First-tier Tribunal Rules on Service Charges for Legal Costs Incurred in Third Party Disputes

OUTCOME: Allowed

© CROWN COPYRIGHT

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

Case Reference

:

CHI/19UH/LSC/2020/0073

Property

:

Variously 14 properties within [NAME], Charmouth, Dorset, [POSTCODE] as listed on the attached schedule

Applicant: [redacted]

14 lessees as listed on the attached schedule. Lead Applicant Miss [APPELLANT], 16 [NAME], Charmouth, Dorset, [POSTCODE]

Representative

:

Respondent: [redacted]

:

Mr [COUNSEL] (Counsel) instructed by [NAME]

:

S27A Landlord and Tenant Act 1985 - Liability to pay and reasonableness of service charges

Tribunal Member(s)

:

Judge R [NAME] [NAME] and venue of hearing

:

Remote hearing by CVP 19th January 2021

Date of Decision

:

18th May 2021

DECISION

In this decision references to the page number of the documents are referred to thus [ ].

2 The Application

1. The 14 Applicants are leasehold owners of various holiday properties (or ‘[NAME]’) situated in [NAME], Charmouth, Dorset, [POSTCODE] (‘[NAME]’). [NAME] [APPELLANT] [NAME], is lead Applicant on behalf of all 14 [NAME] party to this application and she holds the lease of 16 [NAME] (originally unit 6).

2. The Respondent, [RESPONDENT] (‘[RESPONDENT]’), is the freehold owner and developer of [NAME]. The Respondent appears to have purchased the land in or around April 2001 (although the transfer was not registered until 22nd May 2001).

3. The Tribunal received an application from the Applicants dated 22nd July 2020 under s27A Landlord and Tenant Act 1985 (‘the 1985 Act’) seeking determination of the liability to pay and reasonableness of service charges for the years 2016, 2017, 2018 and 2019.

4. On 23rd September 2020, at a telephone case management hearing [NAME] [NAME] and Mr [COUNSEL] represented the Applicants and Mr [COUNSEL] of Counsel, instructed by [NAME], appeared for the Respondent. Directions were given on 5th October 2020, which have been complied with.

5. Following the directions of 5 October 2020 and the explanation therein, there was no inspection of the holiday complex.

Background to the application

6. [NAME] is a holiday complex comprising 51 leasehold [NAME] (‘[NAME]’) of holiday (rather than permanent) residential accommodation built on land on the outskirts of Charmouth in Dorset. The leasehold owners of those [NAME] are referred to in this decision as ‘the Tenants’.

7. The freehold land originally registered under title DT184316 on which the 51 leasehold [NAME] were built also included [COMPANY] and [NAME] and extensive grounds; a woodland, a fishing lake, a swimming pool on a terrace immediately adjacent to [COMPANY] (‘the [ADDRESS]’) and a crazy golf course. There is mention of a tennis court in the leases of the [NAME], but it appears this has never existed. The Respondent also owns adjacent land (the land to the south of Langmoor Manor registered under title number DT247864) over which some of the [NAME] have appurtenant rights.

8. On 28th June 2001 the Respondent sold [COMPANY] and the immediate adjacent land, which included the swimming pool and sun terrace and crazy golf course (‘[COMPANY]’), to [NAME] and [NAME], and [NAME] [NAME] (title absolute registered on 15th October 2001 under DT290360).

3 9. On 29th April 2002 the Respondent sold the freehold of [NAME] (‘the [NAME]’) to [NAME] and [NAME] (title absolute registered on 24th May 2002 under DT296862). Both transfers granted and reserved rights to the Respondent as well as the [NAME] of the [NAME].

10. [NAME] [NAME] holds 16 [NAME] under the terms of a 999-year tri- parte lease dated 22nd January 2002 between the Respondent, [NAME] Management Company (‘[NAME]’) and [APPELLANT] (the tenant). The lease was transferred to her on 24th May 2016. The leases of all 51 [NAME] are said to be in identical terms.

11. [NAME] was incorporated as a company on 2nd April 2001 and was established to manage [NAME] [NAME]. Its [NAME] directors were also Directors of [RESPONDENT]. Shares in the company were allotted to each of the 51 Tenants in or around 2003. However, in October 2006 the Respondent exercised its powers under Clause 8(l) of the lease, and took back management responsibilities from [NAME]. Since that time the Respondent has employed a management company to manage the complex, collect rents and service charge. The initial management company was Torbay Management Services (‘TMS’), but since 2014, [COMPANY] (‘CPM’) has performed that role. Mr [NAME] is the Director of CPM.

12. Although stripped of its management function in relation to [NAME], [NAME] as a company has not been wound up. [NAME] is one of the current directors and is Company Secretary, and a party to this application.

13. In or around 2006 an unincorporated association, [NAME] Association (FHRA), was established. It is not a Recognised Tenants Association (RTA) under s29 LTA 1985, and not all Tenants are members of FHRA. [NAME] is a member of the Committee and has served as both Chair and Secretary, and is a party to this application. His evidence is that less than 50% of the 51 [NAME] had ever been members of FHRA.

14. There has been a very long running dispute regarding the non-payment of contributions allegedly owed by the owners of the [COMPANY] to the Respondent towards the running costs of [NAME] [NAME] that were due under the terms of their respective transfers. [NAME] were said to have taken proceedings in the past to recover moneys owed. It is said that [COMPANY]’s contribution was 20% and the [NAME]’s contribution was 5%. The [NAME] transfers exhibited to the Respondent’s response refer to these % contributions in the Transferees’ covenants ([222] and [207]). However, the Office Copy Entries that appear in the bundle do not provide for any percentage contribution. The relevant clauses of the Transferees’ covenants in the [NAME] transfers appear to have been deleted (for example [70]). Mr [NAME] says there was a challenge by [NAME] in 2010 to a proposed variation in the contributions payable by [COMPANY] from 20% to 17.5%. He says there was a later attempt to reduce

4 the contribution payable by the [NAME] in or around 2017 from 5% to 3% respectively, but there is no other documentation supporting this.

15. It is said that the Respondent issued proceedings in Yeovil County Court against the owners of the [NAME] in 2014 (under claim number C80YM016) and against the current owners of [COMPANY] in 2016 (under claim number C80YM000 (‘the Litigation’). Although the proceedings against the [NAME] were purportedly settled in 2017, there is no documentation regarding this in the bundle. Litigation against [COMPANY] is said to have been settled by consent in 2019, but no final sealed Consent Order has been produced. The signed Consent Order produced by the Respondent shortly before the hearing incorporates ‘[NAME]’ between the parties signed on 14th February 2019.

16. In summary, under that agreement the Respondent was to pay £15,000 to the owners of [COMPANY] as a contribution to the cost of removing and landscaping the Crazy Golf Course, the owner of [COMPANY] is to have sole responsibility to manage, maintain and repair the sun terrace (including swimming pool) and area where the crazy golf course was previously situated. [COMPANY] is entitled to all the rights reserved under the Transfer (including rights of access to the rest of [NAME] land, use of roads and car parks, rights to water, use of septic tank etc.) but is not required to pay any financial contribution in respect of the general maintenance of [NAME]. The Tenants are entitled to use the swimming pool for which no contribution will be payable in future.

17. The terms of this agreement were to be incorporated in a deed of variation to be registered with HM Land Registry, but as yet it appears that no such Deed has been executed or registered. No arrears of contribution owed by [COMPANY] appear to have been recovered as a consequence of the Litigation.

