UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2013] UKUT 0592 (LC)

UTLC Case Number: LRX/36/2012

                                                                             

                            TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charges – whether landlord’s costs of leaseholders’ unsuccessful application to appoint manager recoverable as service charge – section 24, Landlord and Tenant Act 1987 - whether costs of leaseholders’ application to determine service charges recoverable as service charge – section 20C, Landlord and Tenant Act 1985 – whether LVT exercised discretion on incorrect basis - scope of section 20C determination - appeal dismissed – cross appeal allowed

                          IN THE MATTER OF AN APPEAL AGAINST A DECISION

OF A LEASEHOLD VALUATION TRIBUNAL FOR THE

LONDON RENT ASSESSMENT PANEL

 

 

BETWEEN                                  (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                                    Appellants

 

                                                                           and

 

                                           JAM FACTORY FREEHOLD LIMITED               Respondents

                                                   

 

Re: The Jam Factory

       27 Green Walk

       London SE1 4TT, SE1 4TX and SE1 4TQ

 

 

                                                                             

 

Before: Martin Rodger QC, Deputy President

 

                                                                             

Sitting at: 10 Alfred Place, London WC1E 7LR

on

13 November 2013

 

 

Mr Kevin G Conway, the first appellant, for all appellants

Mr Nathaniel Duckworth instructed by Bishop & Sewell, solicitors, for the respondent

 

 

 

 

 

 

 

The following cases are referred to in this decision:

Sella House Ltd v Mears [1989] 1EGLR 65

Canary Riverside Property Limited v Schilling LRX/65/2005

Iperion Investments Corporation v Broadwalk House Residents Limited (1996) 71 P & CR 34

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

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

Church Commissioners v Derdabi [2010] UKUT 380 (LC)

Phonographic Performance Ltd v AEI Rediffusion [1999] 1 WLR 1507

 

DECISION

Introduction

1.           The appeal and cross-appeal in this case are against a decision of the Leasehold Valuation Tribunal for the London Rent Assessment Panel (“the LVT”) given on 2 December 2011 in a dispute between a group of fourteen leaseholders of flats at the Jam Factory, Green Walk, London SE1 and their landlord, a company owned by a substantial group of the leaseholders of flats in that building.  These proceedings, and others which continue between the same parties in the LVT and in this Tribunal, are a sad example of the disagreements which can beset leaseholder-managed blocks of flats despite the best efforts and sacrifices of many whose only motivation is to improve the management of premises in which they and their neighbours share a common interest.

2.           Two main issues are raised by this appeal:

(1)        Whether the terms of the standard Jam Factory lease permit the respondent to include in the service charge payable by all leaseholders the costs which it incurred in lengthy proceedings brought by the fourteen appellants in an unsuccessful bid by them to procure the appointment of a manager under section 24 of the Landlord and Tenant Act 1987 (“the 1987 Act”).

(2)        Whether the LVT was wrong to make an order, under section 20C of the Landlord and Tenant Act 1985 (the “1985 Act”), that the costs of those proceedings, although recoverable in principle, should not be added to the service charge.

3.           The appellants were represented before me by the first appellant, Mr Conway, who is a solicitor, and the respondents by Mr Duckworth of counsel.  I am grateful to them both for their assistance.

The background facts

4.           The Jam Factory is a modern conversion of three Victorian industrial buildings which, as their name suggests, were originally used for the manufacture of jam.  In about 2003 the buildings were converted to provide 194 residential flats and penthouses in three blocks by a development company known as Angel Property (Hartley Buildings) Ltd (“Angel”).

5.           The lease of flats in the Jam Factory is in a standard form for a term of 999 years from 25 December 2000 and includes covenants by the landlord in the Sixth, Seventh and Ninth Schedules to provide services coupled with an obligation on the leaseholder to pay a service charge.

6.           The management of the Jam Factory proved controversial from the outset.  Two different firms of managing agents were successively appointed in the early years but each resigned.  For a period in 2005 and 2006 Angel managed the Jam Factory in its own right before eventually appointing Stonedale Property Management (“Stonedale”) as its agent in 2006.

7.           A series of disputes broke out between individual leaseholders and Angel.  The details do not matter but certain leaseholders complained that work had not been completed to the standard which had been agreed when they contracted, off plan, for the purchase of their flats.  As a result of these disputes, and a wider dissatisfaction with the management of the Jam Factory, a number of leaseholders began to withhold service charges.

8.           Angel went into liquidation in October 2009 by which time the respondent had already been incorporated by the leaseholders of about half of the flats at the Jam Factory with a view to its acquiring management of the building through the purchase of the freehold.  Terms were subsequently agreed with Angel’s liquidator and in September 2009 the respondent entered into a contract to acquire the freehold for £413,000.  The purchase was completed in January 2010.  Under the agreement the respondent became entitled to the arrears of service charges due from leaseholders of flats in the Jam Factory.  The precise number of leaseholders of the 194 flats and penthouses who participated in the acquisition as members of the respondent is disputed between the parties with suggested figures ranging from 92 to 100.  The exact number does not now matter.

9.           On acquiring the freehold the respondent decided to retain the services of Stonedale, Angel’s managing agent.  This decision was contentious as there was considerable dissatisfaction amongst a group of leaseholders with Stonedale’s track record. 

The lease

10.        For all practical purposes, the relevant terms of the leases of flats and penthouses in the Jam Factory are identical.  Clause 2.1, reserves the service charge, payable in accordance with the provisions of the Ninth Schedule, as further rent.  Each party then covenants to perform the obligations on its behalf in the various schedules, including the Ninth Schedule which concerns the calculation and payment of the service charge and identifies the items to which the charge may relate.  Before turning to that schedule however, I should refer to certain other provisions to which most of the argument in this appeal has been directed. 

