Mahbobeh Eshraghi & Ors v 7/9 Avenue Road (London House) Ltd

The First-tier Tribunal has a wide jurisdiction under Landlord and Tenant Act 1985, section 27A, to determine whether litigation costs are recoverable as service charges. That jurisdiction is not defeated because the landlord has met the costs from a reserve fund held on trust. It does not, however, extend to ordering repayment to that fund or determining a breach of trust.

Whether litigation costs are recoverable depends on the lease and the nature of the costs. Broad good-estate-management wording may include reasonably incurred costs of protecting building management or pursuing service-charge arrears, including costs of reasonably conducted but unsuccessful litigation. It does not include costs of a dispute concerned solely with corporate control. Corporate expenditure and company-secretarial services must be apportioned where they fall outside the service-charge covenant.

The appellants were current or former leaseholders of flats in a block whose landlord was a company largely owned by other leaseholders. Their application under Landlord and Tenant Act 1985, section 27A, challenged service-charge expenditure in 2016 and 2017.

The challenged items included costs of High Court proceedings over the company’s directorship, litigation concerning Flats 48 and 50, accountancy charges, and managing-agent fees. The First-tier Tribunal decided on 16 May 2018 that it lacked jurisdiction to consider the use of reserve-fund money for the High Court litigation, and rejected most of the remaining challenges. Permission to appeal was granted and the Upper Tribunal conducted a rehearing of the permitted issues.

The central questions were whether the disputed expenditure was recoverable under the leases and whether the First-tier Tribunal had adequately addressed the evidence.

1. The appeal was allowed in part. The Tribunal allowed the appeals on jurisdiction, corporate accountancy costs, and the limited issue concerning company-secretarial services within the managing-agent fee. It dismissed the appeal concerning the litigation over Flats 48 and 50.

2. Section 27A of the Landlord and Tenant Act 1985 has a wide ambit. It permits the First-tier Tribunal to determine whether an incurred or anticipated cost is recoverable as a service charge, irrespective of whether it has been demanded or has been funded from a reserve account. The inquiry is into the lease and the nature of the cost. The Tribunal cannot order restoration of trust money or determine whether a breach of trust occurred. The First-tier Tribunal had therefore taken too narrow an approach.

3. Under paragraph 11 of the lease, costs incurred before 26 October 2016 in restraining purported directors from interfering with management, the managing agent, and lift works were for the benefit of the building or in the interests of good estate management. They were recoverable through the service charge. Once undertakings and injunctions had secured ordinary management, the continuing High Court dispute concerned corporate control only. Costs incurred after that date were not recoverable under paragraph 11 or paragraph 5.

4. The costs of proceedings to recover service-charge arrears from the Flat 50 leaseholder were recoverable to the extent not recovered from him or his mortgagee. The costs of the Flat 48 proceedings were also recoverable. Although the landlord ultimately had to repair the balustrade and contribute to the leaseholder’s costs, it had reasonably acted on professional advice, accepted a jointly instructed expert, and avoided a more costly trial. The costs remained subject to section 19 reasonableness requirements.

5. The landlord could not withdraw its admission concerning corporate expenditure. In any event, not all leaseholders were members of the landlord company, which materially distinguished authorities concerning leaseholder-owned management companies. Corporate accountancy costs of £1,324 in 2016 and £4,924 in 2017 were excluded. The managing-agent fee was not otherwise unreasonable, but £500 in each year was apportioned for company-secretarial services.

The parties were directed to make submissions on section 20C and the appeal costs.

• Upper Tribunal (Lands Chamber): Appeal from the First-tier Tribunal (Property Chamber) allowed in part. The Tribunal determined the permitted issues afresh after finding that the First-tier Tribunal had made almost no relevant factual findings.
• First-tier Tribunal (Property Chamber): Decision of 16 May 2018. It rejected most challenges to the service charges and declined an order under section 20C of the Landlord and Tenant Act 1985.