(1) Kevin G Conway (2) Ola Aina (2) Carol Marshall & Roger Green (3) Saul Greenberg & Sam Cathcart (4) Sam Bond (5) Manoj Bulsara (6) Georgina Dwight (7) Julianne O’Leary (8) Christopher Scott (9) Malcolm Torz (10) Stephen Lewis (11) Kevin Conway (12) Sudha Kheterpal (13) Saradha Cabral v Jam Factory Freehold Limited [2013] UKUT 0592 (LC) Part II

The section 20C application was two-stage.

First the lessees argued that the lease did not permit the landlord to recover its legal costs through the service charge.

Second, if it did, a section 20C order was appropriate.

The main points of the LVT’s decision were these:

• The costs were recoverable under the lease;
• A section 20C order was appropriate, given all the circumstances;
• The fact that the lessees had failed was not the only relevant consideration;
• A more “user-friendly” style of management by the managing agents, Stonedale, may have avoided the application for a manager in the first place
• Some of the issues to do with disrepair and utility charges should have been dealt with more swiftly by Stonedale, for whom the landlord was ultimately responsible;
• The freehold company should have explored raising finance in order to resolve some of the issues which it was unable to deal with because of the level of service charge arrears;
• The compromise agreement included the recovery of some costs.

Not only was the exercise of the LVT’s discretion appealed here: the scope of the section 20C order was also contentious.

Here is a quick reminder of the wording of section 20C as it was relevant to this case:

“20C. Limitation of service charges: costs of proceedings.E+W

(1) 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 a … leasehold valuation tribunal … 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.

(2) The application shall be made—

(a) – (aa) …

(b) in the case of proceedings before a leasehold valuation tribunal, to the tribunal before which the proceedings are taking place or, if the application is made after the proceedings are concluded, to any leasehold valuation tribunal; …

(3) The court or tribunal to which the application is made may make such order on the application as it considers just and equitable in the circumstances.”

Iperion Investments Corp v Broadwalk House Residents Ltd (1996) 71 P & CR 34

In Iperion Investments Corporation v Broadwalk House Residents Limited (1996) 71 P & CR 34, Peter Gibson LJ held that Parliament had obviously intended to address cases:

“… 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.”

He continued:

“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 had 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 judgment, the landlord should not ‘get through the back door what has been refused by the front’”.

As to the scope of the order, whilst in Iperion the tenant had been substantially successful in the proceedings, and therefore ought not to be required to contribute towards the landlord’s costs, the same protection against the landlord’s costs was not afforded to the other tenants in the building, as Staughton LJ explained at page 41:

“… We were not asked to make any similar order under section 20C of the landlord and tenant Act 1985 in relation to the other tenants, and do not do so.  Indeed it would be a disaster for the defendant, a company owned by residents of Broadwalk House, if such an order were made; the company would presumably be insolvent unless it could raise further capital.”

Tenants of Langford Court (Sherbani) v Doren Limited LRX/37/2000

In this case, the tenants were successful in their application for the appointment of a manager.

In what has become an oft-quoted passage, the Lands Tribunal (Judge Rich QC) observed:

“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 [Iperion] that where a court has power to award costs, and exercises such power, it should also exercise its power under s20C, 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.”

Schilling v Canary Riverside Development PTE Limited LRX/26/2005

Here Judge Rich QC revisited the section 20C jurisdiction. He repeated that the only guidance which can be given on the exercise of the statutory discretion is to apply the statutory test of what is just and equitable in the circumstances, and added:

“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.”

Notwithstanding that observation, he emphasised the significance of the outcome of the proceedings and drew a distinction between applications for the appointment of a manager and application under section 27A of the 1985 Act for a determination relating to service charges, at paragraph 14:

“ “the outcome of the proceedings” [is] one of “the circumstances” to which sub-section (3) requires the consideration of what is just and equitable to have regard.  This was said in the context of an application for the appointment of a manager, which meant that the tenants had undoubtedly been successful; in service charge cases, the “outcome” cannot be measured merely by whether the applicant has succeeded in obtaining a reduction.  That would be to make an Order “follow the event”. Weight should be given rather to the degree of success, that is the proportionality between the complaints and the determination, and to the proportionality of the complaint, that is between any reduction achieved and the total of service charges on the one hand and the costs of the dispute on the other hand”.

He returned to “the circumstances of all parties” in paragraph 28 of Doren, saying this:

“I had particularly in mind the circumstances of a residents’ management company such as was the landlord in Iperion or a reversioner with only nominal ground rents such as was Doren Limited. I do regard it as a circumstance which may affect what is just and equitable in a particular case whether the landlord is such as was a party to those cases or, as in the present proceedings, has an interest which goes beyond the reversion upon flats let on long leases and has relevant resources deriving from the estate of which those flats form a part, such that disputes before the LVT can fairly be regarded as part of the cost of its investment.

Church Commissioners v Derdabi [2011] UKUT 380 (LC)

Here the relevance of the different types of interest vested in the landlord was referred to by HHJ Gerald.