18. In relation to the [NAME], it is now said to be in receivership. The Issues for the Tribunal 19. In summary, the issues identified at the directions hearing requiring determination are as follows;

(i) Whether the legal and professional costs incurred by the Respondent in respect of dispute or disputes with the [COMPANY] (‘the Legal Costs’) are payable by the Tenants as service charge, and if so whether the amounts so charged are reasonable.

(ii) Whether payment for the Legal Costs was made from a [NAME], and

(iii) [NAME] costs and service charges should be apportioned between the Tenants, the [NAME] and [COMPANY].

5 20. The Applicants also make associated applications in respect of the Respondent’s costs under s20C of the 1985 Act (‘s20C’) for the benefit of themselves and all 51 [NAME] at [NAME]. They also seek an order under Paragraph 5A of Schedule 11 of the Commonhold and Leasehold Reform Act 2002 (‘paragraph 5A’).

21. The Respondent asserts that issues (ii) and (iii) above fall outwith the jurisdiction of the Tribunal.

The Law

22. The law relevant to this application is set out in Schedule 2 to this decision.

23. Section 18(1) of the 1985 Act defines ‘service charge’ as ‘an amount payable by a tenant … which is payable, directly or indirectly, for services … and … the whole or part of which varies or may vary according to the relevant costs’. Section 18(2) defines ‘relevant costs’ as ‘the costs or estimated costs incurred or to be incurred by or on behalf of the landlord … in connection with the matters for which the service charge is payable.’

24. Under s27A of the 1985 Act the Tribunal has the jurisdiction to determine whether a service charge is payable and, if it is;

(a) the person by whom it is payable,

(b) the person to whom it is payable,

(c) the amount which is payable,

(d) the date at or by which it is payable, and

(e) the manner in which it is payable.

25. A service charge is only payable to the extent that it has been reasonably incurred and if the services or works for which the service charge is claimed are of a reasonable standard (s19 of the 1985 Act). When service charges are payable in advance, no more than a reasonable amount is payable.

26. Under s20C a [NAME] may apply for an order that all or any of the costs incurred by a landlord in connection with proceedings before a tribunal are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the application.

27. A [NAME] may also apply to the Tribunal under paragraph 5A for an order which reduces or extinguishes the tenant’s liability to pay an “administration charge in respect of litigation costs”.

The Leases

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28. It is common ground that the leases of all 51 leasehold [NAME] are all in identical terms. The relevant provisions of the lease of 16 [NAME] found at [78] to [102] can be summarised as follows.

29. The lease is a tripartite agreement between the Respondent, [NAME] and the [NAME] or ‘Tenant’ for a term of 999 years from 6th April 2001.

30. Clause 1 defines various terms within the Lease.

(i) ‘[NAME]’ is defined as meaning ‘[NAME] to be known as the Fernhill holiday complex Charmouth Bridport Dorset registered under title numbers DT184316’.

(ii) ‘The Unit’ is the individual residential unit identified in Plan 1 and ‘The Block’ is the block in which the unit is situated.

(iii) ‘The Common Parts’ means ‘such parts of [NAME] as are for the time being not comprised or intended in due course to be comprised in any lease granted or to be granted by the Landlord’

(iv) ‘[ADDRESS]’, ‘the Swimming Pool Area’, ‘the Crazy Golf Area’, ‘the [ADDRESS]’ and ‘the Parking Area’ are all identified on Plan 2 by various colours or markings.

31. By Clause 2 the Respondent demises the individual Unit together with rights set out in the First Schedule (including rights of access and the use of facilities such as the Swimming Pool) and excepting and reserving the rights set out in the Second Schedule (which included free passage of water, gas and electricity, access for the Landlord and [NAME] to undertake works etc.), subject to the obligation to pay Rent half yearly on 1st January and 1st July.

32. Each Tenant covenants (in Clauses 3 and 4) to observe and perform the obligations in the Third and Fourth Schedules (to the extent the latter are mutually enforceable between Tenant and lessees of other parts of [NAME]). The Company and Landlord each covenant (in Clauses 5 and 6 respectively) to observe and perform the obligations set out in the Fifth and Sixth Schedule respectively.

33. Clause 8 sets out a number of matters expressly acknowledged by the parties ‘for the sake of clarity’. In summary (and reference to Landlord also includes the Company) these include the following;

“8(a) In the management of [NAME] and the performance of the obligations of…the Landlord….hereinafter set out ….the Landlord….shall be entitled to employ or retain the services of any employee agent consultant service company contractor engineer or other advisers of whatever nature as …the Landlord….may require and the expenses incurred by …the Landlord… shall be deemed to be an expense incurred… in respect of which the Tenant shall be

7 liable to make an appropriate contribution under the provisions as set out in the Third Schedule hereto”

34. Clause 8 also confirms inter alia there is no obligation on the Landlord to provide any service or system not already in existence (8(d)). Nor is it prevented from providing or installing any system or service ‘for the purposes of good [NAME] management’ (8(e)), or removing or altering such a system or service (8(f)). It provides for the service of notices (8(g)), the entitlement of the Landlord to borrow money (8(h)) and to refer service charge demands or certification to the lands tribunal or any relevant tribunal or other court (8(i)). Clause 8(k) entitles the Landlord to vary Service Charge proportions in the event it changes the number of lettable [NAME] or carries out development of any Block or [NAME] and 8(l) provides the mechanism for the Landlord to take back (either temporarily or permanently) the management responsibilities of [NAME].

35. The Third Schedule sets out the obligations of each Tenant and in particular the payment of service charge. Paragraph 2(b) of the Third Schedule requires the Tenant

“To pay forthwith on demand a fair and reasonable proportion (to be determined conclusively by the Landlord acting reasonably) of any outgoings expenses or assessments which may be attributable to or imposed or assessed on the Unit together with any other part or parts of [NAME]….”

36. Paragraph 10(a) of the Third Schedule requires the Tenant:

“To pay and keep…. the Landlord… indemnified against a due and fair proportion of all reasonable costs charges and expenses which… the Landlord…. shall incur in complying with the obligations set out in the Sixth Schedule hereto or in doing any works or things to [NAME] or for the maintenance and/or improvement of [NAME] and/or any other costs charges or expenses which ….the Landlord… designates from time to time.”

37. Paragraph 10(b) of the Third Schedule provides as follows;

“…..the parties agree that if…. the Landlord ….shall consider that any part or parts of the costs charges and expenses which ….the Landlord…shall incur …. shall be the subject of contributions from persons other than the lessees for the time being of the Block and/or [NAME] then the …. Landlord …. shall be entitled but not obliged to reduce the amount of the costs charges and expenses in question to which the Tenant is obliged to contribute by such sums as the… Landlord …. shall in its absolute discretion consider reasonable rather than allocating the total amount of those costs charges and expenses and…. the Tenant acknowledges that the discretion conferred … under … this clause is an absolute discretion which shall be exercisable by… the Landlord…. in such manner and upon such Terms and at such times as … the Landlord …. shall consider appropriate”

38. Paragraph 11 of the Third Schedule sets out the requirement for payment on 1st January and 1st July each year of half of the amount estimated by the Landlord or Company as payable under clause 10 with provision for a balancing payment once final amounts payable were determined. It

8 confirms service charge payments made are held on trust, are payable as additional rent, and paragraph 11(a)(iii) provides for creation of a [NAME] ‘on account of those items of expenditure which are of a periodically recurring nature (whether recurring by regular or irregular periods)’. Paragraph 13 of the Third Schedule confirms that the costs (including legal costs) of forfeiture or other enforcement action against the Tenant for breach of covenant or the service of notices or provision of information are recoverable through the service charge.

