Service Charges: Rule 13 & Determination as to What May Constitute “Unreasonable Conduct” (Zaid Alothman Holdings Ltd and others v Better Intelligent Management Ltd and another – 2024)

With reference to The Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, this Upper Tribunal decision discusses what may constitute “unreasonable conduct” for the purposes of Rule 13 (1) (b).

The background

In Zaid Alothman Holdings Ltd and others v Better Intelligent Management Ltd and another [2024], the subject properties comprised two blocks of purpose-built student accommodation containing 74 self-contained studios, each with a bedroom, bathroom and kitchenette, and 274 bedrooms which were grouped into clusters, each cluster containing shared kitchen and common areas. Long leaseholders hold the studios or clusters on long leases, and sublet to students. Leases contain usual repair and maintenance provisions, and require the payment of a service charge.

The first respondent is the present freeholder, and the second respondent is responsible for the property’s day-to-day management.

The freeholder and management company identified that windows at the property were in urgent need of replacement, and interim service charge invoices were issued to leaseholders in January 2022 in respect of the costs of such works. Leaseholders did not pay the interim invoices.

On 1 June 2022, the respondents served notice that leaseholders were in breach of covenant, requiring them to replace windows within 56 days. 16 days later, the respondents offered to replace the windows as part of a larger project which would offer cost savings, but this was conditional on the leaseholders admitting to being in breach of covenant. On 20 June 2022, the respondents served s.20 consultation notices in respect of the proposed charges.

The leaseholders’ jointly-appointed solicitors wrote to the respondents’ solicitors to assert that they were acting in breach of the leases, unreasonably and in bad faith. No response was received, but the respondents’ solicitors then asserted that, as leaseholders had not carried out the works as required by their 1 June notice, the respondents were entitled to enter the units, carry out the works and recover the costs from leaseholders. Correspondence also stated that, were leaseholders to carry out the works at this stage, this would be considered a trespass.

In August 2022, the respondents made two applications to the First-tier Tribunal against all 348 leaseholders. The first sought determination that leaseholders were in breach of covenant as a result of their failure to repair the windows. The second sought dispensation from service charge consultation requirements on the grounds that the works were required to be undertaken urgently during the students’ summer break.

In its case management directions, the FTT stated that it was concerned it would not have jurisdiction to consider the applications as some of the student units may not constitute ‘dwellings’ for the purposes of the Landlord and Tenant Act 1985, referencing JLK Ltd v Ezekwe. This statement referred to the ‘cluster’ rooms, with shared kitchen and living accommodation.

Addressing the issue of jurisdiction, the respondents then responded to state that they considered both the clusters and studios to be outside the FTT’s jurisdiction, and that they could serve s.146 notices without determination by the FTT. The respondents had not raised this matter in their applications.

Ultimately, the FTT found that it had jurisdiction in respect of the studio leases, but not the clusters. The respondents’ application for costs was refused, and leaseholders appealed.

The decision

The Upper Tribunal found that the respondents’ conduct had been objectively unreasonable for the purposes of Rule 13, failing “to meet the standard expected of parties who have taken legal advice”. The UT awarded costs to ‘cluster’ leaseholders of £19,327.

In summary, a number of features in this case contributed to a finding of ‘unreasonable conduct’ by the UT, including:

1. Giving leaseholders, many of whom are abroad, a 56-day period within which to rectify an alleged breach of covenant;
2. Required leaseholders to admit being in breach of covenant as a condition of an offer to undertake the works;
3. Later asserting that, were leaseholders to undertake works themselves, this would constitute a trespass; and
4. Making two applications to the FTT which conflicted with each other; one for determination of breach of lease which implied that the repair of windows was the responsibility of the leaseholders, and one for dispensation from the s.20 consultation requirements which implied that the responsibility for repair of windows lay with the respondents.

The respondents were aware of the decision in JLK Ltd v Ezekwe but had nevertheless made the applications without agreeing this point with leaseholders beforehand.

The UT stated that proceedings had been brought either when they should not have been brought at all, or when they could have been made in a non-hostile manner which did not require arguments about jurisdiction to be made. The UT found that the respondents had taken unnecessary action, causing stress and expense to the leaseholders, and found that an order for costs should be made.

Advice and action for landlords

As well as the points relating to conduct and jurisdiction raised by this decision, the demise of each long lease is also relevant to freeholders and management companies of properties such as this where many leases are granted, in a large percentage of cases to long leaseholders who reside abroad and are unable to take a ‘hands-on’ approach to property management.

It may have been advisable in this instance to reserve structural features such as windows to the freeholder, retaining its ability to undertake necessary works and recover costs without the need to require the same of the leaseholders.

Aside from this point, the respondents had taken a series of conflicting and contradictory, unnecessary actions, causing stress and expense which constituted unreasonable conduct and resulting in a costs award being made in favour of leaseholders.