Landlord and tenant – Service charge – First-tier Tribunal – Jurisdiction – Landlord and Tenant Act 1985 –– Respondent landlord drawing sums from service charge reserve fund to recoup costs of the litigation – Appellants challenging payability of legal costs out of service charges – First-tier Tribunal concluding no jurisdiction to decide issue – Appellants appealing – Whether FTT having jurisdiction to consider whether the costs of High Court proceedings payable out of service charge reserve fund – Appeal allowed in part
The appellants were the current or former leaseholders of three flats in a purpose-built block of flats in St John’s Wood, London. The respondent was the landlord of the building, a company owned by the leaseholders of all of the flats except the first appellant. The appellants covenanted to pay a fixed proportion of the expenses incurred by the respondent in the repair, maintenance, renewal and insurance of the building, all costs (including legal costs and surveyors fees) relating to forfeiture proceedings following a breach of a lease and service of any notice relating to disrepair of the demised premises.
The appellants challenged the payability of a number of items claimed through the service charge for 2016 and 2017, including the costs incurred by the original directors of the respondent in challenging the validity of the appointment of the appellant and four other leaseholders to the respondent’s board of directors. The original directors obtained a declaration that the new appointments were null and void and that the new directors had no authority to make management decisions in relation to the property.
The appellants applied to the First-tier Tribunal (FTT) under section 27A of the Landlord and Tenant Act 1985 to determine, amongst other things, whether the use of the service charge reserve fund to recoup the respondent’s costs of the litigation was permitted under the terms of their leases. Following the decision in Solitaire Property Management Co Ltd v Holden [2012] UKUT 86 (LC); [2012] PLSCS 113, in which the Upper Tribunal held that the FTT had no jurisdiction to consider an allegation of breach of trust, the FTT held that it lacked jurisdiction to decide the issue; the challenge to the use of the reserve fund involved a breach of trust enquiry, not an inquiry as to the payability of service charges.
The appellants appealed. The appeal was conducted as a rehearing of the original application.
Held: The appeal was allowed in part.
(1) Under section 27A(1) of the 1985 Act, an application might be made to the FTT for a determination whether a service charge was payable and, if it was, as to the person by whom it was payable, the amount which was payable, the date at which it was payable and other such details. Although the language of section 27A(1), and in particular the question “whether a service charge is payable” might suggest that it was concerned only with sums which had not yet been paid, it was clear from section 27A(2) and (5) that it applied also to payments which had already been made. Section 27A(3) permitted an application to be made to the FTT for a determination whether, if costs were incurred, a service charge would be payable.
(2) The FTT took too narrow an approach to its jurisdiction regarding the respondent’s legal costs. The FTT was not powerless to consider whether money from the reserve fund could be used to meet the costs of litigation. The central questions posed by section 27A were whether a service charge was payable on the basis of events which had already happened, or would be payable if costs were incurred in future for particular services, repairs, management etc. If either of those questions was answered in the affirmative subsidiary questions arose, including the amount which was or would become payable. Section 27A was clearly intended to have a wide ambit. The FTT had jurisdiction to consider whether a service charge was payable whether or not any sum had already been paid (section 27A(2)) and whether or not any valid demand had been made in respect of costs already incurred. In addressing the most basic question of whether a service charge was payable at all the route by which the person who incurred the relevant costs intended to recover them did not seem to be relevant. That question simply required consideration of the terms of the lease and the nature of the cost incurred. If the costs fell within the charging provision in the lease they were, or might become, the subject of a service charge payable by the tenant and might therefore be the subject of scrutiny under section 27A. The determination which they sought from the FTT that the costs were not recoverable as service charges under the lease was a live issue when the application was made, and did not cease to be an issue by the respondent opting not to include the costs in the end of year accounts.
(3) It went without saying that the FTT had no jurisdiction under section 27A (or any other power) to order repayment of money held in trust, or to consider whether a breach of trust had occurred. But the fact that money used to meet an item of expenditure was held on trust did not mean that the FTT could not consider whether the expenditure could be recovered as a service charge. The regular service charge contributions made by leaseholders to meet anticipated expenditure in the current year were held on the statutory trust imposed by section 42 of the Landlord and Tenant Act 1987 for the benefit of the contributing leaseholders. If the costs of litigation were off limits to investigation by the FTT because they had been drawn down from the reserve fund rather than being demanded as contributions towards anticipated expenditure, it would not be possible for an application to be made under section 27A in respect of any works which had been funded from reserves. Those questions were squarely within section 27A, from whatever source the work was funded. The issue in this case was whether the legal costs were recoverable as a service charge at all, or whether the costs should be met by the respondent from some other source. That was a question within the scope of section 27A. Accordingly, the FTT had jurisdiction to consider whether the costs of litigation were payable by leaseholders as a service charge: Solitaire Property Management Company Ltd v Holden distinguished.
The appellants appeared by their representative; Jonathan Upton (instructed by Bolt Burdon Solicitors) appeared for the respondents.
Eileen O’Grady, barrister
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