If allowed, the charges would have spread like the omicron variant through the leasehold sector
But will future leases be drafted to include similar charges?
This case – and others – highlight concerns over the inequality of arms between leaseholders and landlords over legal costs
Pro-leaseholder peers draft Bills to address leasehold cost regime abuses and other loaded charges
On 24 October, the Court of Appeal handed down judgment in Avon Ground Rents Limited v. Stampfer  EWCA Civ 1375. The case concerns Trinity Mews in East London. Avon Ground Rents, owned by Israel Moskovitz and his family, bought the freehold to the block in 2017.
In July 2019, Avon began charging a “ground rent collection fee” of £30 plus VAT (£36) to collect the ground rent. The ground rent was collected half-yearly, meaning a total charge of £72 a year, or around 25% of the £250 ground rent.
In 2021, Mr Stampfer and 10 other leaseholders at Trinity Mews brought an application in the First-tier Tribunal that the charge was not payable because it was an unreasonable administration charge. The First-tier Tribunal, having admitted last-minute evidence from a witness for the landlord, found that it was payable. Mr Stampfer appealed.
On 2 March 2022, the Upper Tribunal allowed Mr Stampfer’s appeal. The Upper Tribunal found that the terms of the lease did not permit the charge. The Upper Tribunal found that a notice under section 166 of the Commonhold and Leasehold Reform Act 2002 was required before rent came due. The lease did not permit Avon to charge for serving the section 166 notice. The Upper Tribunal also criticised the First-tier Tribunal for admitting last-minute evidence. Avon appealed.
The Court of Appeal heard oral argument on 18 October. In a rare move, the Court of Appeal dismissed the appeal as soon as Avon’s go-to barrister, Justin Bates, of Landmark Chambers, sat down. A written judgment giving reasons followed on 24 October.
Rebecca Catermole, of Tanfield Chambers, acted for free on behalf of Mr Stampfer and the other leaseholders in both the Upper Tribunal and the Court of Appeal. The Court of Appeal decided the case without Ms Cattermole needing to make oral argument in their favour.
The Court of Appeal agreed with the Upper Tribunal judgment of 2 March 2022. The Court of Appeal finds that the terms of the lease do not permit Avon to charge for serving a section 166 notice.
The Court of Appeal’s judgment is gentle in its criticism of Mr Bates’ legal arguments. Mr Bates conceded on questioning that a ground rent is not due until after a section 166 notice is served. Mr Bates attempted to reheat his Upper Tribunal argument that the 166 notice was part and parcel of collecting the rent.
When asked by Lord Justice Bean why a lease in 2010 had not reserved the kind of power Mr Bates said it contained, noting that section 166 came into force in 2005, Mr Bates replied that leases were conservatively drafted on the basis of older model forms.
The Court of Appeal judgment also doubts, without deciding the point, whether the charge of £36 per ground rent demand is reasonable. Giving the sole judgment, Lord Justice Nugee finds that whether a charge of £36 would be reasonable would depend on what work Avon actually did. There was no evidence or argument that it did anything.
It is astounding that an appeal over £72 a year in charges reached the Court of Appeal. Avon doubtless pursued the appeal in the hope that it would set a precedent for leases with similar wording that it could then use to impose the same charge elsewhere.
It is unclear if the Court of Appeal has yet made a costs order against Avon. Mr Stampfer and the other leaseholders would be entitled to seek such an order. The First-tier Tribunal refused to make an order preventing Avon from passing its costs on to leaseholders. The Upper Tribunal does not record whether it made such an order.
Perhaps the worst part of this case may yet turn out to be that Avon, having lost in the Upper Tribunal and the Court of Appeal, may yet be able to dump all its legal costs on leaseholders at Trinity Mews. The legal costs could run to many tens of thousands of pounds. Whether that happens depends on the terms of the lease.
Unfortunately, the Court of Appeal’s judgment today leaves the door open to future leases being drafted in a way that would allow such charges.
Under the Leasehold Reform (Ground Rents) Act 2022, from 30 June 2022 landlords of new residential leasehold properties are banned from including a ground rent other than one peppercorn. Landlords are also banned from charging to collect the peppercorn.
The Ground Rents Act does not prevent a landlord drafting a lease permitting it to charge for collecting service charges. LKP understands that FirstPort already charges leaseholders a fee of £24 a year for collecting service charges monthly by direct debit. Future leases may see more such charges included in lease terms.
Mr Bates, who is experienced in both leasehold and statutory drafting, is no stranger to appearing in the Court of Appeal. Mr Bates makes a good living from his roster of aggressively litigious residential freeholders, including Avon and John Christodolou’s Yianis Group.
In 2021, the Court of Appeal ruled against Mr Bates’ arguments over Yianis Group’s building, One West India Quay, in London’s Canary Wharf. In that case, the landlord admitted overcharging leaseholders for utilities to the tune of more than £160,000 between 2008 and 2012. The landlord continued to pursue litigation to force leaseholders to pay for meter reading charges related to the utilities.
Ordinarily, service charges must be collected within 18 months of being incurred by the landlord. In No. 1 West India Quay (Residential) Limited v East Tower Apartments Limited  EWCA Civ 1119, the Court of Appeal confirmed that the 18-month time limit runs even if the landlord has not issued a valid service charge demand. If the 18-month limit expires before the landlord serves a valid demand then the charges are not recoverable, unless the landlord serves a section 20B(2) notice within the 18 month period.
