve fund had caused no prejudice to the leaseholders and were irrelevant to the substantive service charge dispute, and in light of the “trivial” nature of the reduction in service charges the FTT should not have made a s.20C order.   The UT considered the points raised.

1. The management company argued that the section 20C Order cannot be used in order to punish them for the breach relating to the reserve fund where that breach was nothing to do with the proceedings.

   The UT held that, even if it was relevant, the minor breach of the lease caused the leaseholders no loss, and therefore should have carried no weight when set against the failure of the leaseholders' application on all points except the matter for which a 4.5% reduction was obtained. As Judge Rich QC said in Schilling v Canary Riverside Development PTE Limited LRX/26/2005, "so far as an unsuccessful tenant is concerned, it requires some unusual circumstances to justify an order under s20C in his favour".

2. The leaseholders relied upon the FTT's statement that breach alone would be enough to justify a s.20C order. They argued that that was the only way the leaseholders could hold the management company to account.

   The UT held that the breach of covenant relating to the reserve fund had “not the slightest relevance to the reasonableness of the service charges”.  It was not appropriate for the FTT to seize upon the section 20C order as a fortuitous means to punish the breach of covenant; even had that been a relevant consideration, in the absence of any evidence that the breach caused any loss to the leaseholders the section 20C order was a disproportionate response.

As for this being the only way to hold the management company to account, the UT disagreed stating that if the leaseholders can show that they have suffered actual loss resulting from the breach then they should make a claim in the County Court for recovery of that loss.

The UT found that the s.20C order was made for two reasons, namely the 4.5%  reduction and the failure to keep the reserve fund in a separate account. The UT considered that the latter point was irrelevant and should not have been taken into consideration. The 4.5% reduction was found to be trivial in relation to the overall costs of the major works and cannot justify the imposition of a s.20C order. The s.20C order  was therefore set aside enabling the management company to place its costs of the litigation against the service charge to which all leaseholders were required to contribute in their respective shares.

Conclusion

It is clear that only a partial success by leaseholders before the Tribunal will not justify, save for in exceptional circumstances, a s.20C Order by the Tribunal.  It remains however that, notwithstanding this finding, it is still necessary for the lease to enable the costs to be placed against the service charge -  not all leases make such a provision.   

For more information, please feel free to contact a member of the team on 01435 897297 or info@kdllaw.com.  

Disclaimer

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