Service Charge: JB Leitch brings successful appeal in Upper Tribunal as to recovery of costs of proceedings through service charge

Instructed on behalf of our management company client, JB Leitch brought a successful appeal in the Upper Tribunal against a First-tier Tribunal order made under s.20C of the Landlord and Tenant Act 1985 which prevented our client from recovering the costs of proceedings from leaseholders through the service charge.

The background

The subject property in this appeal is a 9-storey residential building containing 60 flats which are each held on long leases granted in 2003 for terms of 155 years.

The management company is a party to all leases, carrying responsibility for the maintenance and repair of the building. Service charges are payable by leaseholders to the management company under the leases.

14 leaseholders applied to the First-tier Tribunal in 2021 seeking determination as to the reasonableness and payability of service charges amounting to £69,136.85 in respect of major works undertaken to the roof of the building. An earlier FTT application had also been made in respect of this property by our client, seeking dispensation from the consultation requirements for major works under s.20ZA of the LTA 1985.

Leaseholders unsuccessfully argued in both applications that the management company should have recovered the costs of works from the NHBC or the builder rather than from them through the service charge, and that therefore service charges were unreasonable. Only a nominal reduction in the charges demanded in respect of some specific items was made.

The FTT made an order under s.20C of the LTA 1985, which provides that:

“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 made such an order despite the limited success of the leaseholders’ argument in achieving only a nominal reduction in charges. In making the order, the FTT stated that the order was just and equitable to exclude costs of proceedings from the service charge, giving the FTT opportunity to ensure fair treatment for both parties. In particular, the FTT referenced that the management company had not created a separate reserve fund with its own accounts, giving cause for concern to leaseholders as to a possible failure to comply with lease obligations.

The management company appealed against the s.20C order.

The decision

The Upper Tribunal agreed with the management company, allowing its appeal and setting aside the FTT’s s.20C order.

The UT referenced Schilling v Canary Riverside Development PTE Limited, which stated that “so far as an unsuccessful tenant is concerned, it requires some unusual circumstances to justify an order under s.20C in his favour”. The management company argued that the s.20C order had been made in the manner of punishing it for matters unrelated to the present proceedings and that, even if those matters were relevant, they were minor and caused the leaseholders no loss, thereby carrying no weight when balanced against the leaseholders’ unsuccessful arguments before the FTT.

The leaseholders argued that the s.20C order was the only way that they could hold the management company to account for its breach of lease obligations. The UT did not agree with this, finding that the argument was unrelated to the reasonableness of service charges. If the leaseholders felt that they had suffered loss as a result of the management company’s breach of covenant, a claim could be brought in the County Court.

The UT set aside the FTT’s s.20C order. It had been made on the basis of irrelevant points and was unjustified.

Advice and action for landlords

J B Leitch is pleased to have secured this successful appeal decision on behalf of our management company client.

The management company having been largely successful in the FTT, this decision is clear guidance that a s.20C order should not be used by the FTT to punish for matters unrelated to the proceedings, nor where it is unjustified in the context of the relative success of each party.