The leaseholder’s legal cost nightmare: Part I
This is a two part article setting out the lack of balance in the costs position which faces almost all leaseholders when taking their landlord to court or the First-tier Tribunal, and the potentially catastrophic, one-sided costs position when being taken to court by their landlord. Part I sets out the general background to the problem and Part II, which is a separate article by barrister Amanda Gourlay, sets out the current legal position following a series of court decisions.
The very short version of the leaseholder’s costs position is as follows: in court in the small claims track and in the First-tier Tribunal there are few circumstances where a leaseholder is entitled to recover their costs when challenging the landlords actions, even when they win. Conversely, leaseholders (regularly) face paying the landlord’s costs especially where they have not paid their service charges. Leaseholders even sometime face paying the landlord’s legal costs if they have paid their service charges and gone in to win a case showing the landlord had overcharged.
Although successive governments have claimed the system is “balanced”, the truth is that they have had no evidence for such a claim. LKP would argue the opposite is the case there is plenty of evidence to suggest the system is fundamentally broken and almost entirely biased in favour of the landlord. In looking at the reasons the system is broken we have to look at the two types of costs.
Costs the Tribunals can award
The Property Tribunal like all other Tribunals was always intended to be a “low cost” regime. Until 01 July 2013, the Tribunal could only award costs of up to £500 and reimburse the paying parties court or Tribunal fees. On 01 July 2013 the £500 costs limit was removed.
If the leaseholders win their case, they might at best get their court fees back. They will not get any legal costs unless they can provide evidence that the landlord has gone so far as to behave “unreasonably” in bringing or defending the case. In practice this has not happened. Since 2013 LKP is not aware of any landlord being required to pay any costs to leaseholders. Almost inevitably the Tribunal accept the landlord’s claim that they were entitled to raise a legal point in bringing or defending the case.
While in a number of actions such as RTM or enfranchisement the landlord is statutorily entitled to certain of their legal costs, there are no types of leasehold case where the leaseholder has a statutory entitlement to their costs.
The Tribunal does have some powers to control the landlord’s costs. These powers are provided under s20C of the Landlord and Tenant Act 1985. The Tribunal can make a ruling limiting the right of the landlord to pass his costs back to the leaseholders through the next year’s service charge. However, this award is made at the Tribunal’s discretion, depending on the outcome of the case. The leaseholder generally has to win a not inconsiderable amount of the case in order to have a chance of getting the landlord’s costs limited.
This power to limit costs doesn’t apply where the landlord is entitled to some of their costs by statute, nor, as will be seen below, does it apply in many cases where the landlord initiates the action for breach of the lease. In the latter case, the landlord can argue that their costs are “administration costs” rather than service charges. In such cases the Tribunal’s powers to limit costs under s20C fall away and the leaseholder is obliged to pay the landlord’s costs to the extent that they are “reasonable” -although “reasonable” may be many thousand or tens of thousands op pounds.
Costs which the landlord can pass to the leaseholder but which the leaseholder may not pass to the landlord
In many leases the landlord is automatically entitled to pass on his costs to the leaseholders for breach of the lease, which will of course include all disputes about any monies owed. The problem with these leases is that they provide little or no disincentive where a landlord chooses to act in a highly aggressive way. It is arguable that these leases will also allow the landlord to seek to recover his costs if the leaseholders take them to court. Tails we win heads you lose.
The lease forms the contract between the leaseholder and the landlord. One of the fundamental problems in leasehold law is the total imbalance in the powers provided under the terms of the lease. Under the various statutes passed over the years there has been absolutely no balance in the costs regimes faced by the leaseholder and the landlord. The costs regime set out in the lease is entirely slanted in the landlord’s favour. Statute allows the landlord to set out his own terms in the lease with few limitations. The leaseholder then has no real power to vary these terms as part of any purchase.
Government has fooled itself into thinking that if the leaseholder does not like the lease they will not purchase. The truth is that many buyers don’t even see the lease until well after they have committed to a purchase and few solicitors ever tell their clients about terms which might be to their disadvantage. Forfeiture, exit fees or even the number of years left on a lease are little mentioned.
Government is also fully aware that leases are highly complex documents, little understood even by experienced buyers (and a number of solicitors) and that developers continue to produce quite onerous leases designed to maximise their income. Government seem unwilling to do anything about this, perhaps because successive Housing Ministers are too worried that they might not meet their building targets. You might have thought that government would have learnt from the exit fee disaster in the retirement sector, but apparently not.
If the landlord initiates a case against the leaseholder for breach of the lease, e.g. non-payment of a service charge debt, in many cases he is entitled to deem his legal costs to be an “administration charge” which is recoverable under the terms of the lease. At this point the Tribunal’s powers to limit those costs largely fall away. In theory the Tribunal can still limit these costs to a reasonable amount but in practice judge made law has meant there are few if any limits on the landlords legal costs in most cases.
Where the system has gone horribly wrong is that, following an attempt to control “administration” costs in the 2002 Commonhold and Leasehold Reform Act, the legislators got things wrong. The position has subsequently been made worse as a result of judge made law.
