The LVT and FTT are often described as no costs environments. Whilst technically this is true, Amanda Gourlaythe reality can often be very different.

The recent appeal in Standard Apartments Ltd v Christoforou [2013] UKUT 0586 (LC) pulled that reality into sharp focus.

Inspired by Christoforou, which centred on the LVT’s costs jurisdiction, this article – written for Brady Solicitors by Amanda Gourlay, who runs the service charge blog and is a barrister at Tanfield Chambers – gives an overview of the First-Tier Tribunal’s powers to limit and award costs.

The article first considers the contractual position between the parties, and discusses how Parliament has affected those contractual entitlements through statute.

Part two of the article then covers the powers of the FTT to make an award of costs that is not based on the parties’ contractual arrangements under the lease, but arises under the new procedure rules which came into force on 01 July 2013.

Part I: The contractual position

The lease

First and invariably, the FTT will consider the terms of the lease to establish whether the lessee agreed to pay the costs of any legal proceedings.

There are generally two places in a lease where this agreement may be found:

As part of the service charge

In this case, the entitlement to costs is normally wrapped up in the list of all of the services which the landlord covenants to provide.

Where the landlord claims an entitlement to legal costs through the service charge, the costs are shared among all of the lessees in the building in the same way as the costs of cleaning, repairing and maintaining the building. Plainly a legal bill shared is a legal bill (at least) halved. The lessee involved in the proceedings has the benefit of his fellow lessees’ contributions to the legal costs, even if those lessees had nothing to do with the proceedings.

The entitlement to recover costs as part of the service charge has quite a battle-scarred past. Older leases tend to lack the clarity of expression of modern leases so far as the recovery of legal costs is concerned. Greening v Castelnau Mansions Ltd [2011] UKUT 326 (LC) gives a good overview of the arguments which have sallied to and fro as to whether the lease permits the landlord to put his legal costs through the service charge.

As a cost demanded in full and directly from the lessee

In some instances the lease may allow the landlord to demand payment of all of the costs of FTT proceedings directly from the lessee against whom the proceedings are brought. If the landlord is entitled to recover his costs under this provision, the lessee may be faced with a considerable bill because the costs are not shared amongst all of the lessees in the building. In this case, the landlord will normally rely on that part of the lease which refers to notices under section 146 of the Law of Property Act 1925 and other instances of breach of covenant.

The role of Parliament

The Landlord and Tenant Act 1985 and the Commonhold and Leasehold Reform Act 2002 give the FTT the power to intervene in the parties’ contractual arrangements.

The Landlord and Tenant Act 1985

Where the costs are part of the service charge

The FTT application form for a determination under section 27A of the Landlord and Tenant Act 1985 includes a small box somewhere towards the end asking the lessees whether they wish to make an application under section 20C of the 1985 Act.

Most lessees tick that box – and many tick it orally at the final hearing if they have not already done so at a pre-trial review or case management conference –when the impact of section 20C is explained.

Section 20C, in short, prevents the landlord from putting the costs of FTT proceedings through the service charge of the lessee(s) who make that application if it is just and equitable in the circumstances for the landlord to be prevented from doing so.

St John’s Wood Leases Ltd v O’Neil [2012] UKUT 374 (LC) is a good overview of the case law and the exercise of the court’s discretion to make a section 20C order.

The Commonhold and Leasehold Reform Act 2002

Costs as a variable administration charge

The 2002 Act introduced the administration charge to the service charge world. This charge is not to be confused with the administration charge which often finds its way onto major works invoices, nor is it an alternative description of a managing agent’s charge.

The Act draws a distinction between non-variable and variable charges, the former being a charge which, in broad terms, can either be worked out by the lessee from the wording of the lease, and the latter being one which cannot.

The costs incurred by a landlord as a consequence of a lessee’s breach of covenant fall within the meaning of variable administration charge.

Variable administration charges and reasonableness

The 2002 Act provides that an application can be made to the FTT for a determination of the reasonableness of a variable administration charge.

The test is different to the test which relates to service charges: it is not a question of whether the charge is reasonably incurred and reasonable in amount for work of a reasonable standard. Instead it is simply whether the costs are themselves reasonable. This point was considered by Martin Rodger QC in the Christoforou case.

Part 2: the FTT’s powers under the new procedure rules

The second part of this article reviews the FTT’s powers to make an award of costs.

The terms of the lease, so vital to much that passes before the FTT, are irrelevant to the exercise of these powers.

The First Tier Tribunal (Property Chamber) sprang into life on 01 July 2013. It was accompanied by a new set of rules.

Rule 13 deals with costs, and provides that the FTT can make the following costs orders:

  • A wasted costs determination against parties’ representatives, whether legally qualified or not;
  • A determination that one party pay another’s costs if the first party has acted unreasonably in bringing, defending or conducting proceedings, and
  • A determination that one party reimburse another in respect of any fee paid in connection with the proceedings.

The £500 costs limit, which applies to LVT costs awards (and therefore continues in Wales), has not been reproduced in the new rules for proceedings in the FTT. The FTT therefore now has powers to award costs in an unlimited amount where parties’ representatives cause costs to be wasted, and against parties themselves in cases of unreasonable behaviour.

Wasted costs determinations are new to the FTT. Representatives will be kept on their toes knowing that a costs determination can be made and ultimately enforced against them personally if their conduct of the proceedings warrants it.

The second scenario has echoes of the LVT rules, although to my mind the gateway has widened a little compared to the LVT rules.

The LVT rules require that the LVT must be satisfied that the party against whom an order is sought has acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably.

In Halliard Property Company Limited v Belmont Hall and Elm Court RTM Company Limited (LRX 130/2007) the Upper Tribunal held that, in the context of LVT proceedings, the unreasonable behaviour must be akin to those rather colourful epithets for an order for costs to be made.

Logic dictates that if they have disappeared in the new rules, that limitation has also evaporated.

The third scenario is a direct reflection of the position in the LVT, so there has been no change with the advent of the FTT.

What does this mean for FTT proceedings?

If the costs cannot be recovered because the lease does not provide for recovery, that is the start and finish of the matter unless an award of costs can be justified under rule 13 of the new FTT rules.

If the lease provides for recovery of legal costs as part of the service charge, a section 20C order can prevent the landlord putting the costs of the proceedings through the service charge. It is worth remembering that the LVT and FTT have the power to make a partial section 20C order – for example that the landlord can recover 50% of the costs of the proceedings through the service charge.

If the costs are recoverable as a variable administration charge, the LVT and FTT have the power to consider their reasonableness. As a rule of thumb, a variable administration charge is normally a charge recoverable directly from the lessee who is party to the proceedings, and is not shared amongst all lessees.

A point to note: the LVT has held that legal costs cannot be a service charge and an administration charge at the same time, although they can be claimed/resisted in the alternative. There are however undoubtedly occasions when the costs fall within both definitions. It is then that careful consideration should be given to the way forward.

If costs cannot be recovered under the lease – and I have yet to see a lease which allows the lessee to recover legal costs – the FTT procedure rules empower the FTT to make an order for costs where a party has behaved unreasonably. So far as I am aware, the Upper Tribunal has not yet given guidance on the scope of unreasonableness in rule 13 of the FTT rules.

A no costs environment? I am not at all sure that I agree.

© Amanda Gourlay 2014.

Read more articles by Amanda Gourlay on her dedicated service charge blog

This article is for information and entertainment purposes only. Whilst we make every effort to ensure all information is accurate and up to date, it does not constitute a comprehensive review of the applicable law and should not be relied upon as such. If you have any queries relating to issues discussed in this article please speak to the author or your usual legal provider.