11.        Clause 14 of the lease is headed “General Agreements and Declarations” and, so far as is relevant to this appeal, provides as follows:

“For the avoidance of doubt the parties acknowledge and declare that notwithstanding anything herein contained or implied:-

                   14.1  In the management of the Building and the performance of the obligations of the Landlord hereinafter set out the Landlord shall be entitled to employ or retain the services of any appropriately qualified or experienced employee agent consultant service company contractor engineer or other advisers of whatever nature as the Landlord may reasonably require in the interest of good estate management and the proper expenses incurred by the Landlord in connection therewith shall be deemed to be an expense incurred by the Landlord in respect of which the Tenant shall be liable to make a contribution in accordance with the Service Charge Percentage under the provisions set out in the Ninth Schedule hereto.”

12.        The leaseholder’s covenants in the Fourth Schedule include at paragraph 9 an obligation to pay costs, charges and expenses (including legal costs) incurred by the landlord in a variety of circumstances including in connection with proceedings under section 146 of the Law of Property Act 1925, or in connection with the service of notices or schedules relating to wants of repair, or in respect of requests for information or inquiries, or finally in dealing with any deed required to be entered into under the lease.

13.        The landlord’s covenants in the Seventh Schedule include at paragraph 1 a covenant to enforce, at the request and cost of the leaseholder, the obligations of other leaseholders in the building and a further covenant at paragraph 4:

“To institute such proceedings as the Landlord shall in its absolute discretion deem necessary to recover any arrears of the annual service charges (as here defined) and to instruct solicitors in connection therewith.”

14.        The provisions relating to service charges contained in the Ninth Schedule distinguish between the “Common Parts Service Charge” which is dealt with in paragraph 1 and the “Estate Service Charge” dealt with in paragraph 2.  In the sample lease I have been shown the leaseholder’s contribution towards the Common Parts Service Charge is to be 1.93%, while his contribution to the Estate Service Charge is to be 0.44% (by reason of certain definitions at the start of the document). 

15.        By paragraph 1.1.4 of the Ninth Schedule the “Common Parts Annual Expenditure” (on which the Common Parts Service Charge is based) is defined to mean “all costs, expenses and outgoings whatever reasonably and properly incurred by the Landlord in or incidental to providing all or any of the Common Parts Services… and all sums reasonably and properly incurred by the Landlord in relation to the Common Parts Additional Items…” 

16.        The Common Parts Services are defined in paragraph 1.1.2 and include the repair, maintenance and cleaning of the Common Parts and the Retained Parts.  Those expressions are defined in clause 1.1 of the lease in terms which confine the Common Parts and the Retained Parts to those parts of whichever of the separate Jam Factory buildings the relevant flat or penthouse forms part. 

17.        The “Common Parts Additional Items”, which also form part of the Common Parts Annual Expenditure, are defined in paragraph 1.1.3 of the Ninth Schedule as including the following:

                 “The reasonable and proper fees and disbursements … of:

                 1.1.3.1.1 any Surveyor or Accountant and/or any other individual firm or company employed or retained by the Landlord for or in connection with such surveying or accounting functions in connection with the management of the residential parts of the building

1.1.3.1.2 The managing agents where such functions are undertaken by the Surveyor for or in connection with [management and the provision of services]

1.1.3.2 The reasonable fees of the Landlord or a Group Company for any of the Common Parts Services or the other functions and duties referred to… that shall be undertaken by the Landlord or a Group Company and not by a third party.”

18.        Paragraph 2 of the Ninth Schedule concerns the Estate Service Charge.  The “Estate” is defined by clause 1.1 of the Lease to mean all five of the Jam Factory buildings together with their surrounding roads, footpath, gardens and amenities.  Estate Services and “Estate Additional Items” are defined in terms similar to those applied to the Common Parts Services and Additional Items. 

The proceedings

19.        On 9 November 2010 a group of fourteen leaseholders, including the appellants, who between them held leases of eleven flats, applied to the LVT under section 27A of the 1985 Act for a determination of their liability to pay service charges for the years 2006-2009 and their liability to make payments on account for 2010.  Two further leaseholders subsequently joined in the application, and the period under scrutiny was extended by agreement to include the on account service charges due for 2011.

20.        On 9 December 2011, before the section 27A application was determined, the same group of leaseholders issued an application under section 24 of the 1987 Act seeking the appointment by the LVT of a manager to take over the responsibilities then being discharged by Stonedale.  The basis of the application was the contention that the respondent was in breach of covenants in the leases of the flats requiring it to keep the structure of the building in repair and to maintain the common parts; it was also said that Stonedale had been responsible for overcharging the leaseholders for gas and water together with a number of other complaints.

21.        Both the service charge application and the manager application were made on the LVT’s standard form for such applications.  They identified all of the appellants as applicants and were signed by Mr Conway on behalf of them all.  In each case the standard form included the question: “If you are a tenant, do you wish to make a section 20C application”.  A note explained that such an application was for an order to the effect that costs incurred in connection with the proceedings were “not to be treated as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person(s) specified in the application”.  In each case the appellants ticked a box to indicate that they did wish to make a section 20C application but they did not give specify any person who was to have the benefit of such an order if it was made.

22.        The applications were dealt with together by the LVT.  The proceedings were complex: the leaseholders’ statement of case ran to 65 pages and the hearing before the LVT occupied seven days in July and October 2011.  During the hearing the Tribunal and the parties concentrated their attention solely on the application for the appointment of a manager.  By the final day the original application under section 27A had not yet been investigated and it was apparent that significant additional time and expense would be required if the LVT was to embark on consideration of the leaseholders detailed challenges to six years of service charges.  The LVT urged the parties to seek a consensus if at all possible.

23.        By now the parties had fought each other to a standstill and, thankfully, they were able to reach what the LVT described as “a sensible and comprehensive agreement with regard to the service charge issues and a formula for determining the limitation of costs in so far as it relates to the application under section 27A”.  The parties signed a detailed document in the form of an order by the LVT, but entitled “Compromise Agreement” which “ordered” that the section 27A application and the section 20C application were withdrawn with no order being made on either application.  It was a further term of the Compromise Agreement that the appellants agreed to discharge the sums claimed by the respondent in the section 27A application, with the exception of arrears claimed against two individual leaseholders.  (Regrettably the effect of that part of the Compromise Agreement is the subject of yet another dispute which has spawned further LVT proceedings from which an appeal to the Tribunal is pending; nothing in this appeal turns on the outcome of that dispute).  The respondent also agreed to carry out certain works and to ensure that a deficit in the Jam Factory’s reserve fund would be reduced to nil within a period of fourteen months. 

