WHEN A LANDLORD CAN BE PREVENTED FROM RECOVERING COSTS UNDER A LEASE

I see there has been some chat on Twitter about Landlords’ entitlement to costs under a lease. There is a useful provision in Section 20C of the Landlord & Tenant Act 1985, which can disentitle a landlord from recovering costs in a service charge dispute. This is the text of a briefing note I prepared at the request of a judge with Jonathan Chew from Wilberforce Chambers, who was against me in this particular case; all details of the parties involved have been removed.

BRIEFING NOTE ON S.20C OF THE LANDLORD & TENANT ACT 1985

1. This briefing note has been prepared substantially by Counsel for the Leaseholders but every effort has been made to confine it to the operation of s.20C and to avoid using it as a dry run skeleton argument. In particular I have shied away from any making reference to the facts of the case.

INTRODUCTION

2. Depending on its terms, a lease may entitle a landlord to recover from the tenant, within the service charge, costs incurred in relation to a dispute. As a contractual liability the entitlement will, prima facie, exist regardless of the outcome of the dispute.

3. Section 20C of the Landlord and Tenant Act 1985, therefore allows a tenant, where a landlord has a contractual entitlement under the lease to recover costs, to apply for an order that all or any of the costs incurred, or to be incurred, by the landlord:

“ in connection with proceedings before a court … [or tribunal] … or in connection with arbitration proceedings, 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.”

4. Only parties to the application can benefit from an order under s.20C – Scmlla (Freehold) Limited [2014] UKUT 0058 (LC) @ [25] but non-parties to the main proceedings can still bring an application under S.20C subsequently – ibid. @ [30] and there is no time limit on applications – Willow Court Management Co (1985) Ltd. v Alexander [2016] UKUT 290 (LC) @ [113] & [141].

5. Experience and a not wholly scientific review of recent reported decisions (essentially the most recent 2 years on Westlaw, which inevitably skews the sample because the majority of FTT decisions aren’t reported on Westlaw) suggests that for the most part decisions on S.20C Orders are dealt with on a summary basis or on written submissions. Although there are decisions in which s.20 has attracted several paragraphs of detailed reasoning (and I have not sought to overload this note with them) it is common for its application or otherwise to be dealt with in the space of one or two paragraphs.

GUIDANCE ON S.20C

6. The guidance as to whether or not the Court or Tribunal should make an order under Section 20C Order is limited, and so far as the section itself is concerned, s.20C(3) simply states that:

” the Court or Tribunal to which the application is made may make such an order on the application as it considers just and equitable in the circumstances”.

It is tersely suggested by Westlaw Insight that “this will generally turn to a very large degree upon whom it can be properly said has ‘won’.” In Tenants of Langford Court v Doren Ltd, (2001) LRX/37/2000 Lands Tr. (unreported), Judge Michael Rich QC, reviewing earlier authorities said @ [22]:

“22. The mischief with which s. 20C, as originally enacted, was concerned was clearly explained by the Court of Appeal in Iperion Investments Corporation v. Broadwalk House Residents Ltd [1995] 2 EGLR 47, where a tenant who had successfully defended proceedings brought against him by his landlord and been awarded at any rate some of his costs of the action, sought an order under s.20C to relieve him of having to pay to the landlord under the service charge his proportionate share of the landlord’s costs, including the costs to be paid to him by the landlord. Peter Gibson LJ said at p.49F:
‘ …the court has a discretion to direct that litigation costs be excluded from a service charge, even if the costs have passed the test of section 9 and have been reasonably incurred. The obvious circumstance which Parliament must be taken to have had in mind in enacting section 20C is a case where the tenant has been successful in litigation against the landlord and yet the costs of the proceedings are within the service charge recoverable from the tenant.’

