Service charges: correct test applied for costs under rule 13

The Upper Tribunal (Lands Chamber) has reaffirmed that the First-tier Tribunal is a costs-shifting jurisdiction by exception only. It is only in factually exceptional circumstances that rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 would be engaged. In Lea and others v GP Ilfracombe Management Co Ltd and others [2023] UKUT 108 (LC), the appellants appealed against a costs decision of the FTT following its determination that the leaseholders were not required to pay a service charge demand for the year 2021. The appellants were 195 long leaseholders of residential units at Ilfracombe Holiday Park in Devon. The holiday park consisted of mixed-use units. The respondents were the management company (R1), a former director of the management company (R2) and R1’s managing agent (R3). R2 had an interest in R3 and also had an interest in a company that held two long leases of the entire holiday park. The freeholder of the park had devised a scheme to redevelop the residential units as short-term holiday rentals. The scheme failed and the freeholder became insolvent. The appellants commenced proceedings, seeking to have their leases rescinded due to alleged fraud. R2 became concerned that the residential units would fall into greater disrepair if works were not carried out. In January 2021, R1 issued service charge demands to the leaseholders. The total demanded was £2,634,000. R1 knew the demand would be contentious and immediately made an application for a determination of the reasonableness and payability of those charges under section 27A of the Landlord and Tenant Act 1985. The FTT determined the service charge demands were invalid because they had not been correctly apportioned. If it was wrong in its conclusion, it determined that the sums demanded were neither reasonable nor payable in their entirety. The appellants made a number of cost applications to the FTT, including an application for costs orders to be made under rule 13 against the respondents. The FTT refused that application. In so doing, it found that the respondents had not acted unreasonably. Further, it found that a costs order may be made against a non-qualified legal representative “in the exceptional circumstances” envisaged by rule 13 and endorsed in Willow Court Management Company (1985) Ltd v Alexander [2016] UKUT 290 (LC); [2016] EGLR 48. On appeal the appellants argued that the FTT had applied the wrong test in determining whether a costs order should be made. There was no threshold of exceptionality under rule 13. In dismissing the appeal, the UT found that the FTT had applied the correct test of “unreasonable conduct”. The FTT’s reference to “exceptional circumstances” concerned a general description of the kind of circumstances where rule 13 would be engaged. It correctly highlighted the fact that it should be unusual for an order for costs to be made at all, as confirmed in Willow Court. Elizabeth Dwomoh is a barrister at Lamb Chambers