The Upper Tribunal (Lands Chamber) has ruled on the retrospective effect of Schedule 8 of the Building Safety Act 2022 and whether the service charge protections afforded by the Act covers professional costs associated with a dispensation application. Guidance was also provided on the correct approach to setting conditions for payment of costs in an application for dispensation from the service charge consultation requirements.
Background
The case concerned Hippersley Point, a higher risk building which included 32 flats. In late 2020 it was identified that the building needed cladding works and the installation of cavity barriers, with interim fire safety measures required until the substantive works were undertaken.
In advance of carrying out the works, the landlord applied to the First-tier Tribunal (Property Chamber) (the FTT) for dispensation from the requirement to consult with leaseholders. The FTT granted unconditional dispensation from the consultation requirements, but also made a section 20C order preventing the landlord from recovering any of its costs from the leaseholders via the service charge. At that time, the leaseholders had not made any application under section 20C of the Landlord and Tenant Act 1985 and so the landlord requested that the FTT review its decision.
Upon review the FTT amended the original decision to reverse the section 20C order and to conditionally grant dispensation, on terms that the landlord be "prohibited from seeking their costs of this application from the leaseholders at Hippersley Point". The effect of this condition was to put the landlord in the same position as it would have been in if the section 20C order hadn't been reversed.
The landlord appealed to the Upper Tribunal on the following grounds:
- the FTT was procedurally incorrect to review the original decision as to include the costs condition;
- none of the leaseholders had made a section 20C application; and
- the FTT had failed to provide any explanation as to how the costs condition was appropriate in its nature and effect.
The Upper Tribunal's decision
In respect of dispensation, the Upper Tribunal allowed the landlord's appeal in respect of the costs condition, finding that both procedurally and substantively the FTT's decision was flawed.
The costs condition was procedurally unfair as the FTT made it of its own initiative, without having afforded the parties the opportunity to make submissions.
Substantively, the Upper Tribunal held that the FTT went outside the legitimate and broad ambit of their discretion. In considering the granting of dispensation, a costs condition could be imposed if appropriate in its nature and effect; if it would not be reasonable to grant dispensation in the absence of such conditions.
Since the FTT had found that no prejudice would be suffered by the leaseholders if dispensation were granted, and the leaseholders failed to adduce any evidence to support a case of prejudice, the Upper Tribunal held it was not reasonable to grant dispensation subject to the costs condition.
Crucially however, the Upper Tribunal went on to rule that qualifying leaseholders were nevertheless protected from having to pay the landlord's legal costs by Paragraph 9 of Schedule 8 of the Building Safety Act 2022, which provides that no service charge is payable under a qualifying lease in respect of the legal and professional costs relating to the liability (or potential liability) of any person incurred as a result of a relevant defect.
The Upper Tribunal ruled that the legal costs of the dispensation application related to the liability or potential liability of the landlord as a result of relevant defects, because the application was required in order to ensure that the landlord wasn't capped from recovering more than £250 per flat by way of service charge for the works.
In addition, the Upper Tribunal held that Paragraph 9 of Schedule 8 of the Act, which came into force on 28 June 2022, did not have retrospective effect, but it did mean that from that date no service charge was payable in respect of those costs, regardless of when the costs were actually incurred and when the relevant service charge became payable.
Conclusion
The ultimate outcome of the case was that where leaseholders had not paid their service charge covering the cost of dispensation by 28 June 2022, those costs were no longer payable as a result of the Act coming into force. However, if leaseholders had made payment before 28 June 2022 then they were not entitled to a refund of those sums.
For future dispensation applications in respect of building safety remediation costs, qualifying leaseholders will be protected from the professional costs of a dispensation application. Landlords should therefore ensure that no such costs are sought from qualifying leaseholders.
More broadly, the ruling confirms that there is no principle that a costs condition should be imposed as a term of granting dispensation; it should only be imposed if appropriate in its nature and effect. Consideration should be given to opposing such a condition where no prejudice to leaseholders has been established and there has been no credible case presented for prejudice.
