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The Upper Tribunal has set aside a section 20C order made by the First-tier Tribunal (FTT), which would have prevented a management company from recovering the costs of the proceedings from the leaseholders.

The Appellant, FirstPort Property Services Limited (FirstPort) is, pursuant to the terms of the leases of Switch House (Switch House), the management company responsible for the upkeep and maintenance of Switch House, including the repair and maintenance of the roof.

Fourteen of the leaseholders at Switch House (the Leaseholders) applied to the FTT for a determination under section 27A of the Landlord and Tenant Act 1985 (the 1985 Act) as to the reasonableness and payability of service charges in respect of roofing works (the s.27A Application); the total cost of works within the application was £69,136.85. The Leaseholders also made an application under Section 20C of the Landlord and Tenant Act 1985, to prevent the Leaseholders from being required to contribute to FirstPort's costs via the service charge (the S.20C Application). 

By way of background to the s.27A Application, there had been a previous application for dispensation from the consultation requirements under section 20ZA of the 1985 Act; FirstPort was granted dispensation.

Following a hearing on 27 October 2022, the FTT determined that, save for the sum of £3,161.85, the full charge was reasonable and payable by way of service charge. Notwithstanding this, the FTT made an order pursuant to section 20C of the 1985 Act (the Section 20C Order) preventing FirstPort from recovering its costs of the s.27A Application from the Leaseholders. 

The FTT determined that it was just and equitable that such an order be made due to a failure by FirstPort to not hold reserve fund monies in a separate account, leading to suspicion on the part of the Leaseholders. 

Following the Section 20C Order, after communication from the Leaseholders, the FTT also confirmed that the Section 20C Order would apply to all leaseholders at Switch House, not just those that were a party to the Application. 

FirstPort was granted permission to appeal the section 20C Order on the grounds that : (i) the Section 20C Order could only apply to those persons who are specified in the application and (ii) in any event, it was not just an equitable to make the Section 20C Order.

In considering the appeal, the Upper Tribunal (UT) reminded itself that section 20C of the 1985 Act is concerned with situations where a landlord is entitled to recover its costs contractually as a service charge under a lease. As a section 20C order interferes with a party's contractual entitlement, it should not be made as a matter of course and requires careful consideration. 

The first ground was conceded by the Leaseholders; the UT confirmed that it was clearly correct that the FTT was not able to make an order in favour of those not a party to the S.20C Application. 

On the second ground, the UT noted, as a section 20C order is discretionary, the UT would not interfere unless there was an error of law or some other irrationality. 

The UT determined that the FTT decision was made for two reasons, namely the breach relating to the reserve fund and the reduction in the service charges. The UT held that the breach of covenant relating to the reserve fund was irrelevant to the reasonableness of the service charges and the reduction was trivial, such that the s.20C order could not be substantiated. It was therefore set aside.

A section 20C order should not be considered to be routine; it should only be made in circumstances where it is just and equitable to do so. When deciding to exercise its discretion, the FTT should be invited to take into account relevant considerations but disregard matters which are irrelevant to whether the service charge was reasonable. 

Switch House is also a reminder that a section 20C order can only be made in favour of those leaseholders that are a party to the application; absent consent or authority of non-party leaseholders, an order cannot be made in their favour.