First-tier Tribunal – Costs – Unreasonable conduct – Respondent landlords applying to First-tier Tribunal concerning alleged breach of covenant by appellant leaseholders – Respondents allegedly issuing proceedings knowing FTT had no jurisdiction – FTT refusing to award costs in favour of appellants – Appellants appealing – Whether respondents acting unreasonably in issuing proceedings – Appeal allowed in part
The appellants were leaseholders in Blocks A and B, Phoenix Place, 5, Prince Edward Street, Liverpool, which comprised 348 units of purpose-built accommodation in the two blocks, completed in 2018.
The first respondent acquired the freehold of Phoenix Place in 2020; the second respondent had been responsible for day-to-day management of the property since 2019.
The respondents served notices on the leaseholders asserting that they were in breach of covenants in their leases.
The respondents subsequently made two joint applications to the First-tier Tribunal, against all 348 leaseholders. One was for a determination under section 168 of the Commonhold and Leasehold Reform Act 2002 that the leaseholders were in breach of covenant. The second was for a dispensation from consultation requirements, under section 20ZA of the Landlord and Tenant Act 1985 for the urgent replacement of all the windows in the blocks.
The leaseholders occupied studios and so-called “cluster rooms” (where the letting was of a room with en-suite bathroom and use of a shared kitchen and lounge and showers) let to students.
The FTT concluded that it had jurisdiction in relation to the studios but not the cluster rooms which were not “dwellings” following the decision of the Upper Tribunal in JLK Ltd v Ezekwe [2017] UKUT 277 (LC); [2017] PLSCS 146.
The appellants appealed against the FTT’s refusal to award costs in their favour.
Held: The appeal was allowed in part.
(1) When a tenant was in breach of covenant, a landlord might forfeit the lease. In most cases, before forfeiture, the landlord had to serve on the tenant a notice under section 146 of the Law of Property Act 1925 setting out the breach and, where possible, the measures needed to put it right.
Section 168 of the 2002 Act provided some protection for residential tenants by preventing the service of a section 146 notice by a landlord “under a long lease of a dwelling” unless, amongst other things, the FTT had determined an application under section 168(4) that the breach had occurred.
Under section 168(4), the FTT had jurisdiction to make such a determination only if the leasehold property was a “dwelling” which meant “a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, outhouses and appurtenances belonging to it or usually enjoyed with it” (see section 38 of the 1985 Act).
Where the tenant shared living accommodation, such as a kitchen, with others then the leased property was not “occupied or intended to be occupied as a separate dwelling”: Ezekwe applied.
(2) The Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 had the effect that the FTT was for the most part a no-costs jurisdiction. However under rule 13, there was power to order costs in land registration and electronic communications proceedings, which in practice was exercised on the usual basis that costs followed the event. But aside from that, the only possibilities were the power to make a wasted costs order against a legal representative under section 29(4) of the Tribunals, Courts and Enforcement Act 2007; and the power to order costs under rule 13(1)(b) where a person had acted unreasonably in bringing, defending or conducting proceedings.
(3) In Willow Court Management Company (1985) Ltd v Alexander [2016] UKUT 290 (LC); [2016] EGLR 48, the tribunal suggested a three-stage approach to applications to the FTT for costs: (i) determine whether a person had acted unreasonably; (ii) consider whether, in the light of the unreasonable conduct, it ought to make an order for costs; and (iii) what the terms of that order should be.
The decision at the first stage was not discretionary; the question whether a party had behaved unreasonably was to be assessed against an objective standard of conduct.
In this case, once it was clear that the application for costs was based on the proposition that the respondents should not have issued proceedings in relation to the cluster units, because the law was clear and not in dispute, it could be seen that the FTT missed the point of the application and did not explain why it failed. Therefore, its decision would be set aside.
(4) Applying the three-stage enquiry set out in Willow Court, the UT first had to decide whether the respondents acted unreasonably in bringing the proceedings against the owners of cluster units.
The respondents had not acted unreasonably in bringing proceedings against all 274 cluster unit holders. However, they had behaved unreasonably in bringing the proceedings in the form they did, without telling the FTT that they were aware of Ezekwe and knew that the cluster units could not be dwellings, and without first seeking to agree the position on jurisdiction of which their solicitors were aware.
Had they done so, they would have been able to agree either not to bring proceedings at all, or to bring them on an “out of caution” basis and accompanied by an application, with the appellants’ agreement, to strike out the application as against the cluster units.
Their behaviour was objectively unreasonable; it failed to meet the standard expected of parties who had taken legal advice. The course of action taken by the respondents caused unnecessary stress and expense and an order for costs should be made.
(5) Either the applications should not have been made against the appellants who held cluster units, or they should have been brought in a very different form incurring no or minimal costs. Therefore, a costs order should be made against the respondents in favour of the appellants who held cluster units. The respondents should pay 90% of those costs, summarily assessed on the standard basis pursuant to rule 13(1)(b) of the FTT’s rules. Overall, the costs were reasonable; on the information available to the UT, any reduction would be arbitrary.
The FTT sought representations about jurisdiction in relation to the studios as well as the cluster units; even had there been no proceedings against the cluster units, the appellants who held studios would still have been directed to respond in relation to jurisdiction.
It would not be right to require the respondents to pay the costs incurred by studio leaseholders in relation to jurisdiction since they were bound to incur costs in argument about jurisdiction in any event.
The appeal was determined on written representations.
Eileen O’Grady, barrister