The LVT’s decision

24.        The Compromise Agreement did not deal with the application to appoint a manager and on 2 December 2011 the LVT gave its decision on that aspect of the dispute.  It recited the evidence it had heard of individual leaseholder’s complaints and allegations of mismanagement by Stonedale and found that there was relatively little dispute of fact between the parties.   It criticised the management style of certain of Stonedale’s staff and agreed that the respondent was in some respects in breach of its repairing obligations under the leases.  Generally, however, it found that it would not be just and convenient to appoint a manager and that the leaseholders’ complaints were not sufficiently serious to justify the making of an order under section 24 of the 1987 Act.

25.        The LVT appeared sympathetic to the practical difficulties of meeting the day to day running costs of the Jam Factory in circumstances where arrears of service charges due from a number of leaseholders exceeded £340,000.  The respondent had had no alternative but to use part of the reserve fund, intended for major works over the long term, to meet the everyday expenses of running the building.  That practice, which the LVT attributed to “a stark choice of either using the reserve funds or failing to carry out any day-to-day services at all” was a particular cause of complaint by the appellants.  In paragraph 104 of its decision the LVT stated:

         “We are reluctant to come to the finding that there was a breach of the [RICS] Code in circumstances where the stance of the Applicants in withholding service charges meant that the respondent had no alternative but to dip temporarily into the reserve fund.”

26.        The LVT found fault with the tone of some of Stonedale’s correspondence, describing it as “inappropriate”, but found that there was no question of leaseholders not being kept informed about relevant matters.  It referred to Stonedale’s treatment of two leaseholders who were involved in litigation as “overzealous” ”and identified certain “errors of judgment” but repeated that it did not find the justified complaints of individual leaseholders, such as they were, of sufficient gravity to call for the making of an order under section 24.  There were clearly breaches of the lease in relation to the repair of the common parts and some of the flats and it described the poor lighting on the stairwells as “dangerous”.  It also found that, because of an incorrect apportionment of bills, leaseholders had been overcharged for electricity and water and that when this was pointed out Stonedale did not deal with the issue promptly.

27.        In paragraphs 114-120 of its decision the LVT explained its conclusion that it was neither just nor convenient to make a management order.  It said this at paragraph 114:

         “This was a development which in the past had been managed extremely badly.  As a result the residents had acquired the freehold in order to put the matter right.  The respondent acquired the freehold in 2010 but given the very severe financial problems never had the wherewithal to progress matters fully.”

It went on at paragraph 115:

         “Both Mr Walker and Ms O’Driscoll [representatives of the respondents who had given evidence] appeared to the Tribunal as extremely committed to changing the fortunes of the Jam Factory.  They were and are prevented from so doing by the historic disputes that have blighted the development.”

28.        The LVT was also critical of the appellant’s proposed manager, describing him at paragraph 116 of its decision as “not a suitable candidate for this particular development” who “had no plans for the future of the development”.  It expressed the hope that the compromise agreement and the promised payment of all arrears meant that the respondent would for the first time be in a position to make real and positive improvements to the condition of the Jam Factory.  There were shortcomings in relation to the performance of Stonedale but such shortcomings could not be divorced from the fact that the respondent was under-funded.  Moreover the LVT accepted that the majority of the leaseholders were not in favour of the appointment of a manager.  Taking all of these matters into consideration the LVT concluded that it would not be proportionate to appoint a manager.

29.        The LVT then considered the appellants’ application under section 20C of the 1985 Act for an order that no part of the costs of the proceedings could be added to the service charge.  The appellants, who were represented before the LVT by counsel, had argued that the terms of the lease did not permit costs incurred in legal proceedings against leaseholders to be treated as service charge expenditure.  Their application under section 20C was by way of fallback if the LVT did not accept that contention.  As the LVT’s decision on the question of interpretation of the lease, and its exercise of its discretion under section 20C are critical to this appeal, I will set out the relevant paragraphs of its decision in full.

“121. We have decided that in the circumstances it is appropriate to make an order under section 20C of the Landlord and Tenant Act 1985 in order to limit the landlord’s recovery of costs notwithstanding that the costs can be claimed under the terms of the lease. 

122.     In determining whether or not to make an order under section 20C we must look at all of the circumstances of the case and not merely whether the applicant has failed in its application.

123.     Over the six and half days that we heard evidence (and this was solely in relation to the appointment of a manager application) it became apparent that a lot of ill feeling on the part of the applicants was caused by the way in which Stonedale communicated decisions.  Whilst Miss Mooney was an efficient manager, the manner in which she communicated decisions to the applicants left much to be desired.  A good example was her dealings with Mr Bond, indeed both Miss Measor and Miss Money, as their written evidence makes clear, viewed the applicants as a vocal minority and as a result may not have heeded their complaints, yet their complaints were both real and justified.  We accept that the development had been managed badly prior to Stonedale taking over management because of the lack of available funds but the manner in which Stonedale dealt with the applicants give rise to suspicion or victimisation and discrimination.  A more user-friendly style of management may have avoided the current application.

124.     Moreover some disrepair matters could and should have been attended to more quickly.

125.     There were problems, even given the lack of funding that should have been resolved such as the water and electricity charges.  Stonedale were simply too slow in resolving these issues.  Moreover the respondent itself, despite its inprocuniosty ought to have explored ways of raising capital in order to deal with the health and safety issues and the disrepair to the common parts.

126.     We take into account the fact that in making an order there will be some hardship to the respondents.  However that hardship is outweighed in our view by the conduct of the managing agents which conduct ultimately rests with the respondent for the period while it has been the freehold owner.

