First-tier Tribunal wrong to use section 20C of the Landlord and Tenant Act 1985 to punish a management company for breaching a leasehold covenant

Row of properties

In Firstport Property Services Limited v Various Leaseholders of Switch House [2023] UKUT 219 (LC), the Upper Tribunal (Lands Chamber) (Judge Cooke) has set aside the First-tier Tribunal’s order under section 20C preventing a management company from recovering any of its costs of a service charge dispute through the leaseholders’ service charges.

The leaseholders had applied for a determination under section 27A of the 1985 Act that costs in the sum of £69,136.85 in respect of major roof works were not recoverable through their service charge. The leaseholders contended that the management company should have recovered the cost of the roof works from the NHBC or the builder and that its failure to do so meant that the costs were not reasonably incurred. That argument failed, following Daejan Properties Ltd v Griffin [2014] UKUT 206 (LC). The leaseholders succeeded in one limited respect, so that the cost of abseiling was reduced by 50% to £2,760.

However, the management company accepted that it had not held the reserve fund in a separate trust account and that, in breach of the leases, those monies were held with the rest of the service charge funds. The FtT (chaired by Professor Judge Robert Abbey) was unimpressed by this, finding that this was “a cause for suspicion on the part of the applicant with regard to the conduct of the respondent” and that “it is understandable that the applicant would be concerned about what the respondent was doing when it failed to comply with its lease obligations”. The FtT concluded that “this failure alone would be enough to persuade the Tribunal that this s20C order should be made”.

Judge Cooke observed that the decision whether to make a section 20C order is a discretionary one and that it would not be interfered with unless there had been an error of law or some other irrationality. She found that the FtT’s approach was irrational.

Accepting the management company’s submissions, Judge Cooke held that the breach of covenant “had not the slightest relevance to the reasonableness of the service charges” and that “it was not appropriate for the FTT to seize upon the section 20C order as a fortuitous means to punish the breach of covenant”. That was a matter for the county court which should not have been taken into consideration. She then held that the “trivial reduction in the cost of the major works… cannot justify the imposition of a section 20C order”.

The appeal was allowed and the FtT’s section 20C order was set aside in its entirety.

Tom Morris acted for the successful appellant, Firstport Property Services Limited, instructed by Katie Orr of JB Leitch Ltd.

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