That, as Mr Gallagher points out, is exactly the situation with which the LVT was confronted in this case, at least in respect of the lessees of 44 out of the 125 units. The order for costs made in the tenant’s favour, in the Iperion case, had been reduced because of the tenant’s “reprehensible behaviour” and so in upholding the order made under s.20C the judgement continued at p. 49H:
‘ To my mind, it is unattractive that a tenant who has been substantially successful in litigation against his landlord and who has been told by the court that not merely need he pay no part of the landlord’s costs, but has an award of costs in his favour should find himself having to pay any part of the landlord’s costs through the service charge. In general, in my judgement the landlord should not ‘get through the back door what has been refused by the front’: Holding & Management Ltd v Property Holding & Investment Trust plc [1989] 1WLR 1313 per Nicholls LJ’

Precisely because the LVT has no power to award costs, there is no danger of its order being undermined by the landlord’s contractual rights. It is however, in the context of the absence of any such power that the LVT has to exercise its discretion as to whether to make an order under s.20C.”

7. He continued from [28]:

“28. In my judgement the only principle upon which the discretion should be exercised is to have regard to what is just and equitable in all the circumstances. The circumstances include the conduct and circumstances of all parties as well as the outcome of the proceedings in which they arise.

“29. I think that it can be derived from the decision of the Court of Appeal in the Iperion Case that where a Court has power to award costs, and exercises such power, it should also exercise its power under s.20C, in order to ensure that its decision on costs is not subverted by the effect of the service charge.

“30. Where, as in the case of the LVT, there is no power to award costs, there is no automatic expectation of an Order under s.20C in favour of a successful tenant, although a landlord who has behaved improperly or unreasonably cannot normally expect to recover his costs of defending such conduct.

“31. In my judgement the primary consideration that the LVT should keep in mind is that the power to make an order under s.20C should be used only in order to ensure that the right to claim costs as part of the service charge is not used in circumstances that make its use unjust. Excessive costs unreasonably incurred will not, in any event, be recoverable by reason of s.19 of the Landlord and Tenant Act 1985. Section 20C may provide a short route by which a tribunal which has heard the litigation giving rise to the costs can avoid arguments under s.19, but its purpose is to give an opportunity to ensure fair treatment as between landlord and tenant, in circumstances where even although costs have been reasonably and properly incurred by the landlord, it would be unjust that the tenants or some particular tenant should have to pay them.

“32. Oppressive and, even more, unreasonable behaviour however is not found solely amongst landlords. Section 20C is a power to deprive a landlord of a property right. If the landlord has abused its rights or used them oppressively that is a salutary power, which may be used with justice and equity; but those entrusted with the discretion given by s. 20C should be cautious to ensure that it is not itself turned into an instrument of oppression.”

8. In Conway v Jam Factory Freehold Limited [2013] UKUT 0592 (LC) in which the Deputy President Martin Rodger QC, referring back to Judge Rich QC’s decision in Doren said @[54]:

“ In Schilling v Canary Riverside Development PTE Limited LRX/26/2005 Judge Rich QC reiterated that the only guidance as to the exercise of the statutory discretion which can be given is to apply the statutory test of what is just and equitable in the circumstances. The observations he had made in his earlier decision were intended to be “illustrative, rather than exhaustive” of the matters which needed to be considered. He added at paragraph 13 that:
‘ “The ratio of the decision [in Doren ] is “there is no automatic expectation of an Order under s.20C in favour of a successful tenant.” So far as an unsuccessful tenant is concerned, it requires some unusual circumstances to justify an order under s20C in his favour.””

And he said later @ [75]:

“ In any application under section 20C it seems to me to be essential to consider what will be the practical and financial consequences for all of those who will be affected by the order, and to bear those consequences in mind when deciding on the just and equitable order to make. The omission to do so in this case, an omission for which I do not criticise the LVT in view of the assumption made on both sides, would be sufficient to vitiate the section 20C order. Taken together with the LVT’s incomplete balancing exercise, with its omission to give the respondent’s success in the substantive application the proper weight which the authorities require, I have no alternative but to set the section 20C order aside.”

9. Conway was a case in which the landlord was an RTM (‘Right to Manage”) company (so owned by the leaseholders) and the nature of the landlord, whether an RTM company, a freeholder in receipt of a peppercorn rent and not profiting from the service charge or a commercial landlord is a relevant circumstance; this is discussed in the course of a review of Relevant Jurisprudence @ [51] – [59]). It is also a material consideration that s.20C has the effect of depriving the landlord of a “property right” – Doren @[32] supra.

