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Rule 13 Costs – Acting unreasonably could be becoming even more costly

Recently the Court of Appeal has reached a verdict in the case of Lea and others v GP Ilfracombe Management Co Ltd in relation to what is deemed unreasonable conduct for the purpose of a cost order under Rule 13. The decision reached will become case law referred to within verdicts for similar cases in the future, which is why it is important for managing agents, freeholders and anyone with invested interest in leasehold property to be aware of.

Within this article Liz Rowen, our Head of Litigation and Leasehold Transactions, details what test is applied to determine a cost ruling, the impact the verdict of this case will have in the future and the impact it may have on individuals’ decision making process when deciding whether to proceed with a court case.

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What is Rule 13?

Rule 13 governs the awarding of costs in tribunal proceedings, such as First-tier Tribunal (FTT), Upper Tribunal (UT) and Court of Appeal cases. Whilst generally speaking each party involved in proceedings is responsible for their costs, under Rule 13 the court can order one party to pay for another’s costs when:

  • A legal or other representative has acted improperly, unreasonably, or negligently, leading to unnecessary costs, the tribunal may order the party responsible to pay the costs.
  • If a party has acted unreasonably in brining, defending, or conducting proceedings, the tribunal may order them to pay the other parties’ costs.

Case Background

The case Lea and others v GP Ilfracombe Management Co Ltd concerned the leaseholders of properties at a holiday park. The Management Company for the park brought a claim against the leaseholders for service charge arrears valued at £2.4million.  This claim was successfully defended by the leaseholders in the FTT, but no order for costs under Rule 13 was made. This decision was appealed by the leaseholders, but the appeal was not upheld by the UT.

The leaseholders subsequently lodged an appeal with the Court of Appeal on two issues:

  1. What is the appropriate test to be applied when one party in proceedings claims costs where they alleged that the other party has acted unreasonably?
  2. The second issue was, that in applying the appropriate test for acting unreasonably, in this instance, was the FTT wrong in finding that the Management Company had not acted unreasonably?

The Appropriate Test

Rule 13 generally sets out that the Tribunal may make an Order in respect of costs only, if a person has acted unreasonably in bringing, defending or conducting proceedings.

The test for Rule 13 costs had previously been considered in the case of Ridehalgh v Horsefield and another [1994] by the Court of Appeal, this case was subsequently applied by the UT in the case of Willow Court Management Co v Alexander (1985).

The guidance provided by the Court of Appeal following these two cases was, ‘would a reasonable person acting reasonably have acted in this way? Is there a reasonable explanation for the conduct in issue?”. Ultimately, if the answer to these questions/ tests is no a cost order is likely to be awarded.

Was this test applied correctly by the FTT in this instance?

The Court of Appeal found that the FTT had not applied the test correctly insofar as it failed to consider if there was a reasonable explanation for the conduct of the respondent party.

The Management Company was found to have issued invalid service charge demand for large sums and such sums were not supported by any evidence. The Applicant’s were unable to explain their conduct in these proceedings satisfactorily.

It should be noted that this test is to be applied objectively on a case by case basis and all the background and facts in a case are to be considered.

The Court of Appeal found that in applying the test correctly, that the conduct of the Application would have been deemed unreasonable.

The Court of Appeal, upheld the Appeal by the Leaseholders and the Applicant Management Company was ordered to pay the respondents’ costs of the FTT proceedings.

Summary

It is worth any party entering into court proceedings considering the test used for Rule 13, as if they have any doubt as to whether they are acting reasonably, they may find themselves covering the entirety of the costs involved in proceedings if the judgement does not go their way. Ultimately the verdict in this case means that any party deemed to be acting unreasonably or negligently, leading to unnecessary costs, or unreasonably bringing, defending or conducting proceedings, may be ordered by the court to cover associated costs.

If you have any questions or require expert legal assistance with any First-tier Tribunal, Upper Tribunal or Court of Appeal cases, please get in touch and one of our team will be happy to help.

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With hundreds of years’ worth of combined experience, our experts have dealt with nearly every leasehold property matter you can imagine. If you’re currently in need of legal support or advice, please get in touch.

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