Landlord and tenant – Service charge – Costs – Landlord and Tenant Act 1985 – Appellant landlord largely successful on application under section 27A of 1985 Act for determination of service charge liability of respondent leaseholders – Whether first-tier tribunal properly making order for costs against appellant on grounds of unreasonable conduct pursuant to r 13(1)(b) of Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 – Whether order properly made under section 20C of 1985 limiting proportion of appellant’s costs to be taken into account in determining service charge payable by respondents – Appeal allowed in part
The appellant was the freeholder of a property in London, SE27, which contained four flats of which the respondents were the long leaseholders. It applied to the first-tier tribunal (FTT), under section 27A of the Landlord and Tenant Act 1985, for a determination of the respondents’ liability to pay sums that it had demanded from them as payments on account in respect of the cost of proposed works to the roof of the building.
The appellant had previously asked all leaseholders to sign an agreement acknowledging that they were would contribute to the roof works, and a management fee of 15%, in the percentage specified in their leases. The leaseholders of two of the flats had signed the agreement but the others had not. The first respondents had since purchased their flat from one of the leaseholders who did sign.
One of the issues raised by the appellant on the section 27A application was whether, as a result of the agreement signed by the first respondents’ predecessor in title, liability in respect of the roof works was a matter “agreed or admitted” by the tenant within section 27A(4) so as to deprive the FTT of jurisdiction to determine it.
The FTT held that the signed agreements were void under section 27A(6) of the 1985 Act as purporting to provide for the determination of issues referred to the tribunal on particular evidence. However, it went on to decide that the most of the sum demanded in respect of the roof works was reasonable and payable, but with a management fee of 10% rather than 15%.
The FTT made a determination, under section 20C of the 1985 Act, that only part of the costs incurred by the appellant in connection with the proceedings should be recoverable from the leaseholders through the service charge. It specified different proportions as recoverable from each of the leaseholders, taking into account the degree of the appellant’s success on the various issues in relation to each leaseholder and the extent to which each had already paid the sum demanded; overall, the proportion recoverable was 30.25%.
The FTT also allowed an application by the respondent for an award of costs against the appellant on the grounds of unreasonable behaviour in conducting the proceedings, pursuant to r 13(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. While the FTT rejected the submission that the appellant had acted unreasonably in refusing mediation, since the prospects of success would have been slight and the costs involved would have been similar to those of the hearing, it held that the appellant had acted unreasonably in seeking to oust the jurisdiction of the FTT by encouraging the respondents to enter into an agreement which on the face of it would have had that effect.
The appellant appealed. The respondent cross-appealed against the FTT’s finding that the refusal to meditate was not unreasonable. A further issue arose as to whether a section 20C order should be made in respect of the appeal costs.
Held: The appeal was allowed in part.
(1) Despite its advantages, there was no presumption in favour of mediation. When deciding whether a person had acted unreasonably in refusing some form of alternative dispute resolution (ADR), it was necessary to have regard to all the circumstances of the case. In the instant case, the appellant had engaged in some correspondence, albeit cursory, to explain why it refused to participate in mediation. The FTT had been entitled to conclude from the evidence before it that the prospects of success in mediation were slight and that the costs were likely to be disproportionately high. It was entitled to regard those matters as the two most relevant factors in the case and to determine that the appellant’s refusal to mediate should not be sanctioned by an order under r 13 of the 2013 Rules: Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576; [2004] 1 WLR 3002 and PGF II SA v OMFS Co 1 Ltd [2013] EWCA Civ 1288; [2014] 1 WLR 1386 considered.
(2) The FTT had erred in finding that the appellant acted unreasonably in relation to the agreements signed by some of the leaseholders. The appellant wanted certainty about the status of those agreements and regarded its section 27A application as an opportunity to obtain a ruling from the FTT that the agreements were admissions for the purposes of section 27A(4). That approach involved an inherent contradiction, since, if a service charge was agreed or admitted by a tenant, then no application could be made under section 27A in respect of it. By making a section 27A application, the appellant was invoking a jurisdiction which, on its own argument, the FTT did not have. Nonetheless, where other leaseholders had not signed the agreement or paid the sum demanded, the appellant needed to make the section 217A application in any event in order to be sure of its entitlement to recover the cost of the roof works that it proposed to carry out. A landlord’s desire to clarify its entitlement to recover significant but contentious service charge expenditure was understandable. In view of the range of responses to its proposed agreement and the demands for payments on account, it was not unreasonable for the appellant to seek that clarification by making its application to the FTT. Had it not done so, it was likely that one of the leaseholders would have made such an application in due course.