127.     We also take into account that a proportion of the costs can necessarily be recovered as a result of the compromise reached between the parties in relation to the section 27A application.

128.     Accordingly we make the order as requested.”

Issue 1: Does the lease permit the recovery of legal costs as a service charge?

30.        Notwithstanding the fact that they succeeded in securing an order that the costs of the manager application were not to be added to the service charge, the appellants challenged the LVT’s acceptance in paragraph 121 of its decision, that “the costs can be claimed under the terms of the lease”.  The appellants’ concern is for the effect of that acceptance on their liability to contribute towards the costs of other proceedings, including the section 27A application.  Nothing in this decision affects the separate issue of the construction and effect of the Compromise Agreement on the respondent’s entitlement to recover those costs.

31.        The essence of Mr Conway’s submission on behalf of the appellants is that the Jam Factory lease makes detailed provisions for items which may be included in the service charge and covenants for the payment of certain costs, including certain legal costs, which the leaseholder may be obliged to reimburse in specified circumstances.  None of those provisions, nor any of the specific circumstances contemplated by the leaseholder’s covenants, includes any reference to legal costs incurred by the landlord in connection with proceedings before the leasehold valuation tribunal. 

32.        The appellants also submit that the language of clause 14.1 (see paragraph 11 above) on which the respondent’s principally rely, is not engaged by proceedings for the appointment of a manager before the LVT. 

33.        In detailed submissions on the proper construction of clause 14.1  Mr Conway made the following points:

(a)         Clause 14.1 cannot be regarded as a generalised right on the part of the respondent to recover any expenses which it incurs since that would render the detailed service charge provisions in the Ninth Schedule redundant and would impose limitless burdens on all leaseholders.

(b)        Clause 14.1 complements the Ninth Schedule, and makes clear the types of expenses which may be incurred in compliance with the Landlord’s obligations under the Ninth Schedule, but it does not extend the scope of the Ninth Schedule.

(c)         For expenditure to be within clause 14.1 it must satisfy each of three conditions, namely: (1) it has to be have been incurred in the management of the building, and (2) in the performance of the respondent’s obligations under the lease, and (3) it must have been required in the interest of good estate management.  The costs of dealing with the manager application did not satisfy those conditions because (1) the application related to the Jam Factory estate as a whole, and not to a specific building; (2) the costs of defending the management application did not arise out of any of the respondent’s obligations under the lease and its decision to contest the application was a commercial decision taken in its own interests; (3) in any event the costs of the management proceedings were not incurred in the interests of good estate management, but rather in defence of what the appellants maintain was bad estate management by Stonedale.

(d)        The appellants also maintain that it is impossible to apply clause 14.1 to costs incurred in the management proceedings because there is no procedure or mechanism to allocate such costs either to the Common Part Service Charge or to the Estate Service Charge. As the appellants point out, a different percentage contribution is required of each leaseholder in respect of those separate categories of expenditure.  For that reason, they submit, it is necessary to bring any expenditure which it is desired to recover through the service charge within the scope of either paragraph 1 or paragraph 2 of the Ninth Schedule.  Hence clause 14.1 cannot be regarded as providing an additional category of expenditure, but must be seen as complementing the categories of expenditure already comprehended within the Ninth Schedule.

34.        Mr Conway relied on the decision of the Court of Appeal in Sella House Ltd v Mears [1989] 1EGLR 65 in support of his contention that the language of clause 14.1, and that of the lease as a whole, was insufficiently clear to enable the recoupment of legal costs.  In particular he drew attention to the observation by Taylor LJ at page 68E that:

         “On the respondent’s argument a tenant, paying his rent and service charge regularly, would be liable via the service charge to subsidise the landlord’s legal costs of suing his co-tenants, if they were all defaulters.  For my part, I should require to see a clause in clear and unambiguous terms before being persuaded that that result was intended by the parties.”

35.        In his submissions in reply Mr Duckworth relied principally on clause 14.1, first drawing attention to the words which immediately precede it, namely, “notwithstanding anything herein contained”.  These, he submitted, indicated that clause 14.1 was not intended to be constrained in its scope by the contents of the Ninth Schedule.  On the contrary as he put it, clause 14.1 has “primacy” over the remaining terms of the lease.  Moreover, clause 14.1 was a “deeming” provision.  Its effect was to ensure that if any costs were incurred by the landlord in the circumstances there described but which for some reason fell outside the scope of the Ninth Schedule or over which there was doubt, clause 14.1 resolved that doubt and deemed them to have been incurred in such a way as properly to form part of the service charge.  The purpose of clause 14.1, Mr Duckworth submitted, was deliberately to widen the ambit of the Ninth Schedule.

36.        As for the conditions which had to be satisfied before a head of expenditure could be regarded as falling within clause 14.1, Mr Duckworth relied on the decision of the Lands Tribunal (Judge Rich QC) in Canary Riverside Property Limited v Schilling LRX/65/2005.  The issue in that case was whether the costs of resisting an application to appoint a manager under section 24 of the 1987 Act fell within a charging provision which entitled the landlord to recover the “proper and reasonable fees and disbursements of managing agents, solicitors, counsel, surveyors … employed or retained by the Landlord for or in connection with the general overall management and administration and supervision of the building.”  In paragraph 13 of its decision the Lands Tribunal said that it was “plainly right” that:

         “ … incurring fees in resisting an application to change the manager of the building is in connection with such management and if the fees are proper and reasonable they fall within the costs chargeable to the service charge.”

37.        Later, at paragraph 15, the Lands Tribunal went on:

         “Resisting such challenges is part of the ordinary cost of management, just as is the cost of collecting the service charge from tenants who fail to pay on demand.  Ordinarily such an action, if dismissed, would be dismissed with an order that the unsuccessful claimant pays the landlord’s costs, but providing the landlord reasonably incurred the costs, in so far as they are not recoverable from the complaining tenant, they may surely be charged to the service charge as costs of management.”

