Costs Conditions on Dispensation, and the (Non)Payability of pre-2022 Act costs: Part 1 – Costs Condition

UPDATE: Permission has been granted for this decision to be heard in the Court of Appeal, probably in 2024. There are 2 grounds of appeal: 1) Relating to whether the scope of para 9 extends to costs of pursuing a s20ZA dispensation application; 2) Relating to whether costs incurred and or payable prior to the BSA22 came into force are rendered no longer recoverable by Sch 8 provisions i.e. extent to which the leaseholder protections have retrospective effect.

This two-part post discusses an important Upper Tribunal decision by the Chamber President, Adriatic Land 5 Limited v the Long Leaseholders at Hippersley Point. The first part addresses when it is appropriate to impose a costs condition on granting dispensation under the Landlord and Tenant Act 1985, section 20ZA. The following part discusses what is often referred to as retrospectivity: in outline, Adriatic Land decided that the protected status of qualifying leaseholders under Sch 8, para 9 of the Building Safety Act 2022 applies to landlord’s costs incurred pre-commencement.

The Dispensation Application

The landlord applied under s20ZA for prospective dispensation from the consultation provisions in the Landlord and Tenant Act 1985, section 20. A landlord who has not complied with (or, in prospective cases does not propose to comply with) the s20 consultation requirements is prevented by statute from recovering more than £250 per leaseholder in relation to the works unless dispensation is granted.  The property was a mixed-use block with 32 flats; all long leaseholders were respondents. Two reasons are given for the application. First, although consultation had begun it had not been completed because the ‘interim works are urgent’. From the decision, it appears likely that these relate to the extension of the fire alarm system. In addition, the landlord entered a design and build contract (presumably for the full remediation works) which meant that ‘the applicant is unable to complete the consultation process’. The FTT was ‘unimpressed’ with this, commenting that the use of design and build does not preclude consultation. The FTT noted that the applicants had ‘to a limited degree at least sought to keep the leaseholders up to date as to the proposed works’.  Some leaseholders objected to the application to dispense with consultation, claiming that there had been sufficient time to consult, and that they wanted more time to consider the documentation and to seek alternative contractors for the tender process.

The FTT had ‘no hesitation’ in granting dispensation as the landlord was seeking to make the building safe as soon as possible. In its Original Decision on 20 December 2021 it included a section 20C order preventing the costs of the dispensation application being recovered from the leaseholders. Following the landlord’s request for review, the FTT issued a Reviewed Decision on 30 June 2022 which replaced the section 20C order with a condition stating that the landlord was ‘prohibited from seeking their costs of this application from the leaseholders at Hippersley Point’. The reasons given were that dispensation is ‘essentially a forbearance by the Tribunal’, and it would be unfair for the landlord to recover the costs from the leaseholders in this instance.

The Costs Condition

The Upper Tribunal held that for both procedural and substantive reasons the FTT had been wrong to impose the costs condition. There were three procedural flaws: neither party had requested it, there was no opportunity for the parties to make submissions on its imposition, and in the exercise of its discretion the FTT had not considered the non-recoverability of costs against qualifying leaseholders under para 9 (the retrospectivity point discussed in Part 2). As most dispensation applications are unopposed this means that costs conditions will be infrequent.

In addressing the substantive reasons the Upper Tribunal does not agree that dispensation here is ‘properly described as a forbearance’: the applicant was ‘about as blameless as it could be’ and was ‘not seeking to avoid its responsibilities’. Nor was it unfair for the applicant to recover its costs as they ‘might legitimately be described as essential expenditure for the benefit of the Building and the safety of the Respondents’.

The reference to forbearance stems from comments in Daejan Investments Limited v Benson where Lord Neuberger PSC drew an analogy between dispensation and the grant of relief from forfeiture on terms.  In relief from forfeiture cases the tenant (in breach) is seeking the indulgence of the court and the court may therefore require the tenant to pay the landlord’s costs. In dispensation cases the landlord is seeking to avoid the statutory cap imposed if there is no consultation; hence the Supreme Court in Daejan held that as the landlord there was seeking an indulgence it had to pay the leaseholders’ reasonable costs in connection with their participation in the dispensation application.

