Strengthening leaseholder protections over fees, charges and services: consultation

2.9 Rebalancing the litigation costs regime

152. Leaseholders and landlords can access the tribunal or courts to enforce lease terms or resolve disputes.

153. Landlords routinely recover their litigation costs from leaseholders, either through the service charge from all leaseholders or as an administration charge from a specific leaseholder, depending on the lease terms.

154. Leaseholders must apply to a court or tribunal to limit their liability for these costs through a “Section 20C” or “paragraph 5A” application.[18] Leaseholders also face little prospect of recovering their own litigation costs from their landlords as leases usually do not give them that right.[19]

i) The problem with litigation costs

155. There are circumstances where landlords should be able to recover their litigation costs from leaseholders. For instance, when a leaseholder has breached their lease in ways that negatively impacts other residents in the building, or when non-payment of charges is limiting upkeep or repairs of the building. In such situations, after landlords have exhausted alternative avenues for resolving the dispute, it is important that they have the ability to address these issues in a court or tribunal and, where appropriate, should be able to recover their litigation costs. We understand this is especially important for resident-led buildings, which depend on service charge income to fund litigation.

156. The current regime creates an imbalance however, as the risk of having to pay their landlord’s litigation costs often deters leaseholders from seeking redress in court or relevant tribunals. Leaseholders face the possibility of being charged thousands of pounds for their landlord’s litigation costs, regardless of the outcome of a case, while having limited prospects of recovering their own costs. In few other areas of law do the parties start from such an unequal position.

157. While some protections exist, the responsibility lies with leaseholders to apply to limit their liability for their landlord’s litigation costs. Furthermore, only those leaseholders specifically named in a Section 20C application receive the benefit of an order protecting against such costs. This means landlords’ litigation costs from disputes involving one or more leaseholders can still be passed on to other leaseholders within the block through the service charge, if they were not named in the application.

ii) How the current litigation costs system operates

158. Generally, leaseholders and landlords can bring a case to both the civil court (e.g. the County Court) and the relevant tribunal. Where leaseholders or landlords bring a case will depend on what the dispute is. For example, landlords can bring a case for the non-payment of a service charge to the relevant tribunal or the civil court; we understand the majority of cases to recover service charge debt are brought in the County Court as a civil debt claim. Leaseholders may access the civil court if their landlord is in breach of the terms of the lease, e.g. failing to keep the building in good repair.

159. In the civil court, the Civil Procedure Rules on recovery of litigation costs apply. For most types of claim, the amount of litigation costs that can be recovered will depend on what “track” the claim is on.[20] Assuming most leasehold claims are on the small claims track (value up to £10,000), this means that the amount of litigation costs that either party can recover are limited to: fixed costs in issuing the claim; loss of earnings and travel costs of the party or witnesses to attend the hearing (capped at £95 per day); expert’s fees; and court fees. Litigation costs incurred in possession claims where the landlord is seeking forfeiture of the lease are also limited by a fixed costs regime under the Civil Procedure Rules.

160. However, if a lease allows a landlord to recover their litigation costs from leaseholders as a contractual term, the Civil Procedure Rules permit the landlord to recover their litigation costs on an indemnity basis (subject to any Section 20C or paragraph 5A application). Under court rules, landlords must include their litigation costs in the “particulars of claim” (part of their court application) if they are relying on a contractual right to costs arising from a term of the lease.

161. Where a landlord issues debt proceedings against a leaseholder (e.g. for an unpaid service charge) in the civil court, if the debt is undefended by the leaseholder, the landlord can apply to the court for a “default judgment”. This is a quick process that does not require a hearing to be held or for a judge to review the facts of the case. As long as the claim is properly pleaded, the judgment in default will include the litigation costs of the landlord, without any judicial intervention. We understand that the majority of claims brought by landlords to the civil court to recover unpaid service charges as a debt are undefended by the leaseholder.

162. Similarly, where a leaseholder admits a debt in the civil court, the County Court will issue an order for the leaseholder to pay the amount admitted. Again, this generally does not require a hearing to be held or a judge to review the facts of the case (for the admitted part of the claim) and will include litigation costs as part of the order, assuming that the landlord has properly pleaded their case.

163. There are cases where the leaseholder admits part of a debt claim and defends the other part of the claim. In these cases, we understand the claim goes to a hearing for a judge to assess the defended part. If a leaseholder defends the whole claim brought against them by a landlord for unpaid service charge in the civil court in relation to the reasonableness or payability of those service charges, we understand the case is typically sent to the relevant tribunal as a service charge dispute. For cases before the relevant tribunal, different rules apply to the recovery of litigation costs.

164. The relevant tribunal can consider cases brought from landlords and leaseholders on a range of issues, including whether a service charge or administration charge is payable or whether it has been reasonably incurred, breach of a lease or variation of a lease, and the appointment of a substitute manager.

165. Usually, each party pays their own litigation costs before the relevant tribunal. However, if a lease allows a landlord to recover their litigation costs from leaseholders, the relevant tribunal does not have power to prevent subsequent contractual costs recovery, meaning landlords can still recover their litigation costs from leaseholders in full (subject to any Section 20C or paragraph 5A application). Rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 allows the tribunal in England to make a costs order where there has been unreasonable conduct. Both leaseholders and landlords can make an application for their litigation costs to be paid by the other party under Rule 13. However, we understand there is a high threshold, and such orders are rarely made. There is no equivalent rule to this in relation to the Leasehold Valuation Tribunal in Wales.