39. The Fourth Schedule contains the obligations of the Tenant as regards their use of the property and the requirement to allow access.

40. The covenants in the Fifth Schedule inter alia require the Company to repair, maintain, insure, provide facilities and keep proper accounts and provide certificates of the amounts due by Tenants under the Third Schedule.

41. The Landlord covenants in the Sixth Schedule inter alia to grant mutually enforceable covenants to other Tenants and perform the obligations of the Company if it goes into liquidation or is struck off.

42. Paragraph 1 of the Sixth Schedule expressly provides as follows;

“If so requested by the Tenant to use all reasonable efforts to enforce the covenants contained in such other Leases of [NAME] on [NAME] as may be granted upon the Tenant indemnifying the Landlord on a full indemnity solicitors and own client basis against all costs and expenses in respect of such enforcement and providing from time to time security in respect of such costs and expenses as the Landlord may reasonably require.” The Applicants’ case 43. The Applicants’ case is set out in the application and the statements at [4 - 17]. In summary, they say that their leases do not permit the Respondent to recover the Legal Costs through service charge, that the Respondent has wrongly used reserves for the payment of those costs and they seek clarification of the apportionment of [NAME] costs and service charges and in particular seek documentation from the Respondent which it has to date refused to produce.

The Respondent’s case

44. The Respondent’s initial response to the application is set out at [20]. In summary, the Respondent initially claimed that the legal action against the [COMPANY] had been instigated at the request of [NAME] who had been made aware of the escalating legal fees and had approved them. They said that the [COMPANY] were treated as part of [NAME] and were liable to make contributions towards the expenses of running the complex, including the maintenance and repair of the common parts used by the 51 [NAME].

9 45. Mr [NAME] in his Skeleton Argument and final submissions on behalf of the Respondent says the terms of the lease (in particular clauses 8(a) and paragraph 10(a) of the Third Schedule) allow the Respondent to recover legal costs of action taken against the [COMPANY]. Additionally, he submits the Tribunal has no jurisdiction to consider the use of the [NAME] or the question of apportionment of the costs and expenses recoverable through the service charge.

The hearing

46. Due to the restrictions of the Covid-19 pandemic, the hearing took place remotely by video on 19th January 2021. Neither party had objected to the hearing taking place in this way.

47. [NAME] [NAME] represented the case of the 14 Applicants and evidence was heard from Mr [NAME], Mr [NAME] and Mr [NAME]. Although Mr [NAME] accepted that Mr [NAME], Mr [NAME] and Mr [NAME] evidence was all relevant to the first limb of the application, he sought to exclude the evidence of Mr [NAME] which he said did not assist in dealing with the issues and it was not for the Tribunal to consider the question of reasonableness. Having briefly retired, the Tribunal concluded it was not appropriate to exclude this evidence. The Tribunal was considering s27A of the 1985 Act including whether legal costs were payable under the lease and if so, whether the costs were reasonable and reasonably incurred.

48. For the Respondent, Mr [RESPONDENT] presented their case. Evidence was heard from Mr [NAME]. All the witnesses were asked questions by the Tribunal panel and the respective representatives.

49. Due to a number of preliminary issues, the nature of the video hearing, and breaks during the course of the day, the hearing of evidence was only concluded shortly before 4pm. Following discussions with both representatives, agreement was reached for the parties to provide written final submissions. The hearing was then adjourned part-heard with directions given for final written submissions as to the principal issues; namely

(a) Whether the Litigation Costs are recoverable from the applicants under the terms of their leases (‘the Legal Costs Issue’),

(b) Whether payment of those Litigation Costs was made from a [NAME] which should be restored, and whether this issue falls within the jurisdiction of this Tribunal (‘the [NAME]’), and

(c) Apportionment of the service charges (past and future), and whether this issue falls within the jurisdiction of this Tribunal (‘the Apportionment Issue’).

10 50. Written submissions were received from both parties, following which the Tribunal re-convened to make its decision. The Tribunal’s consideration 51. The primary issue dispute between the parties concerns the entitlement of the Respondent to recover Legal Costs from the [NAME] amounting to some £101,126.00 (for 2016 to 2019 inclusive and for future years). This requires the Tribunal to construe (or interpret) the terms of the Applicants’ leases, and determine whether they permit the Respondent to recover from the Tenants via the service charge the Legal Costs it has incurred in what appears to be a long running dispute and litigation with the owners of the [NAME] and [COMPANY] over their respective contributions to the costs of maintaining [NAME] which are said to be due and owing under the terms of their transfers.

The Applicants’ case

52. Much of the Applicants’ case relates to their concern at the lack of transparency and accountability of the Respondent in relation to the costs of management of the [NAME] holiday complex, the operation of the Service Charge accounts, and in particular the Respondent’s failure to provide documents, certificates and information (particularly regarding contributions payable by the [COMPANY] and the costs of the Litigation).

53. The Applicants complain that the Legal Costs were paid from the [NAME] without consultation, without being provided for or referred to in the budget, without being itemised in any of the interim service charge demands and without any information or documentation being provided to the Tenants regarding the expenditure. They complain that effectively the 51 Tenants have been paying 100% of the costs of managing and maintaining the holiday complex (i.e. without the benefit of the 25% contribution from the [COMPANY]) and without any consultation or warning. They say the Legal Costs amounted to more than £250 per [NAME] yet there had never been any consultation under s20 of the 1985 Act. Furthermore they say the litigation has been unsuccessful in that the contributions the [COMPANY] should have made towards the running costs of [NAME] remain outstanding.

54. In relation to the [NAME], the Applicants say the Legal Costs have wrongfully been taken from the [NAME] which now has a negative balance in excess of £10,000. They say £143,522.47 should be should be restored to the fund with interest.

55. The applicants also seek information from the Tribunal, and documentation from the Respondent, as to the proper apportionment of [NAME] costs for future years and changes to the share that will be paid by the [COMPANY].

The Respondent’s case

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56. In summary, the Respondent submits that the Legal Costs are recoverable from the [NAME] under the terms of their respective leases. Clause 8(a) permits the Respondent to employ or retain ‘advisers of whatever nature as…the Landlord may require’ and this is clear enough to include legal professionals. It is not necessary for the lease to make specific mention of lawyers, proceedings or legal costs for legal fees to be recoverable. Furthermore, the legal costs that have been incurred are in connection with the management of [NAME] and the performance of the Respondent’s obligations. The Respondent also submits that paragraph 10(a) of the Third Schedule also allows independently for recovery of these costs.

57. In relation to the [NAME] issue, the Respondent submits this matter cannot be determined by the Tribunal. It amounts to a claim for breach of trust and restitution, which falls within the jurisdiction of the County Court.

58. In relation to the question of apportionment, the Respondent submits this is more a request for information and clarification and falls outwith the jurisdiction of the Tribunal under s27A of the 1985 Act.

The Tribunal’s determination

(a) The Legal Costs Issues

59. In order to determine whether the Legal Costs fall within the service charge provisions and are payable under the terms of the lease, the first question to consider is why the costs were actually incurred.

The Litigation and Legal Costs

60. Mr [NAME] confirmed the Litigation against the owners of the [COMPANY] related to recovery of arrears of contributions due under the deeds of transfer between the Respondent and the respective owners. This appears to be accepted by the Applicants.

