The First Tier Tribunal (Property Chamber) doesn’t have an extensive jurisdiction when it comes to costs in service charge cases. One weapon in the FTT’s costs arsenal is the ability to make an order under rule 13 of the Tribunal Procedure (First Tier Tribunal) (Property Chamber) Rules 2013 “if a person has acted unreasonably in bringing, defending or conducting proceedings”.
It took a little while for some guidance to come on how a Tribunal should approach its exercise of its discretion under rule 13, but this came in the Upper Tribunal decision in Willow Court Management (1985) Ltd v Alexander.
In Laskar v Prescot Management Company Ltd  UKUT 241 (LC), the Upper Tribunal considered the ‘test’ in Willow Court in some detail.
The decision of the Upper Tribunal sets out the “almost continuous state of litigation” that had existed between the parties (and the lessee’s parter who previously held the lease), including proceedings in the High Court, Residential Property Tribunal, and hearings in the Senior Courts Costs Office.
In 2017, proceedings were issued by the management company against the lessee in the County Court. These proceedings were settled by agreement on 23 August 2018.
The lessee, having failed to pay the estimated service charges for 2018, wrote to the management company’s solicitors on 10 September 2018, saying that despite the consent order the matter was not closed and seeking an assurance that the costs of the County Court proceedings would not be included in service charges demanded from her. In the same letter, the lessee asserted that the 2017 service charge demand was “unlawful”, that the directors of the company were incompetent and dishonest, and that their previous solicitors had committed perjury.
The Upper Tribunal decision makes comment that a “distinctive feature of the relationship between Mr Khan and the [management company] which persisted when the appellant became the leaseholder, has been their readiness to make accusations against the directors of the [management company], its employees, and its professional representatives”.
The alleged unlawfulness of the service charge demand was a reference firstly to a belief that the management company was a dormant company which could not lawfully carry on any activity including receiving service charge funds. The second basis on which the lessee considered she need not pay the 2017 and 2018 service charges was that she believed she was entitled to set off against that liability the costs she’d incurred in the County Court proceedings, as well as damages or compensation which she considered herself to be entitled because of “harassment”.
Proceedings before the FTT
On 18 February 2019, the management company made an application to the FTT for a determination that the lessee was liable to pay the 2017 and 2018 estimated service charges together with interest (claimed as an administration charge) under the terms of the lease. The application included an application under rule 13(1)(b). In that rule 13 application, the FTT were invited to consider the history of disputes going back to 2006 and make an order that the lessee pay the management company’s costs of bringing the application.
The Upper Tribunal passed comment in relation to the prospective nature of the application, it having been made before the application had actually been served on the lessee and therefore before she’d even had opportunity to act in any way, reasonably or unreasonably, in “bringing, defending or conducting proceedings”.
A deal of acrimonious correspondence passed between the parties before the matter was heard by the FTT. In its decision of 12 August 2019, the FTT found that the disputed charges were all payable. At the hearing, three reasons had been given by the lessee as to why the sums demanded should be reduced.
Firstly, it was argued that the lessee had a claim for damages which they could set off against their service charge liability, having been “subjected to severe harassment by members and staff of the applicant company, including instances of perjury and breaches of company law”. The FTT dismissed this suggestion.
The FTT also dismissed the second objection based on the form of the service charge demands.
Finally, the FTT also rejected the suggestion that the lessee’s liability to pay the estimated service charges was conditional on the management company providing certified accounts. The FTT was satisfied that the terms of the lease had been complied with.
The FTT then gave directions for the determination of the management company’s rule 13 application.
The FTT’s costs decision
In its costs decision, the FTT directed itself by reference to the Willow Court decision. In Willow Court the Upper Tribunal had given guidance on the exercise of the jurisdiction in rule 13.
The first issue for consideration was whether the lessee had acted unreasonably (meaning vexatiously), or with a design to harass the management company rather than to advance the resolution of the case, or in a manner in which a reasonable person would not have acted and for which there was no reasonable explanation.
The FTT concluded that the lessee’s “repeated allegations” against the company, its directors, employees and agents, together with allegations against solicitors, was unreasonable. Accordingly, the FTT made an order against the lessee.
Issues on appeal
The Upper Tribunal firstly considered whether the FTT had failed to follow the ‘test’ in Willow Court.
Although in Willow Court the FTT had suggested an approach to decision making in claims under rule 13 “which encouraged tribunals to work through a logical sequence of steps”, it did not follow that a tribunal would be in error if it failed to do so.
“The only “test” is laid down by the rule itself, namely that the FTT may make an order if it is satisfied that a person has acted unreasonably in bringing, defending or conducting proceedings.”
The rule requires unreasonable conduct before the discretion to make an order under rule 13 is engaged.
Having found that the person against whom an order is sought has acted unreasonably, the FTT will normally consider any points made in mitigation or explanation before deciding whether in all circumstances it is appropriate to make an order for costs.
In this case, nothing was said in the lessee’s defence, despite the FTT having given directions for her to respond to the application for rule 13 costs.
The so called “third stage” involves a consideration by the FTT of the scope of the costs which should be ordered. And whilst it does not automatically follow that a party who has behaved unreasonably will be required to pay all of the other party’s costs, the FTT found that the lessee’s conduct had been “sufficiently flagrant and repeated to justify such a draconian order”.
The second issue on appeal was whether the conduct relied on by the FTT in making its order was actually objectively unreasonable, or whether the conduct was susceptible to a reasonable explanation.
The FTT referred in its decision to “a pattern repeated consistently by the [lessee] ….. of making serious allegations of criminal behaviour by the [management company] without a shred of evidence, particulars or follow through”.
However, the FTT had not expressed any view on whether the lessee’s allegations had been made honestly (with a genuine belief in their truth), or whether they had been based on a mistaken understanding of the management company’s obligations or of the facts.
If the FTT had considered and rejected alternative explanations for the lessee’s conduct, it hadn’t said so; “a decision to award costs on account of unreasonable behaviour need not be lengthy or elaborate but the parties and this Tribunal on an appeal must be able to understand why the FTT reached its conclusion”.
Accordingly, the Upper Tribunal allowed the appeal. Consequently, the management company’s application for costs was dismissed.