Jurisdiction & Costs: Definitive Ruling as to Definition of “Unreasonably” Under Rule 13 of the Tribunal Rules (Lea and others v GP Ilfracombe Management Co Ltd – 2024)

Referencing The Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, this Court of Appeal decision becomes the sector’s definitive ruling as to what constitutes “unreasonably” for the purposes of Rule 13 (1) (b).

The background

In Lea and others v GP Ilfracombe Management Co Ltd [2024], the leaseholders of properties at a holiday park in Ilfracrombe had successfully defended an earlier service charge claim brought by the management company for the park to the value of £2.4million. At First-tier Tribunal, the court had not made an award of Rule 13 costs in favour of the leaseholders. On appeal, the Upper Tribunal upheld this decision.

The holiday park comprised 273 residential units held on leases, together with associated commercial and common areas. Service charge demands in the sum of £2.4million were issued on 11 January 2021 by one of the directors of the management company. The same director signed off the claim form to bring proceedings in the FTT on the following day, 12 January 2021; he was subsequently removed as a director in May 2021 but was nevertheless appointed and appeared in the FTT on behalf of the management company, as its sole witness. The FTT repeatedly reminded the director that he was appointed as a representative of the company, this appeared to constitute a conflict of interest. The director did not withdraw from the hearing.

The FTT noted a number of unusual conduct characteristics of the case relating to the director’s behaviour, and stated that large amounts of the service charges demanded were based only on the director’s “self-professed knowledge and experience”, and were unsupported by budgets, estimates or accounts. The FTT found that the budget had not been apportioned properly, and ultimately concluded that the budgeted amounts were not properly payable or reasonable.

The leaseholders sought their costs in the proceedings from the management company, and separately against the individual director and one of his other companies. The FTT determined that it did not find the overall conduct of proceedings to be unreasonable, and that it would not make the costs order, stating “We accept that [the director] believed in his own way he was doing the best for everyone. Whether this view is misguided is not a matter we need to determine.”

The management company had not participated in the costs order proceedings. The FTT stated that “Simply because the Applicant took no part, it does not automatically follow that an order could or should be made against it pursuant to Rule 13.”

The Upper Tribunal upheld the decision of the FTT. The leaseholders brought a further appeal to the Court of Appeal, addressing two issues:

1. The appropriate test to be applied in circumstances where one party claims that the other has acted unreasonably and should be responsible for the costs of proceedings; and
2. Whether, on applying such a test, the FTT had been wrong to find that the managing agents did not act unreasonably and were not therefore liable for payment of the leaseholders’ costs.

The decision

The Court of Appeal found that the FTT’s refusal to award costs had been wrong, concluding that the management company’s conduct had been unreasonable. An order for costs was made in favour of the leaseholders.

Issue 1

Rule 13(1)(b) states that:

“…the Tribunal may make an order in respect of costs only … if a person has acted unreasonably in bringing, defending or conducting proceedings…”

The Court of Appeal made reference in its judgment to Willow Court Management Co (1985) Limited v Alexander [2016], a J B Leitch case in which the UT dealt with the same issue in determining an applicable test for “unreasonable conduct in bringing, defending or conducting proceedings”. In Willow Court, the UT found that guidance set down in the earlier case of Ridehalgh v Horsefield and another [1994] applied:

“…The expression aptly describes conduct which is vexatious, designed to harass the other side rather than advance the resolution of the case … conduct cannot be described as unreasonable simply because it leads in the event to an unsuccessful result…”

With reference to both Willow Court and Ridehalgh, and finding that neither case determined that unreasonable conduct must consist of vexatious conduct or harassment, the judgment in the present case declined to set out general guidance as to what constituted “unreasonable conduct”, concluding that the issue was fact-specific in each case and finding that it is potentially too restrictive to equate unreasonable conduct with vexatious or harassing behaviour.

The Court of Appeal set out a practical rule for the Tribunal to ask itself: “Would a reasonable person acting reasonably have acted in this way? Is there a reasonable explanation for the conduct in issue?”

Issue 2

The Court of Appeal found that the FTT had not applied the principles contained in Willow Court and Ridehalgh, and had not properly addressed whether the conduct of the claim could be reasonably explained.

The Court concluded that the original service charge demand had been an abuse of the process, being a large claim unsupported by evidence and known to be invalid by the director who demanded it. Accordingly, the claim made by the management company, and its conduct during proceedings, would appear to have been unreasonable.

Using the Willow Court and Ridehalgh test and principles, the Court of Appeal found that no explanation for its conduct was given to the FTT or the UT by the management company, which had not appeared or made any representation at the costs hearings; in itself, possibly constituting unreasonable conduct.

The Court found that the FTT had not asked itself the right questions, namely whether there was a reasonable explanation for the management company’s conduct, the costs application had also been wrongly regarded as a matter of discretion. Willow Court sets out that this should be a matter of objective fact. Was the management company’s conduct objectively unreasonable? The FTT had failed to take into account all relevant matters; the Court of Appeal stated that, had it done so, it would undoubtedly have found that the conduct was unreasonable.

The Court of Appeal allowed the appeal, ordering the management company to pay all of the leaseholders’ costs of the FTT proceedings.

Advice and action for landlords

This is an important case for all parties pursuing costs under Rule 13 of the Tribunal Rules, determining that the test for “unreasonable conduct” is fact-specific to each claim and setting down a practical rule for Tribunals to follow when dealing with issues relating to conduct:

“Would a reasonable person acting reasonably have acted in this way? Is there a reasonable explanation for the conduct in issue?”

Whether a party’s conduct is unreasonable should be considered objectively: Was that party’s conduct objectively unreasonable, taking into account all relevant matters?

The Court of Appeal affirmed the decision in J B Leitch case Willow Court, and stated that further guidance in respect of either the test or its application would not be helpful, setting down a clear precedent for determination of “unreasonable conduct” in future claims.