Summary

A property management company whose only income was from service charges could recover legal costs arising from a tenant's threatened proceedings against it as part of the service charge to be divided between all the tenants, as the terms of the lease were general enough to cover defence of legal proceedings that had merely been threatened.

Facts

The appellant management company appealed against part of a decision of the First-tier tribunal regarding service charges payable under a lease.

The company managed 30 apartments in a country house and the respondent tenant leased one. The company's whole income derived from service charges on the leases. The parties had disputed the service charge for years. The tenant appointed a surveyor without the company's agreement, paid the fee, and instructed solicitors to recover it from the company. He did not institute proceedings, but the company incurred legal costs of £11,100 and tried to include them as a service charge to be divided among the tenants under para.16 sch.6 of the lease. That matter, with others, came before the First-tier tribunal, and the tenant asserted that it fell under the Landlord and Tenant Act 1985 s.20C, which allowed a tenant to apply to have costs incurred or to be incurred by a landlord in connection with proceedings to be disregarded when service charges payable to the landlord were calculated. The tribunal disallowed the costs claim entirely and viewed it as a matter for the county court. The company appealed.

The company submitted that the costs incurred in defending threatened legal proceedings fell within the generality of para.16 sch.6, and that while the tenant had not actually commenced the proceedings the use of the term "proceedings" in the clause was wide enough to include the threat of such. The tenant argued that proceedings that were merely threatened did not fall within para.16 sch.6 and that the costs fell under s.20C.

Held

(1) The decision of the tribunal was set aside. It appeared to have been confused as to the nature of the claim. It was correct that the surveyor's fee was a matter for the county court, but the tribunal had not addressed at all the matter of whether the company could include the £11,100 as a service charge. If it was recoverable under the lease, the tribunal had not considered the extent to which it was reasonable within s.19 of the Act. The wording of para.16 sch.6 of the lease was wide enough to cover the costs of intended proceedings. It was plainly contemplated that the reasonable costs of managing the development were to be recoverable under the service charge and the costs of defending threatened proceedings seemed to fall squarely within that definition, Arnold v Britton [2015] UKSC 36 followed. There was no reason to think that costs would only be recoverable if proceedings actually commenced (see paras 27, 31, 36-37 of judgment).

(2) Regarding the tenant's s.20C application, the section concerned proceedings before a court, tribunal or arbitral tribunal. There had been no proceedings respecting the surveyor's fee, and the £11,100 had not been incurred by the company in relation to the proceedings before the tribunal but in connection with that fee, so s.20C had no application to the costs incurred by the company. The reasonableness of those costs was within s.19 of the Act, and the issue was remitted to the tribunal for determination (paras 38-41). The company's costs of the instant appeal were substantial, were plainly within para.16 of sch.6, and its only income was from service charges. The relevant discretionary principle when the issue of a s.20C order arose was what was just and equitable in the circumstances, including the parties' conduct and circumstances, and the outcome of the proceedings involved. Section s.20C orders should only be used to ensure that claims for costs as part of a service charge were not used where it was unjust. A relevant circumstance might be where the landlord was a resident-owned management company with no resources apart from service charges. In the instant appeal it was just and equitable that the tenant should bear a fair share of the company's costs, Conway v Jam Factory Freehold Ltd [2013] UKUT 592 (LC) considered (paras 45-47).


Appeal allowed in part