38.        Mr Duckworth submitted that there was no distinction to be drawn between costs incurred “in the management” of the Jam Factory and those incurred “in connection with management” which had been considered and allowed in Canary Riverside.

39.        As to Mr Conway’s other submissions, Mr Duckworth argued that anything done in the management of the estate as a whole, including resisting the appointment of a manager, must necessarily also be done in the management of the building.  The reference in clause 14.1 to “advisers of whatever nature” was deliberately broad and contrasted with the specific references in the tenant’s own covenants to the expenses of particular pieces of work.  Clause 14.1 was therefore designed to be a general clause of wide application because the circumstances in which it might have to be relied on over the 999 year term were necessarily uncertain.  As far as resistance to the application being in the interest of good estate management that must necessarily have been the case on any objective assessment, because the LVT had found that the proposed manager was unsuitable.

Discussion

40.        I am satisfied that clause 11.4 is amply wide enough to enable the recovery of the costs of employing solicitors and counsel in connection with an application by leaseholders of flats in the Jam Factory for the appointment of a manager under section 24 of the 1987 Act.  I have reached that conclusion largely for the reasons given by Mr Duckworth, which I will express in my own words.

41.        I reject Mr Conway’s argument that the scope of clause 14.1 is restricted to costs or activities already comprehended within the Ninth Schedule.  On that interpretation the function of clause 14.1 would simply be to make it clear that the landlord could engage a variety of professionals in performing the tasks to which the service charge provisions relate.  However that construction seems to me to give no weight to the opening words of clause 14.1 which, as Mr Duckworth submitted, are clearly intended to confirm that the clause is not to be read as restricted by other parts of the lease.  Moreover, the drafting technique of deeming costs which fall within clause 14.1 as being recoverable as part of the service charge expenditure, rather than a simple statement that the landlord is entitled in performing its service charge obligations to engage professional assistance, seems to me to indicate that the parties intended to bring within the scope of the service charge the costs of activities which might not otherwise be within that scope.

42.        I am also satisfied that the costs of dealing with the section 24 application fall clearly within the conditions laid down by clause 14.1.  They were, in my view, costs incurred “in the management of the building”.  The management of a complex residential building necessarily and routinely involves dealing with inquiries, complaints and criticism.  If leaseholders seek the appointment of a new manager, or seek to persuade a landlord to make changes in the style or approach to management, the landlord’s participation in such discussions would, in my view, also be “in the management of the building”.  Where a group of leaseholders, dissatisfied with the landlord’s response to their request for a change in the identity of the manager or in other aspects of management, made an application to the First-tier Tribunal for it to appoint a manager under section 24, resisting that application also seems to me quite properly to be within the scope of management of the building.  The fact that the whole focus of the enquiry before the tribunal in such a case is on both historic management and the new management regime reinforces that clear impression.

43.        Although, as Mr Conway rightly points out, the costs of the proceedings under section 27A of the 1985 Act were withdrawn from consideration by the LVT by the Compromise Agreement and no issue concerning their recovery arises directly for consideration in these proceedings, it would be artificial and unhelpful for me not to express the conclusions I have reached on that issue.  The issue was debated fully by the parties in their submissions and in oral argument and its consideration is an integral part of the overall construction of clause 14.1.  It seems to me to be clear that the landlord’s participation in proceedings which challenge the amount of the service charge, including the service charge payable on account for services which have not yet been incurred, is properly to be regarded as an act of management. 

44.        I am also satisfied that in principle the proper expenses incurred by the respondent in engaging solicitors and counsel are capable of falling within clause 14.1.  I reject Mr Conway’s suggestion that only advisers whose services are akin to those of a consultant, service company, contractor or engineer are recoverable.  Such a restrictive approach would require that the words “of whatever nature” be given no effect at all.  I am equally sure that the employment of professional assistance in successfully resisting an application to appoint a manager that the LVT found not to be suitable, is objectively to be described as being “in the interest of good estate management.”

45.        I was at one stage of the argument concerned by the appellants’ point that clause 14.1 does not indicate how expenditure falling within it is to be apportioned in the context of the different contributions required to be made towards the Common Parts Annual Expenditure and the Estate Annual Expenditure by paragraphs 1 and 2 of the Ninth Schedule.  If such an apportionment was not possible, as the appellants contend, that might suggest a more restrictive approach to the scope of clause 14.1.

46.        On reflection I am satisfied that the omission of the lease to indicate how expenditure within the scope of clause 14.1 is to be apportioned does not render the clause inoperable, nor confine it as Mr Conway suggested.  Clause 14.1 deems certain expenditure to be within the scope of the Ninth Schedule.  If the omission to designate such expenditure as either Estate or Common Parts Expenditure was to be regarded as fatal, it would mean that no category of expenditure would fall within the clause, including those which the appellant accepts would otherwise be recoverable.  The parties clearly intended the clause to have effect and in those circumstances it is necessary to take a practical and pragmatic approach to the issue of apportionment.  The correct approach seems to me to be that the apportionment required is such as best reflects the subject matter of the expenditure.  If the issue on which the costs are incurred is related exclusively to a single building, the reference in clause 14.1 to the “service charge percentage” must be understood as referring to the Common Parts Service Charge Percentage.  If the matter concerns more than one building the Service Charge Percentage must be deemed to be the Estate Service Charge Percentage.  The expression “Service Charge Percentage” defined in clause 1.1 must therefore be construed as meaning the “Common Part Service Charge Percentage” or the “Estate Service Charge Percentage” as the circumstances require. 

47.        I was informed that, pending the outcome of this appeal, no attempt has yet been made to recoup the costs of the service charge dispute which was resolved by the Compromise Agreement and in respect of which the appellants’ application under section 20C was withdrawn.  Since those costs were incurred in connection with an investigation of the service charge expenditure for the whole Jam factory estate, the logical treatment might be to apply the estate percentage to them, but I make no determination on that matter, having heard no relevant argument.

48.        In my judgment the LVT was right to find that, in principle, the costs of the manager proceedings were recoverable through the service charge.  I intend therefore to dismiss the appeal.