61. Mr [NAME] and [NAME] [NAME] made reference to [COMPANY]’s contribution to [NAME] costs being 20% and the [NAME]’s share as 5% (i.e. 25%). This also appears to be reflected in the service charge statements from 2016 to 2019 where the [NAME] contribute a 1.47% (reflecting a 1/51 share of 75%). Mr [NAME] in his evidence refers to earlier attempts to reduce the respective shares to 17.5% from [COMPANY] in or around 2010 and to 3% from the [NAME] (in or around 2017), but no supporting documentation is before us. Whilst there is reference in the [NAME] of Transfer provided by the Respondent to these percentage contributions in the Transferees’ covenants, Office Copy Entries relating to the [COMPANY] appearing in the bundle (at [66] and [73]) and those provided by the Respondent shortly before the hearing all appear to show the clauses relating to this contribution had been deleted from the Transferee’s covenants at the material time.

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62. The Applicants say the arrears of contribution amounted to approximately £68,000. They say [COMPANY] owed contributions of £53,289.54 [30] and the [NAME] £14,639.81 [31]. However, there is no supporting documentary evidence before the Tribunal confirming these arrears figures, and it is clear from the Applicants’ repeated requests for information that little information has been forthcoming from the Respondents. Mr [NAME] confirmed that committee members of FHRA had only found out by chance about the arrears. Mr [NAME] confirmed in cross-examination that no information had been provided about these arrears of contribution when he purchased his property in 2016.

63. The only documentation regarding the legal proceedings, apart from the parties’ respective statements, is an unsigned Consent Order in respect of the litigation against the owners of [COMPANY] [110], draft [NAME] [112-113] and a draft Deed of Covenant and Variation to Transfer [114 -125] provided by the Applicants. Shortly before the hearing, a signed (but unsealed) copy of the Consent Order and [NAME] was provided by the Respondent. From these documents it would appear that agreement had been reached between the owners of [COMPANY] and the Respondent in February 2019 whereby (in summary),

(i) [COMPANY] would henceforth be solely responsible for the management, maintenance and repair of the Crazy Golf Area and the [ADDRESS] (which includes the swimming pool)

(ii) the Respondent would pay [COMPANY] the sum of £15,000 as a contribution towards [COMPANY]’s costs of removing the crazy golf course and re-landscaping the Crazy Golf Area.

(iii) [COMPANY] would continue to have rights of access to the [NAME] [NAME] and services (which includes inter alia the roads, carparks, water supply and septic tank)

(iv) [COMPANY] and its successors in title would be relieved of making any contribution to the Respondent towards the costs of running the [NAME] [NAME], and

(v) the [NAME] would continue to have access to the [ADDRESS] including the swimming pool (provided they complied with the rules) and would not be required to contribute to its maintenance and repair.

64. Nothing is said in the Consent Order or [NAME] about any payment of the arrears of the contributions alleged to be owed by [COMPANY], simply that unspecified claims and counterclaims were determined on the terms of the [NAME] and both sides would be responsible for their own legal costs.

65. There is also no documentation regarding the dispute and litigation with the [NAME]. Mr [NAME] says this was settled by way of a Tomlin Order in or

13 around 2017. [NAME] in his evidence said the [NAME] went into receivership shortly thereafter. He also confirmed that the Respondent had recovered £7,500 from the [NAME], but nothing in respect of [COMPANY] as a result of the Litigation. To that extent the Tribunal found the Litigation had been unsuccessful. It also appeared to be the case that although there was reference in the [NAME] to a Deed of Covenant and Variation of Transfer being registered with HM Land Registry setting out the terms of the agreement, the draft Deed and Variation has not as yet been executed or registered.

66. Although Mr [NAME] in his evidence said the litigation had been initiated at the request of the [NAME], and they were fully aware of the litigation the Tribunal found this not to be the case.

67. Mr [NAME] asserted that the agreement reached benefitted the Tenants in that they would no longer be required to contribute to the maintenance and upkeep of the swimming pool (said to be £10,000 p.a.). However, the [NAME] say the compromise provides little benefit to the 51 [NAME]. The arrears of nearly £68,000 have not been recovered and the Tenants will be responsible for 100% of the costs of maintaining [NAME], including services (such as the septic tank, water and roads) used by the [COMPANY].

68. Given that one of the issues for the Tribunal to determine under s27A of the 1985 Act was whether any legal costs payable under the lease were reasonable and had been reasonably incurred, the Tribunal found the absence of documentary evidence surprising. There were no invoices, bills or evidence of payment. The Applicants were clearly unable to provide any, as such documentation was not in their possession. Furthermore, information about the Legal Costs appears to have been repeatedly requested by the Lead Applicant (and others) from the Respondent ([166] to [192]) apparently to no avail. The only evidence before the Tribunal was the line item ‘Legal and Professional’ being applied to the ‘Block Costs’ expenses in the unaudited accounts. These costs amount to a total of £101,126.00 - £21,315.00 from 2016 [135], £31,853.00 from 2017 [144], 23,839.00 from 2018 [152] and 24,119 from 2019 [161]). The Respondent has not disputed those figures, or that they were legal and professional costs incurred other than in the disputes with the [COMPANY].

69. When it came to providing detailed information regarding the sums involved in the Litigation, the Tribunal found Mr [NAME] a less than impressive witness. He was vague and unable to provide clear information to the Tribunal about the arrears owed by the [COMPANY]. Nor could he provide detail about the legal costs that had been incurred, apart from to say that CPM simply paid the invoices provided by [NAME] as and when presented. He admitted ‘with hindsight’ that it might have been better to make explicit reference in the service charge demands to ‘legal costs’ (rather than ‘contingency’). Of note, he confirmed that the contribution of £15,000 payable by the Respondent to the owners of [COMPANY] under the [NAME] for the removal

14 of the crazy golf course would also have been paid from the [NAME].

70. Although Mr [RESPONDENT] told the Tribunal that the Respondent had only commenced legal action against the [COMPANY] at the instigation of the Tenants, the Tribunal finds this not to be the case. Although all 51 Tenants are shareholders of [NAME], the Company’s management obligations had been taken back by [NAME] on 10th October 2006 when it opted to serve the Initial Election Notice pursuant to clause 8(l) of the leases. There was some evidence of communication between Mr [NAME] and a few of FHRA’s committee over the management and running of FH (including the failure of [COMPANY] to pay contributions), and evidence that Mr [NAME] attended some FHRA meetings and that individual officers may have supported or encouraged the legal action in 2016 [248]. However, FHRA is not formally recognised by the Respondent and has no legal standing. Furthermore, only about half of the Tenants were ever members of FHRA. Mr [NAME] confirmed that CPM had never corresponded directly with all of the Tenants regarding the Legal Costs or the Litigation.

The construction of the leases

71. In relation to the construction of the lease and whether these Legal Costs were payable as service charge, the Tribunal starts with general principles of interpretation and the specific clauses of this particular lease and its context. The Supreme Court in Arnold v Britton [2015] UKSC 36 gave definitive guidance on interpretation. Lord [NAME] (at paragraph 15) set out the approach that courts or tribunals should follow;

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’… And it does so by focussing on the meaning of the relevant words ... in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions”.