In the same case, Mr Bates also attempted to persuade the Court of Appeal to allow the landlord to dump all its legal costs for years of litigation on leaseholders. The Court of Appeal refused, finding that the terms of the lease were not specific enough to enable the landlord to pass on its legal costs.
In August 2022, another of Mr Bates’s clients in the Yianis Group, Riverside CREM 3, which owns the Canary Riverside development, was ordered to pay £67,000 in costs to leaseholders following another unsuccessful appeal.
Mr Bates landed his client with the costs order after attempting to argue that the landlord was no longer bound by a previous order of the First-tier Tribunal appointing a manager to oversee the Canary Riverside site.
Mr Bates irked the Upper Tribunal by attempting to raise the point for the first time on appeal. During oral argument in that case, the judge suggested that Mr Bates lacked proper respect for the Upper Tribunal.
In ordering Mr Bates’ client to pay £67,000 of costs to the leaseholders, Deputy Chamber President Martin Roger, wrote:
“The [landlord’s] decision to [pursue the appeal] can only have been taken with a view to impressing on the [the S24 Manager and tenants] the [landlord’s] determination not to back down, whatever the cost, thereby to harass and intimidate some or all of them.
“This litigation is being conducted with the intensity and expense and in the style of commercial litigation, the [landlord] has full access to the FTT and to the [Upper] Tribunal and appears to be prepared to spend whatever it takes to promote its interests through litigation. The proposed [costs] order is not required to punish the appellant but to protect the respondents from its unreasonable conduct.”
Surely we have arrived at the point after sagas such as Trinity Mews, Canary Riverside and One West India Quay that it is high time leasehold was reformed to stop landlords using leaseholder money to retain Mr Bates and colleagues to engage in litigation to suit their own corporate purposes.
We can expect to see much more of this one-sided litigation as the Tribunal system begins to grapple with applications under the Building Safety Act 2022. LKP is aware that several applications have already been issued by leaseholders without legal representation.
The one-sided nature of costs in the Tribunal system no doubt informed Avon’s thinking in pushing a case involving £72 of charges to the Court of Appeal. The law allows landlords to dump their legal costs on leaseholders, meaning leaseholders can be made to pay.
The courts and tribunals have powers to limit the landlord’s costs, but this is hit and miss and usually in the landlord’s favour. Tribunals have proven reticent to use their power to limit costs because of fear of depriving landlords of their contractual rights under leases.
This reticence to interfere with the landlord’s rights is born out of the legal fiction that the terms of leases are negotiated freely between landlord and tenant. This is unlikely ever to have been the case; terms are often imposed by the landlord on a take it or leave it basis. Lease terms are also unlikely to be renegotiated on the sale of a flat from one leaseholder to the next.
Any order made limiting the landlord’s costs only protects leaseholders participating in the proceedings. In 2013, Mr Bates took an appeal to the Upper Tribunal to prove that point.
The topsy-turvy costs regime means it is perfectly possible for, say, 50 of 100 leaseholders to win a service charge case, obtain an order protecting them from the landlord’s costs and for the landlord to then dump 100% of its legal costs on to the other 50 leaseholders. The landlord is also not obliged to account to other 50 leaseholders for any of the service charges disallowed. The landlord wins despite losing the case.
It is not unheard of for landlords to ignore orders made by the courts and tribunals altogether. At the FirstPort managed St David’s Square site in London, the landlord stuck leaseholders with around £25,000 of costs and damages it was ordered to pay under a disrepair claim. The landlord, ARC Time Freehold Income Fund, eventually partly backed down when leaseholders became aware of the issue, but is continuing to claim it can dump around £5,000 on leaseholders.
Last week, Baroness Hayman of Ullock, a Labour peer, tabled a private members bill in the House of Lords attempting to impose tougher controls on the leasehold costs regime. You can read Baroness Hayman’s bill here: https://bills.parliament.uk/bills/3337
Non-Affiliated Peer, Baroness Kennedy of Cradley has also tabled a bill that would require landlords to account to all tenants if service charges are found to be unreasonable. You can read that bill here: https://bills.parliament.uk/bills/3319
Lord Kennedy of Southwark, Labour’s Chief Whip in the Lords, has also tabled a bill that would require landlords to disclose all commission and other remuneration received from insurance. The bill is here: https://bills.parliament.uk/bills/3321
It is hoped that some or all of these bills will receive a second reading in the Lords in the new year. The bills stand little chance of becoming law, but will allow the House of Lords to continue to press the government to address the one-sided nature of residential leasehold litigation.
The Court of Appeal’s decision in Stampfer is here: https://caselaw.nationalarchives.gov.uk/ewca/civ/2022/1375
The One West India Quay decision is here: https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWCA/Civ/2021/1119.html
The costs order in Riverside CREM 3 is here: https://static1.squarespace.com/static/583dc2681b631b930031188a/t/630e2d78b6535f7993acd0fb/1661873528809/LC-2021-000301+Costs+Order+dated+26+August+2022.pdf
The Upper Tribunal judgment in Riverside CREM 3 is here: https://landschamber.decisions.tribunals.gov.uk/judgmentfiles/j1793/LC-2021-301%20final.pdf