In Adriatic Land, the Upper Tribunal links this aspect of Daejan to the landlord’s conduct, noting that in Daejan the conduct of the landlord in failing to complete the consultation process was subject to ‘considerable criticism’. The Chamber President notes in Adriatic Land that, in contrast, the landlord had not been seeking to avoid its responsibilities and the landlord’s failure to consult had not caused any prejudice to the leaseholders. This echoes the approach in another Upper Tribunal case, Holding & Management (Solitaire) Limited v Leaseholders of Sovereign View, which likewise set aside a FTT condition preventing the landlord from recovering its own costs, and again treats the dispensation not as an ‘indulgence’ but as sensible and in everyone’s interests [30].

Commentary on the Costs Condition

The focus of a dispensation application is effectively on whether a landlord who fails to consult should be prevented from recovering the full costs of the works by the statutory cap on service charge recovery. Whether this cap should be lifted (dispensation granted) is different from the question of who should pay the significant costs associated with making dispensation applications.

There will be situations in which is appropriate for the application costs to be paid by the leaseholders. This might be if there is an immediate threat or problem that must be fixed in a timeframe that makes full consultation impossible. In such a context it is, indeed, inapt to think of the dispensation application as an indulgence as the landlord is left with no choice. Or it may be that delay will lead to mounting costs to the leaseholders, as in Holding and Management (above) where the application was for the installation of a fire alarm system to enable the landlord to dispense with a waking watch. There is, however, a risk that readily granting dispensation without attaching costs conditions makes it easy for landlords to avoid consulting leaseholders and engaging with their observations etc. Although the s 20 consultation process is time consuming (with leaseholders being given time to submit observations etc), it is not particularly onerous. The ‘urgency’ flag is easily raised in the context of fire-safety but complex remediation projects take considerable time to plan and commence. Often this will provide sufficient time to consult leaseholders.

In Adriatic Land the application appears to encompass two projects: the interim measures and the full remediation project. Perhaps consultation might have been possible for the latter if not the former, especially as the FTT said it was unimpressed with the applicant’s statement that consultation is not possible with design and build contracts (note: this is not remarked on by the Upper Tribunal). The tenor of the new building safety regime is to promote fuller engagement with leaseholders and residents, recognising that consultation has an inherent value. This value was acknowledged by Lord Wilson (dissenting) in Daejan (although Lord Neuberger sees consultation as focussed on the goal of ensuring that tenants pay reasonable sums for necessary works to an acceptable standard).

A distinction based on good/bad (responsible/irresponsible) landlord behaviour is also a slippery slope. In relation to the issue of whether to grant dispensation, Lord Neuberger did not see this as determinative in Daejan and he considered at [47] that distinguishing between serious and minor failings would lead to unpredictable outcomes and subjective assessment. Indeed, Lord Neuberger noted that although Lord Wilson took an ‘unfavourable view of Deajan’s failure’ it might, to others, seem not to be a ‘serious failing’.

The Upper Tribunal in Adriatic Land accepted that there are similarities between a costs condition and  a s 20C order. As this prevents a landlord from passing on its costs through the service charge it ‘interferes with the parties’ contractual rights and obligations’ and ‘Tribunals adopt the approach therefore that section 20C orders ‘ought not to be made lightly or as a matter of course’ (re SCMLLA (Freehold) Limited [27]). There are, however, important differences between a costs condition on dispensation and s20C orders. In s20C cases it is the court order that prevents the landlord from enforcing its contractual rights. In dispensation cases it is the court order that enables the landlord to avoid a statutory cap on recovering costs. The landlord avoids a very significant penalty that would otherwise follow from the failure to consult; whether it should bear the costs of the application to avoid this penalty is a decision that a tribunal must make in the round. With prospective applications, FTTs invariably grant dispensation in fire safety cases (unsurprisingly, due to concerns about urgency and safety). It does not necessarily follow that consultation was impossible, and this is something that the imposition of conditions can take account of.

As the outcome in Adriatic Land enables the landlord to recover its costs, the Upper Tribunal also considered whether some of those costs were now made irrecoverable by the Building Safety Act 2022. This is discussed in Part 2.