72. The Supreme Court also confirmed there is no special rule of interpretation for leases and no requirement that terms in a lease should be construed restrictively (at paragraph 23). The Tribunal must therefore start with the ordinary and natural meaning of the relevant words in their immediate context and the cumulative impact of the clauses when read as a whole. In this appeal, the Respondent relies on two clauses in the lease, which Mr [RESPONDENT] says independently of each other allow for the recovery of legal costs incurred in the Litigation against [COMPANY] namely clause 8(a) and paragraph 10(a) of the Third Schedule.

15

73. Paragraph 2(b) of the Third Schedule sets out each Tenant’s obligation to pay the service charge. Each Tenant covenants to pay ‘a fair and reasonable proportion….of any outgoings expenses or assessments which may be attributable to or imposed or assessed on the Unit together with any other part or parts of [NAME]’. If the costs are properly recoverable under clauses 8(a) or 10(a) of the Third Schedule then the Tenants must contribute to them through the service charge.

Clause 8(a)

74. At its core Clause 8(a) allows for recovery of the costs of engaging ‘any employee agent consultant service company contractor engineer or other advisers of whatever nature’ for the ‘management of [NAME] and the performance of the obligations of...the Landlord…’.

75. Mr [RESPONDENT] accepts that Clause 8(a) is a widely drawn clause, but says this is unsurprising given the length of the term of the leases and the size and nature of the holiday complex. He submits the parties would expect that in 999 years circumstances might arise that would require [RESPONDENT] to engage advisors (including lawyers) and that any number of [NAME] management issues might arise given the size and amenities on the complex (including the possibility of legal action against [NAME]). He says the phrase ‘or other advisers of whatever nature’ could not be more permissive, and the natural and ordinary meaning of the words could not possibly exclude legal advisors.

76. The Tribunal accepts that the natural and ordinary meaning of the phrase ‘or other advisers of whatever nature’ in clause 8(a) is capable of including legal advisors. However, those words must be read in context, and the Tribunal must determine whether the words are sufficiently clear and unambiguous to say that a reasonable person having the background knowledge that would have been available to the parties at the time they entered into the lease would have understood it to include solicitors and other legal advisors and the initiation of litigation against [NAME]. For the reasons more particularly set out below, the Tribunal finds that Clause 8(a) cannot be construed as allowing the [NAME] to recover the costs of legal advice or litigation in respect of the [NAME] and/or [COMPANY].

77. Arguably the natural and ordinary meaning of the words ‘other advisers of whatever nature’ could include a legal advisor. However, this residuary category is immediately preceded by a list of occupations the Tribunal considers can properly be identified as those who would be engaged in connection with the maintenance of the physical infrastructure and services of [NAME] (rather than individuals involved in the asserting and enforcement of legal rights), particularly when considering the Landlord’s obligations in the Fifth Schedule.

78. The Tribunal accepts it is not always necessary for there to be an express reference to solicitors or lawyers before legal costs are recoverable. In

16 [NAME] v O’Sullivan [UKUT] 0683 (LC) [NAME] [COUNSEL] [NAME] confirmed that [NAME] LJ’s remarks in [NAME] v Mears [1989] 1 EGLR 65 that legal costs may not be recovered unless there is specific mention of lawyers had ‘wrongly been elevated to a statement of principle’. However, [COUNSEL] [NAME] also confirmed it was improbable ‘that parties to a lease would regard general words as sufficient to express an intention that…the landlord's cost of litigation between them should be a charge on the whole body of [NAME]’.

79. The Tribunal is strengthened in its view that more precise words are required before litigation costs against [NAME] can be recovered under this clause, as there is express reference to solicitors, legal costs and court proceedings elsewhere in the lease (Clause 8(i), paragraphs 13(a), (b) and (c), and 14(b) of the Third Schedule and paragraph 1 of the Sixth Schedule). These matters demonstrate that the parties to the lease had clearly contemplated that legal proceedings might be required particularly relating to the enforcement of covenants and recovery of contributions payable for services and maintenance of the amenities. If the parties to the lease had intended such a widely drawn clause as clause 8(a) to cover litigation costs incurred against [NAME] (and in particular the [COMPANY]) as Mr [NAME] seeks to suggest then, given the substantial potential costs that can be involved in litigation and the awareness of the parties to this lease that legal advice or proceedings might be necessary to enforce obligations, the Tribunal is satisfied that clearer words would have been used.

80. The Tribunal is not persuaded by Mr [NAME] submission that paragraphs 13 of the Third Schedule and paragraph 1 of the Sixth Schedule deal with radically different circumstances. Paragraph 13 of the Third Schedule provides for recovery from an individual Tenant the costs (including legal costs) incurred by the [NAME] in forfeiture proceedings for breaches of covenant, and paragraph 1 of the Sixth Schedule allows for the recovery of the [NAME]’s legal costs on an indemnity basis in relation to proceedings against one Tenant at the instigation of another to enforce covenants. Paragraph 14 of the Third Schedule provides for the Tenant to indemnify the Landlord inter alia from all actions, claims and proceedings arising from Tenant failure.

81. Whilst it is true they do not expressly relate to the service charge provisions these provisions clearly demonstrate the parties were aware that litigation might be required to regulate relationships between individuals as regards payment for services and amenities provided and the enforcement of covenants for the benefit of all on [NAME]. In any event, clause 8(i) clearly relates to service charge disputes and allows to the costs of referral to the lands tribunal or other courts to be recovered.

82. Furthermore, paragraph 10(b) of the Third Schedule shows that the parties envisaged that [NAME] such as the [COMPANY] would contribute to the costs of providing services and amenities on [NAME].

17 83. The Tribunal therefore finds it would have been in the contemplation of the parties that there might be a dispute regarding payment of such costs (in the same way there was the possibility that Tenants might not pay their share of the service charge). If the costs of litigating against [NAME] were to be recoverable from the body of [NAME] through the service charge, then it would have been quite simple for the parties to have said so (as with paragraph 13 of the Third Schedule), by expressly referring in Clause 8(a) (or elsewhere) to solicitors and legal costs. As Lord [NAME] said in [NAME] v Britton (at [17]), ‘parties have control over the language they use in a contract’.

84. In any event, even if the Tribunal were wrong to have reached that conclusion, and the phrase ‘other advisers of whatever nature’ does encompass engaging lawyers, such costs are recoverable only so long as they are incurred ‘[i]n the management of [NAME] and the performance of the obligations of…the Landlord..’. Whilst Mr [RESPONDENT] submits this only needs to be ‘in connection’ with those twin purposes, that is not what the lease says.

85. Contrary to Mr [NAME] assertion [244], [NAME] does not include the [COMPANY]. ‘[NAME]’ is expressly defined in the lease as ‘[NAME] to be known as the Fernhill holiday complex Charmouth Bridport Dorset registered under title numbers DT184316’. The documents before the Tribunal show that DT184316 excludes [COMPANY] and the [NAME] and the land on which they are situated. [COMPANY] is a separate freehold title registered as DT290360 [67] and includes the sun terrace and swimming pool. [NAME] is registered as a separate freehold title under DT296862 [73]. Not only are they both freehold properties, but their respective transfers (executed on and 28th June 2001 and 29th April 2002) also clearly define the ‘[NAME]’ as being all that land under title number DT184316 ‘excluding the Property’ (i.e. [COMPANY] or [NAME]).

