Willow Court Management Company (1985) Limited v Alexander [2016] UKUT 0290 (LC)

After a review of the history and general principles for the exercise of statutory power to award costs for unreasonable conduct under rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013/1169, the Upper Tribunal addressed each the three appeals before it. This is the first.

Willow Court is a purpose-built block of ten flats dating from 1985.

Mrs Alexander was the long lessee of flat 4. She also owned:

  • 50% of the shares in the freeholder, Willow Court (Harrow) Limited, and
  • As lessee, one tenth of the shares in the management company.

The management company

The management company was the lessee of the common parts and main structure of the building, and existed for the sole purpose of holding the lease and managing the property demised to it.

Mrs Alexander was a director of the company until about 1998.

The company’s Articles of Association:

  • Required each member to pay an annual subscription of £25 towards the company’s expenses and
  • Gave power to the directors to increase that subscription if approved by the members in a general meeting.

The service charge

As is generally the case in a tripartite lease, the management company ran the service charge and provided building maintenance services.

Under her lease, Mrs Alexander was required to pay one tenth of the maintenance costs.

The lease provided that this would be done by the lessee paying:

  • £100 per year, or one tenth of the amount that the lessor’s surveyor certified by way of budget for the forthcoming year, and,
  • A balancing amount on the quarter day after the lessor’s surveyor had certified the maintenance costs.

The certification failings

It would appear that, for donkeys’ years, the management company failed to comply with the certification requirements under the lease:

  • It did not rely on the lessor’s surveyor to set a budget figure: it set the figure at a general meeting of the company, and
  • It calculated the balancing charge using its own company accounts, which were certified by a chartered accountant.

And so the litigation begins

Here’s the rub: whilst Mrs Alexander was a director of the management company, she raised no issue with those failings. At that time the annual contribution was agreed in general meeting to be £600 per lessee.

After her directorship ended however, she took a different view, and a dispute arose.

In 2005, the management company brought a claim against Mrs Alexander for alleged service charge arrears of £2,630 that had accrued since 2001.

As night tends to follow day, the claim was transferred to the LVT.

The LVT determined that the management company had failed to comply with the requirements of the lease when it set the annual charge.

It held however that Mrs Alexander had agreed to pay £600 per year – ie the amount payable whilst she was a director.

That being the case, she was estopped from disputing liability to pay £600 per year.

She was however entitled:

  • To object to any increase beyond £600, and
  • To rely on the management company’s failure to comply with the service charge machinery in the lease.

The LVT observed that if the management company obtained a surveyor’s certificate setting out balancing charges for the years where there had been no balancing charge certificate, its situation may be salvageable, even if limitation issues might then arise, presumably through section 20B of the 1985 Act.

Mrs Alexander appealed, and, in April 2008, won her appeal to the Lands Tribunal, as it then was.

HHJ Huskinson determined that she was obliged to pay only the £100 per year specified in the lease, unless a surveyor certified a different amount.

Although he may reversed the LVT’s decision, he concurred with its observation as to the salvageability of the management company’s position.

Plus ça change

In suggesting that demands might be rectifiable if the company obtained a surveyor’s certificate, both LVT and Lands Tribunal effectively advised the management company how it might recover full charges from Mrs Alexander.

The management company was not to be so easily helped however.

It took no remedial action. At all.

No surveyor was instructed, and it continued to rely on the company accounts to calculate balancing payments.

Mrs Alexander continued to pay only £100 per year, as HHJ Huskinson had determined.

The parties reached an impasse. The management company would make sporadic attempts to recover what it considered to be the money due to it. Mrs Alexander did not pay.

In June 2013 she sent the company a copy of HHJ Huskinson’s decision.

The county court claim

Undeterred by such minor matters as a Lands Tribunal decision, in October 2013 the management company issued a county court claim for payment of £5,702 in service charge arrears.

Unsurprisingly, Mrs Alexander responded that she was liable only to pay the £100 per year specified in her lease, as determined by HHJ Huskinson.

The company’s initial position was that Mrs Alexander was welcome to organise certification at her own expense, but that the service charge was otherwise too low to justify certification by a surveyor.

Somewhere down the line however, the reality of the position appears to have dawned, and in July 2014, the company obtained a certificate from a surveyor.

The certificate related to all service charge years from 2007, and approved all the expenditure as having been properly and reasonably incurred in maintaining the building.

The annual amounts due ranged from £800 to £1,212.