CIRCUMSTANCES IN WHICH THE RIGHT TO CLAIM COSTS AS PART OF THE SERVICE CHARGE HAS BEEN HELD TO BE UNJUST

10. S.20 being a “one-way” provision, (i.e. it can only ever be exercised in favour of tenants against landlords), it makes little sense to list at length decisions in which its application has been, more or less, ‘obvious’. Rather there follow some examples which indicate the limits of the envelope within which it operates.

11. One such example is Maryland Estates Ltd V Lynch (2003) Lands Tr (Paul R Francis) 5/2/2003 (Unreported), although a landlord’s appeal from a decision of the Leasehold Valuation Tribunal in respect of surveyor’s costs had succeeded it was held that it was neither just nor equitable for the respondent tenants to pay the whole of the landlord’s costs of the LVT proceedings due to the confusion caused by the service charge accounts. In the circumstances, although the landlord succeeded entirely on the appeal, the court exercised its discretion to determine that the respondents should pay 50 per cent of the landlord’s costs under s.20C of the 1985 Act, through the service charge.

12 In Skelton v DBS Homes (Kings Hill) Limited [2015] UKUT 0379 (LC), the appellant tenants only succeeded to a very limited degree on appeal (in relation to the date when certain charges became payable), notwithstanding this HHJ Huskinson made an order under s.20C that all of the costs incurred by the respondent in connection with these proceedings before the Upper Tribunal were not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the appellants, observing @[47]:

“ My jurisdiction under section 20C(3) is to make such order on the application as I consider just and equitable in the circumstances. The problem which had arisen in the present case has arisen because of the combination of the poor drafting of the provisions in the lease regarding service charges and the respondents’ failure to follow these provisions. Although the ultimate outcome is one which is favourable to the respondent, I have no hesitation in concluding that it would be just and equitable in all the circumstances to make the order sought. Accordingly I order that all of the costs incurred by the respondent in connection with these proceedings before the Upper Tribunal are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by any of the appellants.”

13. A final example (of an FTT decision) Leyser v Pendra Loweth (2015) CHI/OOHE/LIS/2013/0010 (unreported) with an exception in relation to a particular aspect of the proceedings a S.20 Order was made in relation to the landlord’s costs, notwithtanding that, as the FTT observed @[138]:

“ the challenges made by the Applicants [had not] resulted in a proportionately high rate of monetary exclusions,”

before going on to comment:

“ but they did provide much more clarity as to working methods used by the Respondent and have clearly convinced those witnesses responsible for the Respondent’s administration that there needs to be significant change in working methods so as to produce transparency and adhere to recognised practices such as those advocated in the RICS Code. That first major step will be for the benefit of all tenant owners.”

and @[141] concluding:

“ Because the Applicants appear to have been forced before the Tribunal by the landlord’s reluctance to adhere to the terms of the lease, to respond to reasonable requests for information and provide transparent accounts, and when the Tribunal takes a rounded view of all of the factors it has detailed above, the Tribunal has no hesitation in allowing their application under Section 20C of the Landlord and Tenant Act 1985.”

CASES CITED

The following cases have been referred to:
1. Scmlla (Freehold) Limited [2014] UKUT 0058 (LC)
2. Willow Court Management Co (1985) Ltd. v Alexander [2016] UKUT 290 (LC)
3. Tenants of Langford Court v Doren Ltd, (2001) LRX/37/2000 Lands Tr. (unreported)
4. Iperion Investments Corporation v. Broadwalk House Residents Ltd [1995] 2 EGLR 47
5. Holding & Management Ltd v Property Holding & Investment Trust plc [1989] 1WLR 1313
6. Conway v Jam Factory Freehold Limited [2013] UKUT 0592 (LC)
7. Schilling v Canary Riverside Development PTE Limited LRX/26/2005
8. Maryland Estates Ltd V Lynch (2003) Lands Tr (Paul R Francis) 5/2/2003 (Unreported)
9. Skelton v DBS Homes (Kings Hill) Limited [2015] UKUT 0379 (LC)
10. Leyser v Pendra Loweth (2015) CHI/OOHE/LIS/2013/0010 (unreported)