86. The facts and circumstances of the parties at the time the leases were entered into can, in part, be inferred from the leases and the transfers in respect of the [COMPANY]. The Tribunal is satisfied there was clear intention (seen from the plans attached to the lease) that 51 separate [NAME] were to be developed and sold as leasehold properties for holiday lets rather than permanent residences, and that the [COMPANY] were not to be so demised. It is also clear from the Schedule of leases attached to DT184316 at [57] to [60] that whilst the leases are all for a term of 999 years commencing 6th April 2001, the vast majority of the [NAME] were first sold after the transfer of the freehold of [COMPANY] to its [NAME] owners.

87. We were strengthened in the view that the parties were aware of the intention for the [COMPANY] to be sold off by Mr [NAME] evidence to the Tribunal regarding circumstances at the time the leases were entered into. He had acquired his lease in July 2001 and had attended the promotional launch weekend of 7/8th April 2001 prior to purchase. He recalled being informed [COMPANY] was to be sold, but said the

18 swimming pool and crazy golf course would remain within the curtilage of [NAME]. He says this [NAME] intention appeared to have changed during the course of sale negotiations. We were satisfied, therefore, that it was in the contemplation of the parties that the [COMPANY] that occupied land previously falling within DT184316 were to be sold whether together or separately and would therefore not form part of [NAME].

88. The question then for the Tribunal is whether the costs incurred by [RESPONDENT] in engaging solicitors and initiating litigation against the [COMPANY] could fall within the natural and ordinary meaning of the ‘management of [NAME] and the performance of the obligations of..the Landlord..’.

89. Mr [RESPONDENT] submits that legal costs are recoverable as falling within the meaning of ‘management of [NAME]’ and relies on Assethold v Watts [2014] UKUT 0537 (LC) [41] and [NAME] v O’Sullivan [UKUT] 0683 (LC) as authority for this. However, as [NAME] v [NAME] makes clear, each lease must be construed on its own particular facts. Decisions of the Upper Tribunal demonstrate that similar words appearing in leases, such as ‘management of [NAME]’ or ‘proper and reasonable management’ may have different meanings in different contexts (Assethold at [41]).

90. Indeed, this is demonstrated in the cases expressly relied on by the Respondent. [COUNSEL] [NAME] in [NAME] did, as Mr [COUNSEL] submits, confirm ‘that “management” may sometimes include obtaining professional advice, including legal advice’ (at [37]). However, on the facts of that case, he held the lease in question was not sufficiently clearly drafted to allow recovery of legal costs of two rounds of unsuccessful litigation against an individual long [NAME] who failed to pay for major works. The particular clause at issue in that case was a widely drawn clause (not dissimilar from Clause 8(a)) that included a requirement to contribute towards ‘all other expenses (if any) in and about the maintenance and proper and convenient management and running of the Development’. The ‘Development’ in that case was a complex comprising commercial premises (garage, showroom and workshops) below twelve flats, five of which were held on long leases whilst the remainder were retained by the [NAME] and let out on assured shorthold tenancies. [COUNSEL] [NAME] reaffirmed the [NAME] principle that parties to a contract should be clear when defining payment obligations (following Francis v Philips [2014] EWCA Civ 1395). Where parties intend a [NAME] to be entitled to payments in addition to rent, the extent of the obligation must be clearly set out.

91. In Assethold v Watts, however, a general clause was considered sufficient to allow for recovery of the initial costs of initial injunction proceedings to ensure that protection afforded under the Party Wall Act 1966 was not lost to the building in question (later costs incurred were not recoverable). In that case [COUNSEL] [NAME] held (at [59]), ‘[t]he parties must be taken to expect that, in an agreement intended to last

19 for 125 years, circumstances may arise which they do not specifically contemplate at the time of contracting and in which expenditure by the Landlord may be necessary or desirable in their mutual interests. The object of a provision such as clause 6 is to allow for the recovery of such expenditure through the service charge so long as it is for the proper maintenance, safety, amenity and administration of the Building.’

92. When construing this lease, and whether costs incurred in litigation against [COMPANY] could fall within the phrase ‘management of [NAME]’ in clause 8(a) we consider the natural and ordinary meaning of the words in context. Mr [NAME] says there can be no doubt the legal costs were incurred in the ‘management of [NAME]’ because the Respondent sought to recover sums the [COMPANY] were liable to pay under their respective transfers. He says the Respondent is obliged to maintain [NAME] under Schedule 5, and the concept of ‘management of [NAME]’ must include the Landlord taking steps to recover sums required towards the upkeep and maintenance of [NAME] ‘whether from [NAME] or [NAME]’.

93. The Tribunal accepts that an inability to recover contributions might hamper the Respondent from being able to carry out its obligations under the Fifth Schedule. However, that does not mean in and of itself that the term ‘management of [NAME]’ automatically encompasses taking litigation to recover contributions, as was seen in [NAME]. Unlike the circumstances in Assethold, this is not a case where litigation was taken to protect rights or prevent third party interference for the preservation of the physical [NAME] itself (see [62]). The Tribunal finds when reading clause 8(a) as a whole that the focus is on the management of the physical environment, infrastructure, services and amenities of [NAME]. The Tribunal is strengthened in this view by the references elsewhere in Clause 8 to the Landlord’s entitlement to install, remove or change systems or services ‘for the purposes of good [NAME] management of [NAME]’ (clauses 8(e) and (f)).

94. The Tribunal is satisfied when considering the potential for dispute and/or difficulties of collecting contributions and enforcement of covenants are matters that were clearly within the contemplation of the parties at the time [NAME] was created and the leases drafted. There is express provision in the lease for this in relation to the 51 Tenants of the [NAME] (for example Clause 8(i), and paragraphs 13 and 14 of the Third Schedule and paragraph 1 of the Sixth Schedule). There was clearly contemplation of contributions being paid for shared services by the owners of land carved out of the [NAME] freehold land as this is provided for in paragraph 10(b) of the Third Schedule. On balance when looking at these matters in the round the Tribunal finds that had the parties intended the legal costs of litigating with the neighbouring properties over use of or contribution to shared amenities clearer words would have been used.

95. In any event, although the Upper Tribunal found in Assethold that the lease term whilst general and wide was sufficient to allow recovery of

20 legal costs, this Tribunal finds it was drafted in a significantly different manner to the lease clause in issue in this appeal. In Assethold the lease permitted the [NAME] to recover the cost of doing ‘all works installations acts matters and things…..for the proper maintenance, safety, amenity and administration of the Building’. Protecting the building against potential damage or incursion through a party wall award would fall naturally within that term.

96. On balance, the Tribunal finds that a reasonable reader having the background knowledge of the sale of the [COMPANY] and the shared services and amenities would not understand clause 8(a) to mean that the Respondent was entitled to recover costs from the 51 [NAME] in respect of litigation against those [NAME] under the terms of contracts to which the [NAME] were not privy. Nor is there anything in the lease indicating that the ‘performance of… the Landlord’s obligations’ would encompass the taking of legal proceedings against [NAME].

97. The Tribunal finds that clearer words than the wide and general Clause 8(a) are required.

Paragraph 10(a) of the Third Schedule

98. Mr [NAME] asserts that the Litigation Costs are recoverable independently under paragraph 10(a) of the Third Schedule whereby the Tenant covenants to keep the Landlord indemnified against

(i) a due and fair proportion of all reasonable costs charges and expenses which…the Landlord….shall incur in complying with the obligations set out in the Sixth Schedule

(ii) in doing any works or things to [NAME] or for the maintenance or improvement of [NAME]

(iii) any costs charges or expenses which ….the Landlord may designate from time to time.