Issue 2: Was the LVT wrong to make an order under section 20C, Landlord and Tenant Act 1985?

49.        In its cross appeal the respondent submits that the LVT was wrong to exercise its discretion in favour of making an order under section 20C of the 1985 Act, the effect of which was to preclude it from adding the costs of the application to appoint a new manager to the service charge.  The precise scope of the order which was made is contentious, but in summary the respondents says that the LVT failed to take relevant matters into account, including in particular the complete success which they achieved in securing the dismissal of the application, took irrelevant matters into account, and reached a conclusion which was outside the lawful boundaries of its discretion.

50.        So far as it is relates to proceedings before leasehold valuation tribunals, section 20C is in the following terms:

“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.”

 

Relevant jurisprudence

51.        The purpose of the discretion conferred by section 20C was first considered by the Court of Appeal in Iperion Investments Corporation v Broadwalk House Residents Limited (1996) 71 P & CR 34.  That was an appeal from a decision of an Official Referee making a section 20C order in favour of a tenant following forfeiture proceedings in which the landlord had been ordered to pay the tenant’s costs of the proceedings.   Peter Gibson LJ first pointed out that section 19 of the 1985 Act prevents a landlord from recovering so much of a service charge as consists of costs unreasonably incurred before noting that section 20C goes further. 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.”

At page 40 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’”

52.        In Iperion the Court of Appeal was clearly influenced in dismissing the appeal by the fact that 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:

“But they are to be left out of account when calculating the 7.4 per cent share payable by the plaintiff.  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.” 

53.        The jurisdiction under section 20C has subsequently been considered on several occasions both by the Tribunal and by its predecessor, the Lands Tribunal.  Tenants of Langford Court (Sherbani) v Doren Limited LRX/37/2000 concerned an application for the appointment of a manager under section 24 of the 1987 Act in which the applicant tenants had been successful.  The Lands Tribunal (Judge Rich QC) referred to Iperion before making the following remarks:

“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.”

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.”

55.        Judge Rich placed further emphasis on 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”.  

56.        Finally, by way of further commentary at paragraph 15 of Schilling the Tribunal elaborated on the reference in paragraph 28 of Doren to “the circumstances of all parties”, 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.

57.        The distinction drawn in Schilling between landlords with different types of interest was referred to again in Church Commissioners v Derdabi [2011] UKUT 380 (LC).   The Tribunal (Judge Gerald) offered further observations on section 20C applications in the context of service charge disputes and emphasised the breadth of the discretion.  “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).  

58.        At paragraph 23 of Derdabi the Tribunal pointed out that it is the tribunal which hears the substantive issues which is best placed to determine the just and equitable outcome of an application under section 20C.  That considerable advantage is one which an appellate tribunal hearing an appeal from an exercise of the discretion under section 20C, as with any other challenge to the exercise of a judicial discretionary, must never forget.  It is not the task of the Tribunal to decide whether it would have made the same order, but rather to consider whether the original tribunal made some error of principle in its exercise of the discretion.

59.        The proper approach of the appellate tribunal in cases such as this was summarised by Lord Woolf MR in an appeal against a decision of the Copyright Tribunal on an issue of costs, Phonographic Performance Ltd v AEI Rediffusion [1999] 1 WLR 1507, at 1523C, as follows: 

"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.

The parties’ submissions

60.        I have set out at paragraph 19 above the paragraphs of its lengthy decision in which the LVT considered and exercised its discretion under section 20C. 

61.        For the respondent Mr Duckworth submitted that the LVT had carried out a flawed balancing exercise in which it had failed to give any, or any sufficient weight to the outcome of the proceedings, and had given too much weight to matters which were either peripheral or irrelevant.  Collectively these errors of approach had resulted in a decision which was manifestly unjust to the respondent and potentially fatal to its survival, and which could not be allowed to stand.  He made the following submissions:   

(1)        Although he acknowledged that the LVT had referred in paragraph 122 of the decision to the requirement to look at “all the circumstances of the case and not merely whether the Applicant has failed in its application”, he submitted that the matters which it had then proceeded to mention were all one sided in the appellants’ favour.  No attempt had been made to weigh up the significance of the respondent’s successful defence of the application to appoint a manager, let alone making that success the starting point for its assessment.

(2)        The LVT had failed to take into account the extent of the appellants’ failure, and the fact that it could never have secured the outcome which the appellants sought.  The appellants’ own manager had been found himself to be unsuitable for the task for which he had been proposed, and the LVT had found comprehensively that it was not just or convenient to appoint him.  Moreover, the respondents were a very small group, representing only 7.2% of the Jam Factory’s leaseholders.  Less than a year before the commencement of the section 24 application more than half of all the leaseholders had each paid £7,500 for a share in the respondent company and the opportunity to control the management of the Jam Factory.  It was, Mr Duckworth submitted, inconceivable in those circumstances that the LVT could ever have acceded to the appellant’ application for the appointment of their preferred manager (even assuming him to have been suitable).

(3)        The LVT had failed adequately to take into account the practical consequences for the respondent, and for Jam Factory residents as a whole, of its decision to bar recovery of the costs of the section 24 application through the service charge.  The costs of successfully defending the application had exceeded £65,000, and to deny the respondent the only realistic means of recouping that expenditure would be likely to accelerate the decline of  the building and perpetuate the problems which the LVT had identified and attributed to underfunding.  The reference in paragraph 126 to “some hardship” to the respondent, which the LVT considered to be outweighed by the conduct of the managing agents, entirely failed to appreciate the disaster which the section 20C order would represent for the respondent. 

(4)        Mr Duckworth submitted that the grounds on which the LVT had criticised the respondent, and on which the making of the section 20C order was founded, were of comparatively minor importance or were misconceived.  The application had related to six years of management by Stonedale, during much of which period the Jam Factory had been blighted by a crippling service charge deficit.  It was therefore inevitable that problems would be identified.  The majority of leaseholders were seeking to resolve those problems through their participation in and support for the respondent, and against that background the criticism of the attitude of individual former employees of Stonedale must rank at the lower end of the scale of managerial misconduct.

