Rule 13 costs – when is conduct unreasonable?

Introduction

In the recent decision in Willow Court Management Company (1985) Ltd v Alexander [2016] UKUT 290 (LC) the Upper Tribunal (Lands Chamber) has given long awaited guidance on Rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. In three conjoined appeals the Upper Tribunal considered, for the first time, how the Tribunal should exercise its discretion to award costs pursuant to Rule 13 and in particular when costs should be awarded where a party has acted unreasonably in bringing, defending or conducting proceedings.

The facts

In each of the appeals the FTT had found unreasonable behaviour and awarded costs pursuant to Rule 13(1)(b). In Willow Court  Management Company (1985) Limited v Alexander the management  company  had not  properly implemented  the  contractual procedure  for  determining the  service  charge, notwithstanding this having been  explained  in previous tribunal decisions. The FTT found this to have been unreasonable and Mrs Alexander was awarded £13,095 plus  VAT as  a  contribution  towards  her costs.

In Sinclair  v  231  Sussex  Gardens  Right  to Manage  Ltd the FTT found that Miss Sinclair had behaved unreasonably by failing  to  pay  her service  charges, defending herself on what was considered to be spurious grounds, unsupported by sufficient evidence, and in general, behaving unreasonably. She had been ordered to pay £16,800 towards the costs incurred by the RTM company.

In Stone  v 54  Hogarth  Road  London  SW5  Management  Limited Mr Stone had withdrawn his  application for a determination of the service charge shortly before it was due  to  be  heard by  the  FTT. The FTT was satisfied  that  he  had  had  reasonable  grounds  for  commencing  his  application  but nevertheless considered  that  he  had  acted  unreasonably  in  not withdrawing  the application at an earlier stage, after concessions had been made by the landlord and when fewer costs would  have been incurred.  Mr Stone was ordered to pay £2,260.80 towards the costs incurred by his landlord.

The Tribunal’s decision

The Upper Tribunal allowed all three appeals (setting aside the order for costs in each case), stating that the standard of behaviour expected of parties in tribunal proceedings ought not to be set at an unrealistic level. The Tribunal then proceeded on giving general guidance on how the tribunal should approach rule 13 applications.

The Upper Tribunal held that when exercising any power under the 2013 Rules, the tribunal had to give effect to the overriding objective, namely dealing with cases justly and fairly. The ‘unreasonable test’ can be expressed in different ways, including:

• Would a reasonable person in the position of the party have conducted themselves in the manner complained of? Or
• The Sir Thomas Bingham’s ‘acid test’– is there a reasonable explanation for the conduct complained of?

How to apply the ‘unreasonable test’

When applying the test, the tribunal should take a sequential approach, following a three-stage assessment:

1. Firstly, the tribunal must first assess (as an value judgment and not as the exercise of its discretion) whether the conduct complained of is objectively “unreasonable”;
2. Secondly, if the conduct meets the ‘unreasonable test’ threshold, the tribunal must consider whether, in the exercise of its discretion, and taking account of all relevant factors, it is appropriate to make a cost order;
3. Thirdly, if the tribunal considered that it is appropriate to award costs the tribunal must, as a further exercise of discretion, consider the form and quantum of the costs award.

The Upper Tribunal stressed that each case would turn on its own facts. However, “rule 13(1)(a) and (b) should both be reserved for the clearest cases and that in every case it will be for the party claiming costs to satisfy the burden of demonstrating that the other party’s conduct has been unreasonable"

The Upper Tribunal held expressly that a party does not have to show “causation”; thus a party would not have to establish a causal nexus between the costs incurred and the behaviour to be sanctioned.

Litigants in person

The Upper Tribunal held that the standard of reasonable conduct between represented parties and unrepresented parties would differ, recognising that legal advice was often only available at a disproportionate cost to litigants in the tribunal.

The behaviour of an unrepresented party with no legal knowledge should be judged by the standards of a reasonable person who does not have legal advice. The fact that a party ‘acts without legal advice’ is therefore relevant at the first stage of the inquiry. This may also be relevant, to a lesser extent, in the second and third stages.

Parties, especially unrepresented parties, should be assisted to make sensible concessions and abandon less important points, or where appropriate, their entire claim. Such behaviour should not be discouraged by the fear that it will be treated as an admission that the abandoned issues were unsustainable and ought never to have been raised (and thus would arguably be justification for a claim for costs).

When to make a Rule 13 application?

Applications should be determined summarily, preferably without the need for a further hearing, and after the parties have had the opportunity to make submissions. Submissions are likely to be best made in light of a tribunal’s decision, rather than in anticipation of it; applications at an interim stage should not be encouraged.

Who is affected by the decision?

The case will be of interest to all who appear in the tribunal on residential property cases (including service charges, estate management and enfranchisement), agricultural land and drainage matters, rent determinations, and certain other case types – where ordinarily, the FTT is largely a ‘no-costs jurisdiction’.  

Conclusion

Whilst the procedural guidance as to the manner and timing of Rule 13 costs applications, and the structured approach to determining such applications, is welcome, the high bar set by the Upper Tribunal to establish unreasonable conduct is likely to mean that Rule 13 costs are in reality only awarded in exceptional cases. This will be particularly frustrating for landlords, RTMs and management companies when there are no cost provisions in the lease for recovery of litigation costs and they are dealing with persistent non-payers who, as so often is the case, are litigants in person. In such circumstance the best way of seeking to recover Rule 13 costs will be:

1. Write to the litigant in person setting out in clear term what the unreasonable conduct complained of is (eg the weaknesses of his/her case) and set out what the correct legal or procedural position;
2. Advise the litigant in person to take independent legal advice and give him/her the address of the nearest CAB or other free legal advice center;
3. State clearly that Rule 13 costs will be sought if the conduct or situation is not remedied.

If the unreasonable conduct persists, the above should assist the tribunal in finding that the conduct meets the threshold ‘unreasonable test’. But we’ll have to wait and see how the FTT will implement the Upper Tribunal’s guidance.