99. The Sixth Schedule contains nothing that could be construed as including the costs of the Landlord enforcing the covenants contained within the transfers of the [COMPANY]. Paragraph 1 simply relates to the mutual enforceability of covenants between Tenants.

100. The Tribunal also finds the Litigation Costs cannot in any way be construed as costs of ‘doing any works or things to [NAME] or for the maintenance or improvement of [NAME]’. We are satisfied given their ordinary and natural meaning that could only include physical works to the land or structures on [NAME] and would include acts such as building, repairing or replanting.

101. The only question therefore is whether the legal costs incurred in proceedings against [NAME] could potentially fall within the catchall

21 phrase ‘and/or any costs charges or expenses which…the Landlord..may designate from time to time’ . Mr [RESPONDENT] submits that the natural and ordinary meaning of this wide and general clause allows the Respondent to recover the Litigation Costs through the service charge. He says the Landlord would not be acting capriciously or irrationally in designating the Litigation Costs as expenditure to be paid through the service charge, as the litigation was for the benefit of the [NAME] as a whole.

102. The Tribunal rejects that submission for the same reason such a residuary clause was rejected in [NAME] (see [78] above). Whilst Arnold v Britton confirms the words in a clause should be given their natural and ordinary meaning, in this case that reading would indicate the Respondent was free to designate any costs or charges as payable, no matter how frivolous or distant from the subject of the contract. In [NAME] v Britton the relevant clause in dispute was a term providing for the service charge to increase by 10% each year on a compound basis, and it was those words that were to be given their natural and ordinary meaning.

103. However, [NAME] which was handed down after [NAME] v Britton confirmed the ‘[NAME] principle’ that parties to a lease may expect the extent of their obligation to make payments under a lease to be clearly spelled out.

For the reasons set out above at [74] to [96] the Tribunal is satisfied that if the parties clearly had intended that the costs of litigation against [NAME] such as neighbouring properties should be included in the liabilities then clearer words than this generalised residual term would be needed.

104. In conclusion, therefore, the Tribunal finds that the recovery of the Respondent’s legal costs incurred in the dispute and litigation against both the [NAME] and [COMPANY] are not permissible under the terms of this lease for the years 2016, 2017, 2018 and 2019, or for future years.

105. The Tribunal was hampered in making findings as to the extent of the Legal Costs, by the Respondent’s failure to provide information about the legal costs it has incurred. No detailed schedule was provided setting out the costs incurred in each service charge year. The only information available to the Tribunal is the line item ‘Legal and Professional’ appearing in the Block Costs of the end of year income and expenditure accounts for the respective years in issue, which amount to £101,126 over the four- year period. Mr [NAME] confirmed in evidence this solely related to the dispute with the [COMPANY].

106. This lack of transparency is perhaps down to the Respondent’s position as regards the Tribunal’s jurisdiction to consider moneys spent by the Respondent from the [NAME] (see below). However, for the reasons more particularly set out in [113] below the Tribunal does have the power under s27A of the 1985 Act to consider whether and the extent which a service charge is payable under the terms of a lease (regardless of where the money comes from).

22

107. On balance, having considered the evidence in the round, and in the absence of any evidence from the Respondents demonstrating that the line item appearing in the end of year accounts is anything other than the costs incurred in the dispute with the [COMPANY] the Tribunal finds the Respondent was not permitted to recover as service charge under the terms of the lease the following;

£21,315.00 for the year ending 31st December 2016 [135] £31,853.00 for the year ending 31st December 2017 [144] £23,839.00 for the year ending 31st December 2018 [152] £24,119.00 for the year ending 31st December 2019 [161]

108. The Respondent is also not permitted to recover Legal Costs relating to the dispute with the [COMPANY] over their contributions to [NAME] costs and the Litigation for the 2020 and future service charge years.

(b) The [NAME] issue

109. The Applicants’ case is that [RESPONDENT] was not entitled to use moneys from the [NAME] (called the [NAME]) to pay for its Legal Costs, that the fund stood at £98,820 as at 31st December 2015 and by the year ending 2019 had been depleted to minus £10,728 without any of it being spent on ‘items of expenditure which are of a periodically recurring nature’ (Clause 11(a)(iii) Third Schedule). The Applicants argue that £143,522.47 (plus interest) should be restored to the Residents Fund and be deposited in a separate interest-bearing account in accordance with the RICS Code of Practice [34].

110. The Respondent submits this aspect of the claim is outwith the jurisdiction of the Tribunal as it is effectively a breach of trust claim and the Tribunal lacks jurisdiction to make an order for restitution, as confirmed in Solitaire Property Management Company [COMPANY] v Holden [2012] UKUT 86 (LC).

111. Mr [NAME] further submits that if the Tribunal finds that legal costs were recoverable under the lease, it would have no jurisdiction to consider under s27A of the 1985 Act either whether the amount of the legal costs were reasonable or were reasonably incurred. In this, he relies on [NAME] v 7/[ADDRESS] ([NAME]) [COMPANY] [2020] UKUT 208 (LC) (paragraph 67).

112. Following the decision in Solitaire, the Tribunal accepts Mr [NAME] submission it has no jurisdiction under section 27A (or any other power) to consider whether a breach of trust has occurred in respect of the moneys held on trust in the [NAME]. Nor does it have the power to order repayment of money held in trust. These matters fall under the jurisdiction of the County Court.

113. However, as [NAME] makes abundantly clear (at [52] to [54]) the fact that the money used to meet an item of expenditure (in this case legal costs) is

23 held on trust in a [NAME] does not mean that the First Tier Tribunal cannot consider (under s27A) whether the expenditure can be recovered as a service charge, whether the expenditure is reasonable and has been reasonably incurred as Mr [COUNSEL] seeks to suggest. As [COUNSEL] [NAME] confirmed in [COUNSEL], regular service charge contributions made by [NAME] to meet anticipated expenditure in the current year are held on the statutory trust imposed by s42, Landlord and Tenant Act 1987 for the benefit of the contributing [NAME]. At paragraph [53] he rejected a submission made in similar terms to those of Mr [NAME]. ‘If, as Mr [NAME] submitted, the costs of litigation were off limits to investigation by the FTT because they had been drawn down from the [NAME] rather than being demanded as contributions towards anticipated expenditure, it would not be possible for an application to be made under section 27A in respect of any works which had been funded from reserves. If, for example, money accumulated in a [NAME] was used to replace the roof of the building, or to install new window, the effect of Mr [NAME] argument would be that the FTT would be unable to consider whether the relevant costs had been reasonably incurred or the works had been done to a reasonable standard. Those questions are squarely within section 27A, from whatever source the work is funded.’

114. As the Tribunal has determined that the Legal Costs of the dispute with the [COMPANY] are not recoverable as service charge under the terms of the lease it will be for the Respondent now, in the light of the Tribunal’s findings at [104] to [108] to take whatever action is needed in accordance with its fiduciary and legal duties as the trustee of the [NAME]. In the event it does not, the Tenants’ remedy will lie in the County Court.

(c) The apportionment issue

115. The Applicants seek clarification and information from the Tribunal as regards the future apportionment of costs for the management of [NAME] and the contributions payable by the [COMPANY], and submit as [NAME] they should all have been consulted regarding any changes. It is clear from the ‘letters of reservation’ written by [NAME] [RESPONDENT] to the Respondent, and the evidence of Mr [RESPONDENT] and Mr [RESPONDENT] that there has been considerable frustration on the part of some of the [NAME] at the lack of transparency, documentation and the failure to consult Tenants about changes which ultimately have a significant bearing both on costs payable and amenities available to the Tenants of [NAME].

