On the Fifth day of Christmas - Vassilios Goulielmos

On the fifth day of Christmas….Today Vassilios Goulielmos from Irwin Mitchell’s Real Estate Disputes team looks at the limited circumstances where the First tier Tribunal should grant a section 20C Order in the case of Firstport Property Services Ltd v Various Leaseholders of Switch House.

The Upper Tribunal (Lands Chamber) (UT) recently heard an appeal regarding a section 20C Order under the Landlord and Tenant Act 1985 (LTA 1985). The order was originally granted by the First Tier Tribunal (FTT) in relation to service charges for Switch House, a development of flats. The UT overturned the section 20C Order, highlighting that the FTT had made an error in granting it. This case serves as a reminder that section 20C Orders are only warranted in limited circumstances.

Background

Switch House is a residential development where significant maintenance works were carried out. These works were necessary to fulfil the management company's obligations under the lease. The total cost of the works amounted to £69,136.85. Some leaseholders of Switch House sought a determination from the FTT, arguing that the works should not be recoverable through the service charge as they were not reasonably incurred and should have been covered by the builders or the National House Building Council.

During the hearing, the FTT deducted £3,161.85 from the total sum, representing around 4% reduction. The FTT also found that the management company, Firstport Property Services Ltd, had breached a lease provision by not keeping the reserve fund separate from the service charge monies. However, this breach did not cause any financial loss to the leaseholders.

In addition to the deduction, the FTT granted a section 20C Order, preventing Firstport from recovering its legal costs for the proceedings from the leaseholders through the service charge. The FTT reasoned that Firstport's failure to keep the reserve fund separate and provide accounts for it justified the section 20C Order.

Firstport appealed this decision, focusing on two main grounds. Firstly, they argued that the section 20C Order should only apply to the 14 leaseholders involved in the FTT proceedings, not all leaseholders as ordered by the FTT. Secondly, they claimed that the section 20C Order was punitive and irrelevant to the issue of whether the service charges were reasonable. Firstport also contended that the breach was minor and did not cause any loss to the leaseholders.

Judgment

The UT agreed with Firstport that the section 20C Order should only apply to the leaseholders specified in the application, as required by section 20C(1) of the LTA 1985. Judge Cooke stated that the FTT had exceeded its discretion in making the section 20C Order, as it was not appropriate to use it as a punitive measure for Firstport's breach of the lease. Furthermore, even if the breach was relevant, it was considered trivial and had caused no loss to the leaseholders. The UT emphasised that "unusual circumstances" would be necessary to justify the granting of a section 20C Order in favour of leaseholders.

As a result, the section 20C Order was quashed, allowing Firstport to include its legal costs in the proceedings against the service charge, to which all leaseholders contribute.

Implications

This case highlights some important implications for service charge proceedings. By default, landlords can recover all their legal costs, even if they are unsuccessful, if the lease provides so. However, this may be reversed if there is a clear connection between the factors relied upon in seeking a section 20C Order and the reasonableness of the service charges. Breaches of lease provisions must not be trivial or minor, and the level of reduction obtained in service charges will be considered when assessing the seriousness of the breaches. Using section 20C as a punitive tool unrelated to the reasonableness of service charges is inappropriate. Finally, leaseholders can only benefit from a section 20C Order if they are party to the application, meaning that leaseholders not involved in the application may still have to bear the cost of the proceedings, even if a section 20C Order is made.