On 22 October 2024, the Court of Appeal handed down judgment in an important case concerning the jurisdiction to award costs in service charge proceedings, overturning the decisions of both the First Tier Tribunal (Property Chamber) (‘FtT’) and the Upper Tribunal ('UT').
Under Rule 13 of the relevant First-tier Tribunal Rules, costs can, essentially, only be awarded against another party where that party has ‘acted unreasonably in bringing, defending or conducting proceedings’. There is an equivalent rule for the Upper Tribunal, which is identically worded.
The case of Lea and Others v GP Ilfracombe Management Co Ltd now becomes the definitive ruling as to what ‘unreasonably’ means in this context.
The Court of Appeal allowed the appeal from the UT. The UT had itself dismissed an appeal against the ruling of the FTT - which had refused to order costs to the successful appellant leaseholders, following the total failure of the respondent landlord’s service charge application. That substantive application related to service charge demands which the respondent had served on the appellants, totalling around £2.4M. In dismissing the proceedings entirely, the FTT found that the demands had been served without any genuine belief that the sums were correct. Yet the FTT had refused to award costs in the leaseholders' favour, despite this finding. The UT upheld their decision, agreeing that the ‘unreasonableness’ threshold had not been crossed.
The Court of Appeal, in allowing the appeal, concluded that the FtT had "… reached a conclusion on costs that no reasonable Tribunal could have reached".
It made clear that ‘unreasonably’ in Rule 13 was not to be equated only with ‘vexatious’ or ‘harassing’ behaviour. Such an interpretation was much too restrictive. Both the UT and FTT decisions, suggesting that this was the threshold test, were wrong. Unreasonable behaviour includes vexatious, abusive and harassing behaviour but is not limited only to such behaviour.
The Court of Appeal further clarified that the UT had not intended, in the Willow Court case (which, until now, has been the leading case on Rule 13 costs) to state a threshold test which confined the rule only to abusive/harassing behaviour. Affirming Willow Court, the Court of Appeal stated that: ‘a good practical rule is for the tribunal to ask: would a reasonable person acting reasonably have acted in this way? Is there a reasonable explanation for the conduct in issue?’.
The Court also made clear that further guidance on the threshold test, or its application, would not be helpful.
Michael Green (Partner) and Harriet Muffett (Associate) of Trowers & Hamlins acted for the successful Appellants alongside Martin Hutchings KC of Wilberforce Chambers.
The full judgment can be found here.