116. The Respondent says this part of the application is not properly framed within an application under s27A of the 1985 Act, and falls outside the jurisdiction of the Tribunal.

117. The Tribunal does have the power under s27A to clarify the terms of the lease as regards the service charge provisions as set out in paragraph 24 above. In this lease, Paragraph 2(b) of the Third Schedule sets out each Tenant’s obligation to pay the service charge. Each Tenant covenants to pay ‘a fair and reasonable proportion….of any outgoings expenses or

24 assessments which may be attributable to or imposed or assessed on the Unit together with any other part or parts of [NAME]’. The percentage share is unspecified. Mr [NAME] in his evidence confirmed, historically Tenants have been required to pay 1/51 of the costs attributable to the Block, in other words the costs are shared equally between the 51 [NAME] of the [NAME]. In relation to the costs to which the [COMPANY] previously contributed a 25% share, the proportion payable by each tenant was calculated as 1.47% (i.e. 1/51 of the 75% share of costs).

118. Paragraph 10(b) of the Third Schedule provides that if the Respondent seeks a contribution from individuals other than lessees of the [NAME] and/or [NAME] then it may but is ‘not obliged to reduce the amount of the costs charges and expenses…to which the Tenant is obliged to contribute’. That clause makes clear this ability to seek a contribution, and the amount of any resulting reduction in the Tenants’ share of the costs is a matter for the Company (i.e. [NAME]) and/or the Landlord alone to decide ‘in its absolute discretion’, a discretion that the Tenant acknowledges. As Mr [APPELLANT] accepts, where there is such an absolute discretion it cannot be exercised arbitrarily, unreasonably or capriciously.

119. It is clear from the Applicants’ statement of case and final submissions that a key expectation from this application was the disclosure of documents and clarification of information from the Respondent regarding arrangements for management of the [NAME] holiday complex. Much of this appears to have arisen on account of the lack of clear information from the Respondent and its managing agents (including CPM). Although Mr [NAME] in his evidence said he had always answered Tenants’ questions this would unfortunately appear not to be the case. [NAME] [NAME] ‘letters of reservation’, the statement of case and the witness evidence of [NAME] [NAME], Mr [NAME], Mr [NAME] and Mr [NAME] all demonstrate that relevant information and documentation about management of the complex has not been forthcoming. The Applicants have other remedies if documents and information requested under the 1985 Act are not forthcoming, but this Tribunal’s jurisdiction is confined to the application for determination of service charge payable under s27A of the 1985 Act.

The applications under 20C of the 1985 Act and paragraph 5A of Schedule 11 of the 2002 Act

120. Having reached those conclusions, the Tribunal considers it just and equitable and is minded to make orders under section 20C and paragraph 5A preventing the Respondent from recovering its costs in connection with these proceedings from the Applicants as the principle issue in dispute (whether legal costs are recoverable through the service charge) is determined in the Applicants’ favour. These orders will take effect unless the Respondent makes representations within 14 days from the date of the decision.

121. Under rule 13(2) of the Tribunal Procedure (First Tier Tribunal) (Property Chamber) Rules 2013 the Tribunal has a discretion to require a

25 party to reimburse to any other party the whole or part of the fee paid by the other party. Rule 13(2) is not caught by the provisions of rule 13(1) under which the Tribunal operates as a no costs forum unless one of the parties has acted unreasonably.

122. The Applicants have paid £100 application fee and a £200 hearing fee. As the Applicants have been successful in the primary element of their application the Tribunal also is minded to order the Respondent to reimburse the Applicants with £300. This order will take effect unless the Respondent makes representations within 14 days from the date of the decision.

26 Appeals

1. A person wishing to appeal this decision to the Upper Tribunal (Lands Chamber) must seek permission to do so by making written application to the First-tier Tribunal at the Regional office which has been dealing with the case.

2. The application must arrive at the Tribunal within 28 days after the Tribunal sends to the person making the application written reasons for the decision.

3. If the person wishing to appeal does not comply with the 28-day time limit, the person shall include with the application for permission to appeal a request for an extension of time and the reason for not complying with the 28-day time limit; the Tribunal will then decide whether to extend time or not to allow the application for permission to appeal to proceed.

4. The application for permission to appeal must identify the decision of the Tribunal to which it relates, state the grounds of appeal, and state the result the party making the application is seeking.

27 Schedule 1 – the Applicants

Mr. and Mrs. [NAME] and [NAME] No 1 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME] and [NAME] No 3 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME] and [NAME] No 7 [NAME], Charmouth, Dorset [POSTCODE]

[NAME] No 8 [NAME], Charmouth, Dorset [POSTCODE]

[NAME] No 16 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME]. [NAME] No 23 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME] No 31 [NAME], Charmouth, Dorset [POSTCODE]

[NAME] No 35 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME] No 39 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME] and [NAME] No 40 [NAME], Charmouth, Dorset [POSTCODE]

[NAME] No 44 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME] and [NAME]

No 45 [NAME], Charmouth, Dorset [POSTCODE]

Mr. and Mrs. [NAME] and [NAME]

No 47 [NAME], Charmouth, Dorset [POSTCODE]

[NAME]

No 50 [NAME], Charmouth, Dorset [POSTCODE]

28 Schedule 2 – the Law The Landlord and Tenant Act 1985 Act (as amended) provides: Section 18 Meaning of “service charge” and “relevant costs” 18(1) In the following provisions of this Act ‘service charge’ means an amount payable by a tenant of a dwelling as part of or in addition to the rent— (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord's costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs. (2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable. (3) For this purpose— (a) ‘costs’ includes overheads, and (b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period. Section 19 Limitation of service charges: reasonableness (1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period— (a) only to the extent that they are reasonably incurred, and (b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard; and the amount payable shall be [COMPANY] accordingly. (2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise. Section 20c Limitation of service charges: costs of proceedings (1) A tenant may make an application for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings before....the First-tier Tribunal....are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or person specified in the application. ... Section 27A Liability to pay service charges: jurisdiction (1) An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to – (a) the person by whom it is payable, (b) the person to whom it is payable,

29 (c) the amount which is payable, (d) the date at or by which it is payable, and (e) the manner in which it is payable. (2) Subsection (1) applies whether or not any payment has been made. (3) An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs, and if it would, as to – (a) the person by whom it is payable, (b) the person to whom it is payable, (c) the amount which is payable, (d) the date at or by which it is payable, and (e) the manner in which it is payable. (4) No Applications under subsection (1) or (3) may be made in respect of a matter which – (a) has been agreed or admitted by the tenant, (b) has been, or is to be, referred to arbitration pursuant to a post-dispute arbitration agreement to which the tenant is a party, (c) has been the subject of determination by a court, or (d) has been the subject of determination by an arbitral tribunal pursuant to a post- dispute arbitration agreement. (5) But the tenant is not to be taken as having agreed or admitted any matter by reason only of having made a payment. ... Paragraph 5A to Schedule 11 of the 2002 Act (as amended) provides: Limitation of administration charges: costs of proceedings (1) A tenant of a dwelling in England may apply to the relevant court or tribunal for an order reducing or extinguishing the tenant’s liability to pay a particular administration charge in respect of litigation costs. (2) The relevant court or tribunal may make whatever order on the application it considers to be just and equitable ..