As a result we now have a number of legal firms who specialise in running up large legal bills for recovering unpaid service charges. A dispute for £1,500 might be initiated by the landlord in the county court. This may be because the leaseholder says they dispute the amount demanded. The matter then gets moved to the Tribunal to determine the amount to be paid. What nobody tells the leaseholder is that the landlord, and presumably his solicitor, may be laughing their socks off at this point. No matter what the Tribunal decide, and even in cases like that of Mr Jackson where his service charge was reduced by 25% by the Tribunal, the landlord is probably entitled to all his legal costs in both the county court and the Tribunal, so long as they have brought the case and call their costs “administration charges”. Costs can quickly raise the leaseholders bill from £1,500 to say £4,000 if the matter goes to the county court. It can then increase to perhaps £10,000 to £20,000 once it has been moved to the Tribunal. When the case moves back to the country court, for final determination of the debt, it is likely to include all of these costs and leaves the leaseholder who does not pay just a few steps away from seeing their home forfeit. In the case of Dennis Jackson, where matters went on to forfeiture hearings, his costs would eventually grow to over £100,000, with the Tribunal bizarrely deciding in his case that a landlord could make two attempts to pass on his costs, first as a service charge and then as an administration charge (provided he did not recover them twice). The Upper Tribunal then ruled that he had no right to appeal this issue or the level of costs.
The costs problem becomes a disaster once a breach of the lease has been established through the courts. Most leaseholders have no idea they are just a few short steps away from forfeiture. If payment or redress for breach is not made, the lease quickly moves to being forfeited by the courts. The courts currently have no records of how often this happens. If a lease is forfeit, the leaseholder and any mortgage interest in the property will both lose their entire equity in the property and the landlord will make a massive windfall profit of the whole asset. LKP has reported organisations ranging from the ethical social housing sector through to dubious property speculators and even RMC controlled sites where the forfeiture route has been used. Government knew over a decade ago it urgently needed to change this law but has still not done so.
As a result of decisions in the higher courts detailed in the second article the Tribunal now has extremely limited powers to limit these type of “administration” costs. Housing Minister Brandon Lewis was warned about this problem and advised the law urgently needed to change by a senior member of the Judiciary in a round table meeting last year. The Competition and Markets Authority had also noted this problem in their work last year. At the moment we await the outcome of the current review of s20 which will then advise the Department of Communities and Local Government on a potential change in the law.
This costs imbalance means that LKP always advise leaseholders to pay their service charges first and dispute them afterwards. This means the Tribunal then can use its s20C powers to limit costs from being passed to the service charge, it also stops the landlord from deeming his costs to be administrative charges. Leaseholders often ask if paying their service charge constitutes acceptance of the contract and reduces their rights to dispute the charges. Providing a leaseholder does not say specifically that they accept or agree the charges they can pay and are still entitled to dispute the charges going back over a number of years. The leaseholder can then make an application under a section 27A of the Landlord and Tenant Act 1985 through an application to the First-tier Tribunal (Property Chamber) which has offices around England and Wales.
Balance what balance?
So does the nightmare of the one sided costs regime end here? No of course not.
Having spent weeks or months of effort getting a landlord to court in a disputed service charge case the leaseholders can at best get some of their money back, for some properties, for some years, with no interest. They will never get their costs. They might have taken and won an RTM case or even enfranchised the site, but again will have to pay their costs almost no matter how badly the landlord behaves or no matter how ridiculous his lawyers’ arguments.
A landlord with, say, a thousand sites with 50,000 leaseholders can overcharge on all of them with almost no danger of a penalty or fine from any regulatory body or action from the CMA or FCA or the various Ombudsmen or the courts. Such a landlord faces almost no disincentive from over charging they might even own the managing agent themselves who need not be a member of any regulatory body and of course needs no licence to hold leaseholders monies.
In the worst case scenario for the landlord they may have to repay some of the money on those few sites willing to spend their own time, money and effort taking them to the Tribunal. Those leaseholders foolish enough not to pay the inflated charges will face far higher costs and potentially forfeiture if the landlord takes them to court. The vast bulk of sites are in fact likely to do nothing. This may be because the leaseholders don’t even realise they’ve been overcharged, or might be because nobody is willing to tackle the stress and workload to prepare a case for the Tribunal when there is no chance of recovering their costs.
If a landlord is taken to the Tribunal it is almost always likley to be in their best interests to have legal representation not least because they generally have the right to pass these charges on under the terms of the lease.
“Ah”, the lawyers cry, “but they can only do so if the Tribunal does not make a s20C award and if the charges are deemed reasonable”. The problem is that in the real world things do not work out this way. Even with a s20C award there is nothing to stop a landlord adding his legal costs to the service charge by “accidentally” recording them under the wrong heading, or in the wrong year, which means that the leaseholder than has to search for that needle in a haystack and go back to Tribunal again. Worryingly, the Tribunal has sometimes allowed the landlord say 50% of his costs without establishing what the total costs were. In such a case there is no way at all for leaseholders to verify that only 50% has been passed on to them.
As a result we have a Tribunal system where landlords, who may regularly appear before the courts, are put in a position where they are, by default, entitled to their costs for professional representation. They are facing what are mostly first time leaseholder users who do not understand the system or the law and have no right to their costs under any circumstances in what they are told is a “low cost system”. The most disgusting abuses of the system occur in the social sector where some providers feel entitled to spend tax payer’s money defending what is sometimes gross overcharging with expensive lawyers trying to argue about the technicalities of the law rather that factual matters – or justice.