An order under section 20C of the Landlord and Tenant Act 1985 should not be used to punish a breach of covenant. In the absence of any evidence that the breach has caused a loss to the leaseholders, the making of a section 20C order would be disproportionate.
Under section 20C(1) a tenant may apply to the First-tier Tribunal for an order that all or any of the costs incurred, or to be incurred, by the landlord arising from proceedings before it are not to be regarded as relevant costs that can be taken into account in determining the amount of any service charge payable by the leaseholders or any other person or persons specified in the application.
In Firstport Property Services Ltd v Various Leaseholders of Switch House [2023] UKUT 219 (LC), [2023] PLSCS 158 the respondents were long the leaseholders of fourteen flats in Switch House, a residential block of 60 flats built in 2003. The appellant was the management company and was responsible for the maintenance and repair of the block. The leaseholders were required to pay their service charges to the appellant.
In January 2021 the respondents applied to the FTT for a determination of the reasonableness and payability of service charges demanded for the years 2018 to 2019 and 2019 to 2020.
The costs related to major works for roof repairs that the leaseholders believed should have been recovered from NHBC or the builder.
The FTT disagreed and this aspect of the leaseholders’ application failed. The leaseholders were, however, successful in obtaining a reduction in charges for part of the works done on the basis that they could have been carried out using a cheaper method. Accordingly, the service charge of £69,136.85 was reduced by £3,161.85.
The respondents subsequently applied for a section 20C order. Despite the limited success of their section 27A application, the FTT made a section 20C order.
One of the main reasons the FTT gave for making the section 20C order was due to the appellant’s failure to comply with a contractual obligation to create a separate reserve fund with its own accounts.
The FTT found that the breach was contrary to good management and raised suspicion. The FTT subsequently confirmed on a request made by the lessees that the section 20C order was made for the benefit of all the leaseholders of the block.
The appellant appealed to the Upper Tribunal (Lands Chamber) on two grounds.
First, the FTT was wrong to make the section 20C order for the benefit of all leaseholders of the block. The respondents conceded this ground and the UT found they were correct to do so.
Second, the FTT had made the section 20C on the basis of an irrelevant consideration; namely-the failure of the appellant to keep the reserve fund in a separate account. The UT agreed.
A section 20C order should not be used as a mode of punishment. If the leaseholders could not show that they had suffered loss by the breach an order would be disproportionate.
Elizabeth Dwomoh is a barrister at Lamb Chambers
