Kathryn Anne Lea & Ors v GP Ilfracombe Management Company Limited & Ors

In the First-tier Tribunal’s service-charge jurisdiction, rule 13(1)(b) requires an objective assessment of whether a person acted unreasonably in bringing, defending or conducting proceedings. There is no separate threshold of exceptionality, although costs orders remain unusual because the jurisdiction is exceptional. The inquiry follows the three stages identified in Willow Court Management Company (1985) Limited v Alexander [2016] UKUT 290 (LC): unreasonable conduct, whether costs should follow, and the terms of any order. The first stage involves an evaluative value judgment, not a discretion. On appeal, the Upper Tribunal asks whether the conclusion was open to the FTT on relevant material and without irrelevant material. The reasonableness of the process for setting estimated service charges concerns the budgeting decision itself, not the company’s internal corporate organisation.

The appellants were 195 long leaseholders at Ilfracombe Holiday Park. The FTT had determined that the 2021 service charges demanded by GP Ilfracombe Management Company Limited were invalid and, alternatively, unreasonable and not payable. The leaseholders then sought costs under rule 13(1)(b) against the management company, Mr Michael Gubbay, its representative, and Epworth SW Ltd, its managing agent.

The FTT ordered GPIMCL to pay £864 for unreasonable conduct in applying to withdraw the service-charge proceedings and then seeking to withdraw that application. It otherwise refused the costs application. The leaseholders appealed, alleging that the FTT had applied an exceptionality threshold and had assessed the conduct too narrowly.

1. Appeal dismissed. The FTT had applied the correct test. Its reference to “exceptional circumstances” was descriptive and did not create an additional threshold. Rule 13(1)(b) concerns unreasonable conduct, while the jurisdiction remains exceptional in the sense that parties will usually bear their own costs.
2. The three-stage approach in Willow Court Management Company (1985) Limited v Alexander [2016] UKUT 290 (LC) was applicable: first, determine objectively whether the conduct was unreasonable; secondly, decide whether a costs order should be made; and thirdly, determine its terms. The first stage is not discretionary, but it is an evaluative decision involving a value judgment on which views may differ.
3. The FTT had considered the substance of the complaints. It was entitled to conclude that bringing proceedings to obtain a determination of contentious service charges was not unreasonable merely because the demands were ultimately invalid and unreasonable, or because the application was made before payment was due. It was also entitled to treat the procedural defaults, alleged conflicts of interest and hearing conduct as insufficient to justify a further order.
4. The two-stage reasonableness principle discussed in London Borough of Hounslow v Waaler [2017] EWCA Civ 45 concerns the decision to incur the service charge, or, for estimated charges, to plan, budget, estimate and demand them. It does not turn on the company’s internal organisation or compliance with company-law formalities. The FTT was entitled to consider the parties separately and to avoid being influenced by unrelated High Court fraud proceedings or by looking through the corporate veil.
5. The FTT’s conclusion that the conduct, apart from the withdrawal applications, was not unreasonable was open to it on the evidence. The existing £864 order against GPIMCL was undisturbed.

• Upper Tribunal (Lands Chamber): dismissed the appeal against the FTT’s costs decision, while leaving undisturbed the £864 order against GP Ilfracombe Management Company Limited. The decision appealed from was dated 14 June 2022; no citation for it was stated.