It has been announced that Section 131 of The Housing and Planning Act 2016 will come into force on 6th April 2017 (S.I. 2017/281) in a change which will increase the risk to landlords that the costs they incur in litigation may not be fully recoverable as an administration charge from a lessee, even where a contractual entitlement to recover these costs in such a manner exists. This is expected to operate in a similar manner to Section 20C of the Landlord and Tenant Act 1985, albeit this allows a lessee to make an application for the landlord’s costs of proceedings to not be regarded as relevant costs when determining the service charges (as opposed to an administration charge) that are payable by that lessee.
To remind ourselves of what s.131 says, it states:
(1) A tenant of a dwelling in England may apply to the relevant court or tribunal for an order reducing or extinguishing the tenant’s liability to pay a particular administration charge in respect of litigation costs.
(2) The relevant court or tribunal may make whatever order on the application it considers to be just and equitable.
It then goes on at sub-section (3) to define “litigation costs” as being “costs incurred, or to be incurred, by the landlord in connection with proceedings…”, with these proceedings being those either in the courts, the First-tier Tribunal, the Upper Tribunal or at arbitration. Sub-section (3) also defines “the relevant court or tribunal” as where the proceedings take place, or in circumstances where a s.131 application is not made until the conclusion of earlier court or arbitration proceedings then this shall be the county court.
Lessees are currently afforded protection in terms of administration charges by Schedule 11 of the Commonhold and Leasehold Reform Act 2002, with paragraph 2 of such stating that an administration charge is only payable to the extent that it is reasonable. It is clear however that it is Government’s intention for this protection to be increased through s.131, and below are a few circumstances in which a court or tribunal may consider it just and equitable to make such an order:
- Disproportionate costs – if the landlord’s costs are disproportionate to the principal matter of litigation i.e. instructing a QC with a high hourly rate in respect of a £750 service charge dispute.
- Equitable set-off – if the landlord has failed in terms of one or more of its obligations to the lessee i.e. failing to maintain the gardens of the development to a reasonable standard.
- Outcome of litigation – if the lessee is successful to any extent in the litigation i.e. a reduction in the level of service charge arrears due to the higher amount having been unreasonable.
To protect against the risk of being subject to a s.131 order, landlords and managing agents may wish to take a more considered approach before commencing litigation whilst also ensuring that they and their representatives have a full understanding of both the strengths and weaknesses of their case. Unlike s.20C orders which prohibit the recovery of the landlord’s costs in their entirety from the lessee through their service charge payments, s.131 provides the courts and tribunals with the jurisdiction to make whatever order they consider to be just and equitable and it is perhaps likely therefore that s.131 orders will be much more commonplace than their s.20C counterparts, albeit serving in most instances to simply reduce the lessee’s liability to pay the landlord’s costs as an administration charge rather that doing away with this liability all together.
I hope that this blog has been helpful and of interest to you; should you wish to discuss the potential implications of s.131 on you & your clients further, or should you require advice or representation in relation to any current or future proceedings, then please do not hesitate to get in touch.
NW
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