BY encouraging the respondents to enter into an agreement, the appellant not acting unreasonably in seeking to oust the jurisdiction of the tribunal. The statute specifically envisaged that the effect of an agreement would be to deprive the tribunal of jurisdiction. Reaching agreement was a legitimate objective for parties seeking to avoid the need to refer service charge disputes to the FTT and it was the policy of the Act that, where agreement had been reached, the jurisdiction of the tribunal was ousted. The only agreement that the Act treated as objectionable was one that provided for the resolution of a continuing dispute otherwise than by the FTT or which sought to limit the evidence that could be relied on before the FTT. Despite the absence of any challenge to the FTT’s conclusion that the agreement was void by reason of section 27(A)(6), the FTT was wrong in principle to regard the appellant’s reliance on the agreement as unreasonable conduct. At the very least, there was a respectable argument that, in the case of one of the leaseholders, the agreement had achieved its purpose, and there was also a real issue on the effect of the agreement with the first respondents’ predecessor in title on the position of the first respondents. There was nothing unreasonable in relying on an agreement the effect of which may be that a tribunal had no jurisdiction.
Although the appellant had taken a blunt and uncompromising approaching in seeking the leaseholders’ signature to the agreement, that did not provide grounds for the making of an order under r 13(1)(b). The appellant’s approach could not fairly be described as vexatious and designed to harass the leaseholders rather than advance the resolution of the case. Although it was an aggressive negotiating style which clearly antagonised the respondents, and leaseholders might have felt pressured to sign, they were free to refuse, as some did.
(3) The FTT had approached the section 20C issue by: (i) analysing the extent to which each leaseholder was concerned with each of the issues that it identified; and (ii) giving credit where a leaseholder had paid some or all of the amount demanded. As to the first element of that approach, there was nothing objectionable in an issues-based approach in principle, provided it did not lose sight of the extent to which individual issues were simply steps on the way to a determination of the extent of each leaseholder’s liability. One significant factor was the extent to which issues are discrete rather than simply individual components of a single, larger dispute. However, in the instant case, the FTT’s approach produced an unbalanced result under which the appellant could recover only 30.25% of its costs through the service charge despite having succeeded in the majority of the issues and been found entitled to recover almost all of the sum in dispute. The reason for the discrepancy was due to, first, the FTT’s assumption that none of the appellant’s costs should be charged to any leaseholder if that leaseholder was not involved in disputing an issue; and, second, its decision to credit leaseholders who had paid some or all of the amounts demanded. There was no justification for that approach.
Each leaseholder covenanted under the lease to contribute and pay a stated percentage of all costs, charges and expenses incurred by the appellant in providing the stated facilities. There was no provision that a leaseholder should contribute to the landlord’s costs only if those costs related to an issue directly involving that leaseholder, rather than the building or the leaseholders as a whole. The FTT was therefore wrong in principle to adopt an approach to the section 20C assessment that relieved leaseholders of any liability for expenditure on issues with which they were not directly concerned. The FTT’s approach of giving credit or an allowance to those leaseholders who chose to pay on demand, but who subsequently exercised their right to dispute their liability, was also wrong in principle. Making a payment was expressly stated in section 24A(5) not to constitute an agreement or admission for the purposes of section 27A(4). It was a neutral act and allowed leaseholders to comply with the terms of their leases by paying on demand and on-account without prejudicing their ability subsequently to challenge the reasonableness of the sum demanded. The costs to which the section 20C order related were the costs of the dispute, which were not avoided by the payment.
Overall, the appropriate order under section 20C was that 40% of the appellant’s costs of the proceedings before the FTT should not be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by any of the leaseholders.
(4) The respondents had offered to settle the appeal and had paid sums demanded by the appellant in respect of costs. In light of those matters, the appeal against the section 20C order was academic. The appeal against the section 20C order had merely incurred unnecessary further expense for both parties. In all the circumstances, it was just and equitable to make a section 20C order in respect of a proportion of the appellant’s costs of the appeal. It had succeeded in its appeal against the FTT’s r 13 order and had secured a token success in respect of the section 20C order but no meaningful benefit. The appropriate order was that no more than 50% of the costs incurred by the appellant in connection with the appeal proceedings prior to the date of the respondents’ offer to settle should be treated as relevant costs for the purpose of any service charge payable by the leaseholders. After that date, none of the appellant’s costs of the appeal should be treated as relevant costs.
The appeal was determined on the written representations of the parties.
Sally Dobson, barrister
