Lea and other leaseholders v GP Ilfracombe Management Co Ltd

Costs – First-tier Tribunal – Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 – Appellant leaseholders defeating claim for service charges by respondent managing agents – Appellants applying for costs – First-tier Tribunal refusing application – Upper Tribunal dismissing appeal – Appellants bringing second appeal – Whether FTT applying appropriate test where one party claiming other acted “unreasonably” – Whether FTT wrongly concluding respondent not acting unreasonably – Appeal allowed The appellants were the leaseholders of properties at Ilfracombe Holiday Park. They appealed against the order of the First-tier Tribunal, subsequently upheld by the Upper Tribunal, refusing them their costs of proceedings in which they defeated in its entirety the claim for £2.4m by way of service charge brought against them by the respondent managing agents: [2023] UKUT 108 (LC). Under rule 13(1)(b) of the Tribunal Procedure (First Tier Tribunal) (Property Chamber) Rules 2013 (as amended), the FTT might make an order in respect of costs only if a person had acted unreasonably in bringing, defending or conducting proceedings. The FTT determined the service charge demands were invalid because they had not been correctly apportioned or, if that was wrong, the sums demanded were neither reasonable nor payable in their entirety. The appeal raised two issues: the first concerned the appropriate test to be applied in circumstances where, as here, one party claimed the other had acted unreasonably and should therefore pay the costs of proceedings which would otherwise be “costs neutral”; the second was whether, on an application of the correct test, the FTT erred in law in concluding the respondent did not act unreasonably and was therefore not liable to pay the appellants’ costs. Held: The appeal was allowed. (1) An assessment of whether behaviour was unreasonable within rule 13(1)(b) required a value judgment. At the first stage, the question was whether a person had acted unreasonably. That did not involve an exercise of discretion but rather the application of an objective standard of conduct to the facts of the case. At the second stage it was essential for the tribunal to consider whether, in the light of the unreasonable conduct it had found to have been demonstrated, it ought to make an order for costs or not. “Unreasonable” conduct could include conduct which was vexatious, and designed to harass the other side rather than advance the resolution of the case. It was not enough that the conduct led in the event to an unsuccessful outcome. If the conduct permitted a reasonable explanation, the course adopted might be regarded as optimistic and as reflecting on a practitioner’s judgment, but it was not unreasonable: Ridehalgh v Horsefield and another [1994] Ch 205; [1994] EGCS 15 and Willow Court Management Co (1985) Ltd v Alexander [2016] EGLR 48 applied. (2) It was important to note that neither Ridehalgh nor Willow Court decided that unreasonable conduct had to involve vexatious conduct or harassment. The Upper Tribunal made clear in Willow Court that unreasonable conduct could include conduct which was vexatious or designed to harass, but it did not require such conduct; that was just one way in which unreasonable conduct might be established. Deciding whether there had been unreasonable conduct and, if so, whether an adverse order for costs should be made, was a fact-specific exercise. A good practical rule was for the tribunal to ask whether a reasonable person acting reasonably would have acted in that way and whether there was a reasonable explanation for the conduct in issue. (3) There was no basis for treating rule 13(1)(b) in any different way to any other jurisdiction which operated a generally “costs neutral” regime. The test in Ridehalgh and Willow Court for unreasonable conduct was consistent with a “costs neutral” regime and it was an impermissible gloss on the rule, and potentially much too restrictive, to elide unreasonable conduct with vexatious or harassing behaviour. The appeal against the finding by the FTT that the respondent’s conduct was not unreasonable was not an appeal against the exercise of discretion but remained an appeal against an evaluative decision. In those circumstances, the appeal court would always allow the original court or tribunal considerable latitude before concluding that its decision could not be allowed to stand. Ultimately, the test was not whether the appellate court would have come to a different decision on the facts, but whether the judge reached a conclusion which no reasonable tribunal could have reached: see Volpi and Another v Volpi [2022] EWCA Civ 464; [2022] PLSCS 65. (4) The court would only interfere with the costs determination of the FTT if the FTT failed to take into account a relevant matter, or took into account an irrelevant matter, or reached a decision no reasonable tribunal could have reached. For the purposes of the present appeal, although the UT’s refusal of the first appeal might be of some relevance, the focus was always on the original FTT decision. The FTT’s substantive conclusions demonstrated that, to all intents and purposes, the original service charge demand was an abuse of the process: an unsupported claim for a huge sum of money, unjustified by any independent documentation, and known by its creator to be invalid. Unsurprisingly, the claim failed in its entirety. The bringing of the claim by the respondent in the first place, and its conduct throughout the FTT proceedings, prima facie appeared to have been unreasonable. Notwithstanding the absence of any explanation at the time, the question was whether there was, in fact, a reasonable explanation for the respondent’s conduct. Although there was some oblique consideration of that issue by the FTT, its reasoning appeared conclusory rather than analytical, which was an error. It meant that either the FTT failed directly to ask itself the right question when considering the costs order or, if it did, it failed to take into account any of the relevant matters in arriving at an answer. Still further, the FTT appeared to regard the application as a matter of discretion when it was a matter of objective fact. (5) In the circumstances of the present case, the FTT failed to ask itself directly the questions identified in Ridehalgh/Willow Court, and/or failed to take into account all relevant matters. Had it done so, it would undoubtedly have concluded that the relevant conduct was unreasonable. Having made the finding of unreasonable conduct, the court was able to exercise its discretion and make an order for costs in favour of the appellants, to be assessed if not agreed. Martin Hutchings KC (instructed by Trowers & Hamlins LLP) appeared for the appellants; Justin Bates KC and Edward Arash Abediah (instructed by Brethertons LLP) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Lea and other leaseholders v GP Ilfracombe Management Co Ltd