Zaid Alothman Holdings Ltd & Ors v Better Intelligent Management Ltd & Anor (COSTS – CONDUCT – what amounts to “unreasonable conduct”) (2024) UKUT 253 (LC)

This was the appellant leaseholders’ appeal from an FTT decision refusing them Rule 13 costs on the freeholder/managing agent’s application for determination of breach of lease which was dismissed for lack of jurisdiction. It isn’t so much of interest for the decision itself (though that is interesting) but about what the conduct of the freeholder, the tangle of the law and the messy outcome say about the state of leasehold law in general.

The property at issue was Phoenix Place, Liverpool, two blocks of purpose built student accommodation, made up of 74 self-contained studios with a bedroom, bathroom and kitchenette, and 274 ensuite bedrooms grouped into clusters with shared kitchen and common room facilities. Each of the studios, or ‘clusters’ was sold on long leases to leaseholders in 2018, who then let them out to students via agents. In that, not untypical of these ‘investment property’ developments. The current freeholder took over in 2020.

The background is

In January 2022 the respondents issued interim service charge invoices to all the leaseholders to cover the cost 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 mid-July the first appellant, Zaid Alothman Holdings Limited (leaseholder of 30 units in Phoenix Place) instructed Mishcon de Reya, and in the weeks that followed the rest of the appellants joined in that instruction and entered into a retainer agreement with the firm. On 22 July Mishcon de Reya wrote to the respondents explaining that they were instructed, 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.

(…)

Meanwhile on 16 August 2022 the respondents had made two joint applications to the First-tier Tribunal, each against all 348 leaseholders. One was for a determination under section 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 section 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.

It was these applications that unlay the present proceedings.

The difficulty with the applications was that as per JLK Ltd v Ezekwe (2017) UKUT 277 (LC)  ‘cluster rooms’, where there is shared accommodation as well as the student’s let room, could not be considered a ‘dwelling’ for the purposes of section 168(4) which gives the Tribunal jurisdiction to determine a breach of lease. The definition of dwelling is as per section 38 Landlord and Tenant Act 1985

“”dwelling” means a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, outhouses and appurtenances belonging to it or usually enjoyed with it.”

The FTT had initially raised Ezekwe with the parties. Rather surprisingly, the freeholder responded that they considered both ‘clusters’ and studios were outside the FTT’s jurisdiction and that they could serve section 146 notices without the Tribunal’s determination. This was surprising because a) it was their application for determination, and b) it had not been mentioned in the application. IT was also surprising because the freeholder’s response then went on to say that there was jurisdiction for the studios but not the clusters and invited the FTT to make a determination of breach of lease for the studios.

One group of respondent leaseholders argued that the position was that there was jurisdiction over the studios, but not the clusters, and another group of leaseholders argued no jurisdiction over either, so the matter went on to a full ruling on jurisdiction.

The FTT decided that it had jurisdiction over the studios, but not the clusters. The leaseholders made a application for costs under Rule 13, which was refused. The leaseholders appealed.

The Upper Tribunal decided that the freeholder’s conduct in making the applications and proceeding with them when it knew that the effect of Ezekwe was that the Tribunal did not have jurisdiction was unreasonable conduct, in particular by not making it clear that it was aware of Ezekwe and that the cluster units were not dwellings, and without first seeking to agree the jurisdiction point with the leaseholders. “Their behaviour was objectively unreasonable; it failed to meet the standard expected of parties who have taken legal advice.”

Costs for the ‘cluster unit’ leaseholders awarded of £19,327

Comment

The costs award seems reasonable – you don’t go round making Tribunal applications against large numbers of leaseholders when you know/have been advised that the Tribunal does not have jurisdiction.

But let’s look at the background.

First – though actual lease clauses are not mentioned in the Judgment – it appears that the leases of these ‘investment units’ demised the windows to each unit to the leaseholder. On a development of separate 348 units, intended to be sold off on individual leases, this is completely deranged on any practical view. Apart from the physical impossibility of the leaseholders individually repairing or replacing windows, there is the issue of co-ordinating hundreds of leaseholders.

This may in part be behind the astonishing behaviour of the freeholder. In the course of 7 months, the freeholder/managing agents

i) issued an interim service charge demand to replace windows, for allegedly urgent reason – which clearly relies on the windows being the freeholder’s responsibility

ii) Served notice on the leaseholders of breach of lease for failing to replace the windows and giving them 56 days to do so!

iii) Two weeks later ‘offered’ to do the works for the freeholders, but only if the leaseholder admitted being in breach of lease!

iv) Then threatened to enter the properties and do the works, and that if the leaseholders tried to do the works this would now be a trespass!

v) Applied to the Tribunal for both determination of breach of lease, and for dispensation from section 20 consultation, even though the latter would only be required if the works costs were to be put through the service charge – ie, the applications were directly contradictory.

Now this is just my opinion, based on no inside knowledge whatsoever, but this looks like a freeholder faced with a very difficult position (of its predecessor’s making in the drafting of the leases) and – assuming that the window works were indeed urgent – trying to legally bully and threaten its way through in a way that would be most advantageous for it. But that would only work if the leaseholders didn’t get competent legal representation (which here, they did).

Then we have the Ezekwe position, where the accommodation in which someone lives is not ‘a dwelling’ where it shares other living spaces and facilities with another separately demised unit, for the purposes of section 38 Landlord and Tenant Act 1985. This may need revisiting.

But there we are, it is amazing how complicated and painful these ‘high return investment unit’ leases can be…