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Upper Tribunal decides that commencing proceedings without first sending a letter before action is unreasonable conduct

The Upper Tribunal has allowed an appeal against the FTT’s refusal to make a rule 13 costs order on the basis that the conduct of both the landlord and management company in bringing the proceedings “in the form they did”, in particular without first sending a letter before action, was unreasonable. 

This case is a salutary warning that legally represented parties who do not engage in pre-action correspondence may be held to have acted (objectively) unreasonably and, as a result, be subject to an adverse costs order. 

Jonathan Upton, instructed by Joanna Lampert, Sarah Heritage and Hannah Morris of Mishcon de Reya, acted for the successful appellants. 

The factual background

Phoenix Place comprises 348 units of purpose-built accommodation in two blocks, completed in 2018. There are two types of unit: 74 self-contained studios with a bedroom, bathroom and kitchenette, and 274 ensuite bedrooms grouped into clusters with shared kitchen and common room facilities. All the units (studios and cluster units) are held on long leases as income-producing investments, and let out to students by agents; many of the long-leaseholders live abroad. The leases contain covenants to keep the demised premises in good repair and condition and to pay a service charge.

The first respondent, Better Intelligent Management Limited, is the freeholder; the second respondent, Phoenix Place (Liverpool) Management Limited, is the management company responsible for day-to-day management of the property.

In January 2022 the respondents issued interim service charge invoices to all the leaseholders to cover the cost (circa £4.8m) of replacing the windows in Phoenix House, which they claimed was needed as a matter of urgency. The sums demanded ranged from £7,459 to £21,717 depending on the number of windows in the relevant unit. The appellants did not pay those invoices. On 1 June 2022 the respondents served notices on the leaseholders asserting that they were in breach of the covenants in their leases and requiring them to replace the windows in their units within 56 days. On 16 June the respondents wrote to the leaseholders offering to replace their windows as part of a large-scale project, with associated costs savings; they said that the offer could be accepted only if the leaseholder admitted to being in breach of covenant as stated in the letter of 1 June 2022. On 20 June 2022 the respondents served consultation notices under section 20 of the Landlord and Tenant Act 1985 in relation to the replacement of the windows.

In July 2022 Mishcon de Reya (MdR) wrote to the respondents explaining that they were instructed by a group of leaseholders, acknowledging the communications sent by the respondents and asserting that they were acting in breach of the leases, unreasonably and in bad faith. No response was received.

On 28 July 2022 the respondents’ solicitors wrote to the leaseholders asserting that, as they had not carried out the work as required within 56 days of 1 June, the respondents were entitled to enter the unit, execute the works and recover the cost as a debt; and furthermore that for the leaseholder to attempt repairs would now be a trespass that could be restrained by injunction.

MdR wrote to the respondents’ solicitors on 29 July seeking confirmation that no injunction would be sought, and “that no attempt will be made to forfeit any lease on the basis of non-payment of service charge or breach of repair obligations without (a) service a s.146 notice (having first sought a determination from the FTT (where appropriate)); and (b) other than by proceedings”. On 3 August 2022 the respondents’ solicitors replied, refusing to give the confirmations requested. MdR wrote to the respondents’ solicitors providing a list of those whom they represented and suggesting a meeting between the respondents’ surveyors and the appellants’ surveying team to try to agree what work was needed. No response was received.

On 3 November 2022 MdR wrote to the respondents’ solicitors again, chasing for a response, and repeating the requests for confirmation contained in the letter of 29 July 2022. No response was received.

Meanwhile on 16 August 2022 the respondents had made two joint applications to the FTT, each against all 348 leaseholders. One was for a determination under s.168 of the Commonhold and Leasehold Reform Act 2002 that the leaseholders were in breach of covenant because they had failed to repair their windows. The second was for a dispensation from consultation requirements, under s.20ZA of the 1985 Act in respect of the replacement of all the windows, on the basis that it was urgently required to be done during the summer vacation while the students were away. The appellants knew nothing about those two applications until they were served on all the leaseholders on 4 November 2022.

On 28 October 2022 (prior to service of the applications on the appellants) the FTT issued a “Case Management Note and Directions” which said: “Following a preliminary review of the applications a procedural judge is concerned that the Tribunal may not have the jurisdiction to determine either all or part of the applications because all or some of the individual student units may not constitute dwellings within the meaning of the Landlord and Tenant Act 1985…”.  The FTT gave directions requiring the respondents to serve on the appellants their applications and a copy of the directions within 7 days and both parties to make representations with 28 days of the date of directions.

In their written submissions, both parties referred to JLK Ltd v Ezekwe [2017] UKUT 277 (LC) and submitted that the cluster units were not dwellings and the FTT did not therefore have jurisdiction to determine the applications in respect of those units.  The FTT agreed and dismissed the applications in respect of the cluster units. 

The appellants applied for a costs order under rule 13 on the basis that the respondents had acted unreasonably in bringing proceedings against persons (ie the owners of the cluster units) which (as the respondents later admitted and averred) the FTT had no jurisdiction to determine. The appellants also relied on the respondents’ failure to send a letter before action and submitted that, had they done so, the parties could have agreed the position as to jurisdiction and avoided incurring any costs.  The respondents argued that the applications had been made “out of abundance of caution”, that their purpose was to establish the legal position with certainty and that they had not acted unreasonably.

The FTT held that the respondents had not acted unreasonably and refused to make an order for costs.  In giving permission to appeal, the UT (Martin Rodger KC, Deputy President) stated: “The proposed appeal raises an issue of principle about the standard of conduct by professional representatives in tribunal proceedings which merits consideration by the Upper Tribunal and in respect of which the proposed grounds of appeal are arguable. That issue is whether professionally represented parties should be expected to avoid unnecessary tribunal proceedings by first seeking to identify such common ground as may exist through pre-application correspondence, and whether commencing tribunal proceedings without first sending a letter before action is unreasonable conduct.”

The appeal

The UT (Judge Elizabeth Cooke) held that the respondents behaved unreasonably in bringing the proceedings in the form they did, without telling the FTT that they were aware of Ezekwe and knowing that the cluster units could not be dwellings, and without first seeking to agree the position on jurisdiction of which their solicitors were aware.  Had they done so, they would have been able to agree either not to bring proceedings at all, or to bring them on an “out of caution” basis and accompanied by an application, with the appellants’ agreement, to strike out the application as against the cluster units. Their behaviour was objectively unreasonable; it failed to meet the standard expected of parties who have taken legal advice.

The UT acknowledged that it might have been difficult to reach agreement about jurisdiction with all the leaseholders (there were other leaseholders not represented by the same solicitors) but held “That was not a reason not to send a letter before action, since to do so would be no less practicable than to serve service charge demands, for example, or indeed the FTT proceedings themselves. But I accept that correspondence before action might not have resulted in agreement with all the leaseholders … What we do know is that the respondents did not check with the very people who were in fact trying hard to communicate with them, and who had pointed out to them the necessity to make a section 168 application, namely the solicitors for these appellants. Had they done so the appellants would have agreed that the cluster units are not dwellings ... Their behaviour was objectively unreasonable; it failed to meet the standard expected of parties who have taken legal advice.”

The UT ordered the respondents to pay the appellants’ costs in the FTT.  A copy of the judgment has been included below. 

Jonathan Upton, instructed by Joanna Lampert, Sarah Heritage and Hannah Morris of Mishcon de Reya, acted for the successful appellants.  The same team was also successful in the related court proceedings.