[2023] UKUT 219 (LC)

Section 20C(1) of the Landlord and Tenant Act 1985 provides:

“(1)

A tenant may make an application for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings before [the FTT]… , are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the application.”

The FTT is not a costs-shifting jurisdiction and costs will only be awarded on an application for a determination of the reasonableness of service charges where one party has behaved unreasonably in bringing, conducting or defending the proceedings, or where there have been wasted costs (rule 13(1) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. Section 20C is aimed at the situation where a landlord, despite not being awarded its costs in the FTT, is nevertheless contractually entitled to recover them as a service charge under the terms of the lease. An order under section 20C is not made as a matter of course where leaseholders have been successful; careful thought has to be given to whether it is right to interfere with the landlord’s contractual entitlement – or, as in this case, the management company’s.

In the present case an order under section 20C was made despite the leaseholders’ very limited success. This is what the FTT said:

“24.

It is the tribunal’s view that it is both just and equitable to make an order pursuant to S. 20C of the Landlord and Tenant Act 1985. Having considered the conduct of the parties, their written submissions and taking into account the determination set out in the decision above, the tribunal determines that it is just and equitable in the circumstances that there be an order made under section 20C of the 1985 Act. As such these costs may not be included as a service charge expense.

25.

With regard to the decision relating to s.20C, the Tribunal relied upon the guidance made by HHJ Rich in Tenants of Langford Court v Doren Limited (LRX/37/2000) in that it was decided that the decision to be taken was to be just and equitable in all the circumstances. The tribunal thought it would be just not to allow the right to claim all the costs as part of the service charge. The s.20C decision in this dispute gave the tribunal an opportunity to ensure fair treatment as between landlord and tenant in circumstances where costs have been incurred by the landlord and that it would be just that the tenant should not have to pay them.

26.

As was clarified in The Church Commissioners v Derdabi LRX/29/2011 the tribunal took a robust, broad-brush approach based upon the material before it. The tribunal took into account all relevant factors and circumstances including the complexity of the matters in issue and all the evidence presented. The Tribunal also took into account all oral and written submissions before it at the time of the hearing.

27.

It was apparent to the tribunal that the failure by the respondent to honour the lease terms by not creating a separate reserve fund with its own accounts was a cause for suspicion on the part of the applicant with regard to the conduct of the respondent. It is understandable that the applicants would be concerned about what the respondent was doing when it failed to comply with its lease obligations and consequently failed to provide reserve fund trust accounts. When supplying accounts every year, the respondent repeatedly failed to include any accounts for a reserve fund, from which it says the repairs were mostly funded. This failure alone would be enough to persuade the Tribunal that this s20c order should be made.

After the FTT’s decision was sent out to the parties Mr Hodder wrote to the FTT to ask whether the section 20C order was made in favour of all the leaseholders, and not just the 14 who had applied to the FTT; he was told that it was.

The first ground of appeal from the section 20C order is that the no-one except the 14 leaseholders was “specified in the application” as required by section 20C(1). Therefore, following the Tribunal’s decision in Plantation Wharf Management Ltd v Fairman [2020] L. & T.R. 7 the FTT was not in a position to make an order in favour of all the lessees in the absence of consent or authority given by the non-party lessees to the making of an application on their behalf. That is clearly correct and the respondents have helpfully conceded this ground.

Turning to the order made under section 20C, which can only operate in favour of the 14 appellants themselves, the decision whether to make such an order is a discretionary one and the Tribunal will not interfere with the FTT’s judgment unless there has been an error of law or some other irrationality.

For the appellant Mr Morris argues that the section 20C order cannot be used in order to punish the appellant for a breach that was nothing to do with the proceedings. Even if it was relevant, this is a minor breach of the lease and can have caused the respondents no loss, and therefore it should have caried no weight when set against the failure of the leaseholders’ application on all points except the RopeTech point where they were partially succesful. As Judge Rich QC said in Schilling v Canary Riverside Development PTE Limited LRX/26/2005, “so far as an unsuccessful tenant is concerned, it requires some unusual circumstances to justify an order under s20C in his favour”.

For the leaseholders Ms Gourlay argues that there were ample reasons before the FTT to justify a section 20C order. First, the failure to keep the reserve fund in a separate account which he argues was a serious breach of the terms of the lease. She agrees with the FTT’s statement that that alone would be enough to justify a section 20C order. She argues that this was the only way the leaseholders could hold the management company to account.

I disagree. The breach of covenant relating to the reserve fund had not the slightest relevance to the reasonableness of the service charges. It was not appropriate for the FTTs to seize upon the section 20C order as a fortuitous means to punish the breach of covenant; even had that been a relevant consideration, in the absence of any evidence that the breach caused any loss to the leaseholders the section 20C order was a disproportionate response. As for this being the only way to hold the management company to account, it is not; if the leaseholders can show that they have suffered loss because of a breach of covenant then the forum for recovery of that loss is the county court.

Next Ms Gourlay says that the order was also justified by the appellant’s conduct in arousing the leaseholders’ suspicions when it failed to set up a separate account for the reserve fund when asked to do so. She cites a number of additional matters not mentioned by the FTT as reasons for the section 20C order including what questions that she says are raised by the audited accounts as well as the appellant’s conduct in introducing a new point of law (Daejan Properties Limited v Griffiths, see paragraph 9 above) on the eve of the hearing, the RopeTech point, the late disclosure of a reduction to certain costs and the impossibility of identifying the costs of the works from the accounts.

In my judgment the section 20C order has to be set aside. It was made for two reasons, namely the RopeTech decision and the failure to keep the reserve fund in a separate account. The latter point was irrelevant and should not have been taken into consideration. The RopeTech point alone gave rise to a trivial reduction in the cost of the major works and cannot justify the imposition of a section 20C order. I am not persuaded that the order can be justified by any of the other points raised by Ms Gourlay because none of them was relevant to whether the service charge was reasonable.