“Circumstances” which were identified as of relevance included “the landlord being a resident-owned management company with no resources apart from the service charge income” (paragraph 21).

HHJ Gerald observed that the LVT/FTT had the advantage over the Upper Tribunal because it dealt first hand with the substantive issues, and was therefore best placed to determine what was just and equitable in a section 20C application.

So saying, Martin Rodger QC moved on to consider the proper approach of the appellate tribunal in appeals against the exercise of the first instance tribunal’s discretion.

In Phonographic Performance Ltd v AEI Rediffusion [1999] 1 WLR 1507, Lord Woolf MR said:

“Before the Court can interfere it must be shown that the judge has either erred in principle in his approach, or has left out of account, or taken into account, some feature that he should, or should not, have considered, or that his decision is wholly wrong because the Court is forced to the conclusion that he has not balanced the various factors fairly in the scale.

To Martin Rodger QC’s mind, the LVT’s starting point should have been the freeholder’s success on the appointment of a manager application.

He did not think that the LVT had paid no attention to that success, but, taking the other factors which the LVT had weighed in the balance, he considered that he was empowered to interfere with the section 20C order.

The acquisition of the freehold

The freehold had been acquired, less than twelve months before the application was made, so that the Jam Factory could be run in the interests of the lessees as a whole. The appointment of a manager at the instigation of less than 10% of the lessees would effectively have thwarted that purpose.

Stonedale’s conduct

The actions of the managing agents were clearly important on an application for the appointment of a manager, but Stonedale had only been the Jam Factory (Freehold) Ltd’s managing agent for ten months – before that the freehold had belonged to Angel. The sins of Angel could not be visited on its successor in title, especially in a case where the LVT had really gone to town on Stonedale’s poor management style.

Raising finance

On the question of funding – there being some £340,000 of service charge arrears – the LVT had determined that the freehold company should have explored alternative sources of funds, and yet there had been no credible evidence that the landlord could have raised money elsewhere. The company was:

• Lessee-owned;
• Had no assets of value and,
• As Martin Rodger QC rather caustically put it: “a substantial black-hole in its accounts caused by the actions of the appellants in withholding service charges”.

Scope of the section 20C order and its effect

The parties and the LVT appeared to have understood that all of the lessees were to benefit from the section 20C order.

Martin Rodger QC did not however consider that the embrace of the order was so wide. The only beneficiaries of the order could be “the tenant or any other person or persons specified in the application”.

In this case, that effectively meant that the unsuccessful lessees would benefit from a section 20C order, while the remainder of the lessees would not.

Martin Rodger QC stood back and deployed a mini-thesaurus on the effect of the order: “[it is] at best ironic and at worst perverse or capricious … The vice of the order is that it benefits the losing appellants at the expense of the members of the successful respondent, each of whom will not only be liable to pay their own share as leaseholder, but will have to make up the shortfall created by the respondent’s inability to recoup an equal share from the appellants.  That seems to me to be fundamentally unfair…

“In the context of a development owned by leaseholders through their own company it seems to me quite impossible to describe an outcome which discriminates between leaseholders in that way as just and equitable.

“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 LVT could not be reproached for failing to take that ironic outcome into account because the parties had been labouring under a misapprehension at the hearing.

Nonetheless, the only course of action was to set the order aside, taking into account:

• The LVT’s misapprehension and its effect;
• The LVT’s incomplete balancing exercise, and
• The failure to give the freeholder’s success in the substantive application the proper weight which the authorities require.

Fresh exercise of the discretion

Observing that he was now “well acquainted” with the case, Martin Rodger QC held that it would be “an unreasonable imposition both on the parties and on the LVT for me to remit the application back to the LVT”.

He therefore exercised the discretion available to him under section 20C(2)(b) of the Landlord and Tenant Act 1985, and ordered that “in drawing up the service charge accounts, so far as they are applicable to the [lessees], 10% of the costs incurred in the section 24 application should be omitted from the respondent’s annual expenditure for the relevant year or years” to take account of the LVT’s criticisms of the conduct of the managing agents and the freeholder itself.

In other words, the lessees were granted a 10% reduction on their share of the legal costs when put through the service charge.

It would appear that there was no section 20C application in respect of the costs of the appeal.

This case highlights one of the issues which affects limited company freeholders which exist solely – or primarily – for the purpose of owning the freehold.

Such companies can be terribly cash-strapped, so that any failure to recover the costs of litigation tip them over the edge into insolvency. Here, I understand that if the section 20C order had not been overturned, the freehold company was going to have to raise some £65,000.

In general, a company turns to its shareholders for help in plugging the gap. Where the articles of association impose no obligation to contribute, all the company can do is plead for support.

Where however the articles contain what has become known as a Morshead Mansions clause, it could be said that the landlord’s prospects of surviving are much improved. See here for the wording of the clause which took the landlord home in Morshead Mansions v Leon di Marco [2013] EWHC 1068 (Ch), and which was unaffected by the Court of Appeal’s decision in [2014] EWCA Civ 96.

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