Mrs Alexander’s new solicitors

The claim had not been heard by August 2014, when Mrs Alexander appointed a new firm of solicitors.

They pointed out to her that the claim was a small claim and that she was unlikely to recover her legal costs “unless the court considers that the claim is frivolous or should never have been brought and this is very rare.”

Transfer to the FTT

In September 2014, some eleven months after issue, the claim was transferred, by consent, to the FTT.

The parties’ positions were clear.

The management company relied on their surveyor’s certificate from July 2014.

Mrs Alexander:

  • Disputed the validity of the retrospective certificate;
  • Challenged the authority of the directors, and
  • Required the management company to prove all service charge expenditure back to 2007.

The parties were directed to prepare for a hearing of three issues:

  • Compliance with the lease;
  • The reasonableness of the service charges, and
  • Section 20B limitation.

The FTT’s decision

The FTT treated the contractual compliance issue as a preliminary issue, and found in favour of Mrs Alexander, who therefore remained liable to pay only £100 per year.

It did not determine the reasonableness of the costs, or any question of limitation under section 20B of the 1985 Act.

The application for rule 13(1)(b) costs

Mrs Alexander made an application for costs of £19,206 under rule 13(1)(b).

The FTT acceded to her application. It held that the management company should have:

  • Realised that it had not complied with the terms of the lease before it brought the claim, and
  • Taken legal advice on whether to discontinue once Mrs Alexander had set out her defence.

It had therefore behaved unreasonably and a costs order was justified.

Even so, the amount claimed in costs was disproportionate, being more than triple the amount of service charge in dispute.

The FTT ordered that the management company pay £13,095+VAT, and recorded:

  • The limited income of the company by reason of it being lessee-owned;
  • That Mrs Alexander had not informed the company that she would make a costs application if successful.

The Upper Tribunal’s decision

Martin Rodger QC and Siobhan McGrath stated that they had identified two mistakes in the FTT’s reasoning. I have to say that their decision actually discloses three:

  • The relevance of success;
  • An justified assumption, and
  • The unreasonable conduct bar being set too low.

Success

Success – or a lack of it – might support a decision to make a rule 13(1)(b) order, but it cannot be the sole basis for such an order.

The power to costs-shift in the FTT is an exceptional one. The parties should start from an expectation that they will bear their own costs.

Unjustified assumptions

The FTT held that the management company should have reviewed or taken detailed legal advice on the merits of the case.

… “to continue with the proceedings without curing the procedural flaws was in the circumstances of this case unreasonable,” it said.

Unfortunately, the Upper Tribunal found that the flaw was the FTT’s.

The FTT had assumed that the management company had not taken legal advice before Mrs Alexander pointed out the failure to comply with the terms of the lease, but that was an inference which could not stand.

The management company:

  • Had been legally represented from the beginning, and
  • Had corresponded, through its solicitors, about the requirements of the lease after Mrs Alexander provided her statement of case in January 2015.

The high bar

The FTT’s directions required the parties to prepare for a hearing in March 2015 at which it would hear not only the preliminary question of contractual compliance, but also:

  • The reasonableness of the service charge costs, and
  • The possible limitation of costs under section 20B of the 1985 Act.

There was no indication that the FTT would limit itself to the preliminary question alone, as it had done.

It should therefore have heard all three issues, especially because, in 2007, HHJ Huskinson had concluded a surveyor’s certificate could correct omissions retrospectively.

Disposal of the appeal

The appeal was allowed, the Upper Tribunal holding that the management company had not acted unreasonably.

Importance of the staged approach

The Upper Tribunal footnoted the importance of the staged approach set out in their overview of the rule 13(1)(b) costs power.

“Here,” said Martin Rodger QC and Siobhan McGrath, “the FTT decided that there had been unreasonable behaviour (stage 1) but did not then go on to consider whether, in its discretion, it ought to make an order or not (stage 2).

“Instead it appears that having found unreasonable behaviour the FTT moved straight to considering the quantum of the costs which should be awarded.

“If it had paused to consider matters such as proportionality and the conduct of the parties more generally, even if it remained of the view that the Management Company’s conduct could be characterised as “unreasonable”, the FTT may have decided in all of the circumstances not to make an award at all.

“In this case the FTT made an award (stage 3) of £13,095 plus VAT in respect of a dispute about arrears of service charge in the sum of £5,702.

“Although the FTT did not award the full sum claimed (£19,206), even the lower amount may be regarded as disproportionate and as inconsistent with the overriding objective.”

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