(5)        Mr Duckworth described as “unreal” the LVT’s suggestion in paragraph 125 of its decision that the respondent ought “to have explored ways of raising capital in order to deal with the health and safety issues and the disrepair to the common parts”.  This was unsupported by any evidence that alternative sources of funding could have been found, and ought not to have been taken into account.  The evidence was in fact to the opposite effect, as the respondent’s director, Mr Walker, had been cross examined on the point and had explained that nobody would be willing to lend money to the respondent.  The LVT had given no reason for rejecting that evidence.

(6)        The LVT’s statement in paragraph 127 of its decision that it had taken into account that a proportion of the costs would necessarily be recovered as a result of the compromise of the service charge proceedings under section 27A of the 1985 Act was irrelevant to the exercise of deciding whether the costs of the section 24 application could be added to the service charge.  Those costs related only to the service charge dispute and the possibility that the respondent would succeed in recovering them (a possibility which the appellants challenge) could not in any sense be treated as counter-balancing its inability to recover the costs of the seven day management hearing.

(7)         Mr Duckworth also submitted that the LVT also failed to consider whether a more limited order, barring recovery of part of the costs, would be sufficient to recognise the problems which had been experienced by the applicants.  He submitted that no order exceeding 20% of the costs could possibly be justified.

62.        Mr Duckworth’s submissions proceeded on the assumption that the effect of the LVT’s order under section 20C was to prevent the respondents from adding the disputed costs to the service charge of any of the leaseholders in the Jam Factory. Mr Conway took a different approach and asserted that the sole beneficiaries of the order were the appellants themselves.  No other leaseholder had been identified in the form of application which must be taken to have been intended to extend only to the applicant on whose behalf the form had been signed (see paragraph 21 above).  Mr Conway’s submission about the effect of the application was made in the appellants reply to the respondent’s statement of case in the appeal, but at that stage it appears to have been a new point, which neither he nor Mr Duckworth had considered, both having assumed that the order applied to all leaseholders.

63.        In answer to the respondent’s cross appeal Mr Conway submitted correctly that the Tribunal could only disturb the section 20C order if satisfied that the LVT had made an error of principle.  The LVT had had all of the relevant circumstances in mind and, as far as the appellants were concerned, they had had no alternative other than to commence proceedings for the appointment of a new manager when the respondent re-appointed Stonedale.  The homes of two of the appellants in particular had been rendered uninhabitable due to damp caused by breaches of covenant by the respondent and its predecessor, which were not minor considerations.

Discussion

64.        In my judgment there is considerable force in the respondent’s complaint that the LVT gave no indication in paragraphs 121 to 128 of having started its consideration from, or given appropriate weight to, the most important feature of the proceedings as far as the section 20C application was concerned, namely its own unequivocal dismissal of the application to appoint a new manager.  The application was brought by a small group comprising leaseholders of only 13 of a total of 194 flats.  Given that the purpose of the freehold acquisition less than 12 months earlier had been to enable the majority of leaseholders, who are members of the respondent, to control management of the Jam Factory in the interests of leaseholders as a whole, the respondent had no alternative but to resist the section 24 application in principle.  The irony that the appellants’ candidate to take over management was himself found to be unsuitable provided additional retrospective justification for that resistance.  After expenditure of very substantial sums the respondent was entirely successful in defeating the application. 

65.        The only allusion to those basic and inescapable aspects of the dispute comes in paragraph 122 of the LVT’s decision where the LVT noted that “we must look at all of the circumstances of the case and not merely whether the applicant has failed in its application”.   The words “not merely” might be taken to indicate that the LVT regarded the outcome of the proceedings as of relatively modest significance compared to other circumstances, but Mr Duckworth was inclined to treat that paragraph as simply setting the scene, and I agree.  It would be wrong to place weight on semantic points, especially coming at the conclusion of the LVT’s lengthy and thorough consideration of the substantive application itself.  Nonetheless, it is striking that in that part of the decision dealing with the section 20C application the LVT did not at any point state that it was giving weight to the successful outcome the respondent had achieved; it did not even name that outcome, or identify the successful party, referring only to “whether the applicant has failed”. 

66.        I do bear in mind that the LVT’s consideration of the section 20C application came at the end of 120 paragraphs, prepared after seven days of evidence and argument, in which it set out the details of the dispute and resolved them in the respondent’s favour.  There can be no suggestion that the LVT overlooked the outcome, and if I was satisfied that the other matters which the LVT measured in the scales were both relevant and capable in themselves of outweighing the significance of the respondent’s success in resisting the application, it would not be right for me to interfere with the order.

67.        The LVT commented critically on the approach taken by Stonedale, the respondent’s managing agents, to the legitimate complaints of certain leaseholders and in paragraph 126 had held the respondent responsible for the conduct of its agents.  The appellants’ complaints about Stonedale were obviously a legitimate subject of investigation in relation to the application for the appointment of a new manager and the appellants’ statement of case and evidence went into considerable detail regarding Stonedale’s alleged misdeeds since its appointment in 2006.  The respondent was quite properly held responsible for its agent’s actions after its acquisition of the freehold, but as Mr Duckworth pointed out, this had occurred on 14 January 2010, only seven months before the notice given under section 22 of the 1987 Act on 11 August 2010 and 10 months before the commencement of the proceedings.  The LVT began to hear the appellants’ numerous complaints in July 2011, about 18 months in to the respondent’s ownership. 

68.        Stonedale had been managing agent since 2006, and responsibility for its errors could not be visited on the respondent for the first four years of its involvement.  In holding the respondent responsible for Stonedale’s failure to adopt “a more user friendly style of management” and for creating “suspicion of victimisation and discrimination” the LVT did not distinguish between events before and after the respondent’s acquisition of the freehold of the Jam Factory.  That might be a small point if the issue of management style had been a make weight, or given only relatively modest significance, but it is clear from paragraphs 123 and 126 of the decision that the LVT regarded Stonedale’s conduct as sufficiently serious to outweigh the consequences to the respondent, described as “hardship”, of the making of the section 20C order.  It is not possible to be confident that in making that judgment the LVT had put out of its mind conduct for which the respondent was clearly not responsible.  It was necessary, in my judgment, for that distinction to be drawn for the purpose of deciding the section 20C application, because it was the agent’s conduct, and not the respondent’s decision to retain its services, which was the subject of the LVT’s criticism.

69.         The LVT acknowledged several times in the decision that the management shortcomings at the Jam Factory could not be divorced from the fact that, because of the service charge arrears of more than £340,000, the respondent was under-funded.  It clearly regarded that as a problem which the respondent ought to have endeavoured to overcome (other than by attempting to collect the service charge arrears) but I accept Mr Duckworth’s submission that, in the absence of credible evidence of alternative sources of funds, the idea that the respondent could borrow was unreal and ought not to have been taken into account. The fictional possibility of access to additional capital had caused the LVT to attribute greater blame to the respondent for the breaches of covenant which it had found, and wholly overlooked the reality that the respondent was a leaseholder-owned vehicle with no assets of value and a substantial black-hole in its accounts caused by the actions of the appellants in withholding service charges. 

70.        The LVT described the consequence of the section 20C order as “hardship” for the respondent, but it did not go on to consider what impact the order would have on the prospects of the respondent succeeding in its objective of improving the management of the Jam Factory for the benefit of all leaseholders.  The effect of the order, as the parties understood it and the LVT appears to have intended, was that no part of the costs incurred in the seven day hearing (said to be £65,000) would be recoverable through the service charge.  If the respondent was not to succumb to insolvency that sum would have to be found from an alternative source which, in the circumstances, could only mean from its members.  

71.        The LVT did not consider in any detail how its order would operate.  It seems likely that it assumed, as the parties almost certainly did, that its section 20C order applied to all of the leaseholders and prevented the respondent from recouping its expenditure through the service charge payable by any of them.  I am satisfied that that was not the effect of the order, and that Mr Conway’s submission on the scope of the order is correct.  On an application made by a tenant under section 20C the benefit of any order made extends only to “the tenant or any other person or persons specified in the application”.  The application in this case was made by the appellants (and two other leaseholders who have subsequently sold their flats and discontinued their involvement in this appeal) but no other tenant was specified in the application either expressly or implicitly as being an intended beneficiary.  The order itself does not state to whom it is intended to apply.  No formal order appears to have been drawn up and the decision itself says only that “the Applicants’ application under section 20C … is allowed”.  In those circumstances no person other than the applicants themselves is entitled to the benefit of the order.

72.        Standing back and considering the order, as the appellants now  invite me (correctly) to interpret it, I cannot help but feel that its effect is at best ironic and at worst perverse or capricious.  The majority of leaseholders did not support the appellants’ application under section 24, but were either neutral or backed the respondent’s successful resistance to it.  Those leaseholders, it is said by Mr Conway and the appellants, are to contribute through the service charge to the costs incurred by the respondent in defeating the application.  The appellants themselves, however, are to be protected from what would otherwise be their contractual obligation to pay their share of those costs, notwithstanding the fact that the costs had been incurred in ensuring that their efforts to secure the appointment of an unsuitable manager did not succeed.  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.

73.        I do not think it is an answer to this unattractive discrimination in favour of the unsuccessful appellants that it leaves the respondent better off than it or the LVT understood it would be.  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.

74.        I have no doubt that the LVT did not foresee that the effect of the order they were asked to make under section 20C would be as the appellants now suggest and as I have described above.  Neither party made the submission which Mr Conway now makes and if the LVT had had in mind the narrow terms of the application they would have been bound to mention it and to take it into account. 

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.

76.        It remains to consider whether any new or different order under section 20C ought to be made.  Although I do not have the advantage which the LVT had of having heard the original proceedings themselves, I am now well acquainted with the underlying dispute and it would be an unreasonable imposition both on the parties and on the LVT for me to remit the application back to the LVT for reconsideration.  Section 20C(2)(b) also contemplates that an order may be made by a tribunal other than the tribunal which heard the original proceedings.

77.        I am satisfied that this is not a case in which an order relieving the appellants from all responsibility for contributing towards the relevant costs through the service charge would be just and equitable.  I reach that conclusion largely because the appellants failed in their application for the appointment of a manager and I can see no reason why they should be in a privileged position as compared to their neighbours who will contribute.  Nonetheless I am mindful of the LVT’s conclusions on the conduct of the respondent’s managing agents and its criticisms of the respondent itself, and I think it is right that weight should be given to those factors so far as they relate to the period of the respondent’s ownership.  The order which I will make is that 10% of the costs incurred by the respondent in resisting the appellants’ applications under section 24 of the 1987 Act are not to be regarded as relevant costs to be taken into account in determining the amount of the service charges payable by the tenants who were party to the proceedings before the LVT (including both the original applicants and those who were late joined by order of the LVT).  In case there should be any doubt about the effect of this order, it means that in drawing up the service charge accounts, so far as they are applicable to the appellants, 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.  It does not mean (as Mr Conway has suggested it might) that the appellants are each to be entitled to 10% of the total expenditure on the section 24 application as a credit against their service charge liability.

Disposal

78.        For these reasons the appeal is dismissed and the cross appeal is allowed.  I substitute the order indicated in the preceding paragraph in place of the LVT’s order of 2 December 2011.

79.        The appellants indicated that, depending on the outcome of the appeal, they might wish to make a further application under section 20C of the 1985 Act relating to the costs of the appeal and cross appeal to the Tribunal.  If, after considering this decision, they still wish to do, I direct that any submissions be made in writing by not later than 31 December 2013, and any submissions in response shall be made by the respondent by not later than 17 January 2014.

 

 

                                                                                                Martin Rodger QC

                                                                                                Deputy President

 

                                                                                                10 December 2013