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Avoiding and Resolving Disputes involving Residents Associations

Disputes involving residents associations need special care. First, they can involve a group of interested persons - the owners of flats or houses in an estate or block and sometimes a company of theirs - against an opponent who may be one or more members of that group, a neighbour, a lessor or a developer. Secondly, the disputes can involve intense feelings, for example over the interpretation of words in documents to do with the manner of use or occupation of property or over ethics of conduct.

A lease owner, if he/she is the claimant party against the entity which charges him/her service charges, can be liable to underwrite in part the costs of the defendant party; even if this duty to contribute is avoided by a means which will be explained below the outcome can still leave the defendant management entity insolvent and therefore the block needing to be re-constituted in its management structure. Thus, recourse to the civil justice system for resolution of any dispute can have additional risks and problems beyond the usual ones, as if they were not bad enough.

To resolve a dispute which impacts on a large group there can be a need to gain a necessary level of support of the group’s members. Support comes in various forms and the most critical is often funding. Each situation needs to be looked at for its particular components. A group of dedicated and pro-active owners usually has to take the lead. A civil claim can be brought directly (with owners as claimants), through using the ‘representative claim’ procedure or through suing in the name of the management entity if it has a cause of action.

There is always a need to liaise with owners for evidence and support. A database of their email addresses and phone numbers should be kept.

Questionnaires may need to be sent to the members of the represented group to obtain necessary information. It can be best to leave this to your solicitor so that it is privileged from the need to be disclosed to an opposing party.

Access to flats may be necessary, possibly on repeat occasions and possibly for hours at a time. This will have to be organised by clients because it would make the dispute uneconomic for the solicitors to arrange it, with all the time involved. Leases typically contain the necessary powers.

Prevention of disputes is far better than cure. For any block of 5 units or more, the best form of prevention of internal disputes may be to re-constitute as a commonhold scheme, which is the better alternative to leasehold. But unfortunately commonhold has not yet found favour with important parts of the property industry.

Otherwise, if there must be a cure then it is more efficient if done by discussion and agreement and learning to live with the other party better in the future - rather than by litigation.

These notes describe matters affecting the various types of residents associations which exist and look at the typical issues which give rise to disputes.

These notes have been written by James Brenan, a solicitor, as general guidance. They are not a substitute for proper advice on the facts of any situation and no responsibility is accepted for action taken without first obtaining specific advice from retained solicitors or specialist counsel.

Take an overview

Any solicitor, before advising, has to research and establish several matters. First, the title structure – this means obtaining Land Registry title entries for the freehold, any head lease and all leases of individual units, and any relevant further deeds. Ownership and control over the reserved or common parts should be checked, along with the locus of authority in regard to the enforcement of covenants, grants of licences and the right to forfeit for breaches of covenants. Restrictive covenants affecting the freehold and all leases are another matter to look for – these will be apparent from the title registers unless they pre-date 1926.

Leases of individual flats have to be read. Sometimes it’s necessary to find original purchase agreements as well, since claims under contract may be easier to pursue than under the lease.

The next level of investigation is the constitutional documents of any company or trust. If this is any type of company, then a search needs to be done at Companies House. (Where more than 4 persons hold property together they have to operate through a company or through a trust with up to 4 trustees.) Sometimes a dispute can arise from the defective way in which a tenants’ collective acquisition of freehold was put together – e.g. owing to the lack of a participation agreement and the possibility of there being a trust which binds the new entity to act in a certain way. Evidence of how the freehold title purchase was funded may have to be sought, starting with the accounts of any such company from its first year and all later years.

If there is a management company, your solicitor needs to first see its origins and type. It could be a party to the leases – possibly with the sole right and duty to manage – or it could be a more recently formed company, possibly with the same name as an earlier company which was a party to the leases but with a different registered number (meaning that it is a different company entirely), or a voluntary association of lessees with no status under the leases or a statutory Right To Manage (“RTM”) company. (If the management company is a party to leases an interesting question arises when any new lease comes to be granted by the lessor: can the lessor call on that company to execute the new lease of a flat and what are the consequences if one new lease is granted that differs from those granted already?)

Transactions of the company need to be prepared with great care, especially if the other party is one of its directors. Any dealing by the company with one of its directors will only be valid if the company’s constitution is observed. The generous dispensations that company law lays down in favour of outside parties acting in good faith will probably not apply.

One fundamental question will be: does this company have the power under its documents to raise the money needed to do what is being asked? Or can that power be created by some change which is feasible? And if something has been done ultra vires or so as to create a monetary liability which is beyond the company’s power to raise funds then what are the consequences – particularly personal liability of the directors – and is any ‘directors and officers liability insurance’ able to cover the situation?

Equally, when looking at liabilities of the company, bear in mind how these will have to be funded. If they will have to be funded via service charges, then any judgment for a liability going back over time may in practice be unenforceable. Section 20B of the Landlord and Tenant Act 1985 stops liabilities incurred more than 18 months previously being charged to lease owners unless a detailed warning letter has been sent within those 18 months. If the management company has no assets, can it easily be put down and a new one started up in its place? Is such a company therefore worth suing?

If a company is a Single Project Vehicle without funds and so exists to insulate its parent against unwanted liabilities, it’s always worth consider if the use of the company has been genuine and not a sham.

Another question can be whether a particular claim lies in the right and power of the management company to pursue or whether it is owned solely by the lessees who therefore would need to act as individuals. Some claims, although owned by the lease owners, can actually be pursued by the company which manages their block’s maintenance and service charges by virtue of “representative claimants” provisions in the Civil Procedure Rules.

A last factor to bear in mind is the amount of time elapsed since the cause of any dispute came about. The general limitation period for civil claims is 6 years or 12 if the claim arises from breach of a deed. Courts tend to favour the harsh application of limitation rules as a way of cutting down litigation. A case which is only started near the end of a limitation period is often a much harder one to bring than one brought soon after the cause of action has arisen. This is for a number of reasons, one being that any amendment to the case after the expiry of the limitation period will be disallowed if it seeks to introduce a new claim, which is a concept that case law interprets widely.

Getting enough support

With a voluntary association – that is, one where there is no compulsory tie between ownership of a flat and membership of the association of owners - individuals cannot be required to join an association and so to contribute funds. The law balks at forcing individuals to incur expenditure and risk when they have never promised to pay towards seeking the goals of a faction or majority within their group.

Trustees or committee members of voluntary associations of owners or residents have no right of recovery against persons who take the benefits of their efforts – “free riders” – unless they are defending the trust property or fund against some wrong done to it and then they can claim recourse to the trust property or fund (not without risks though).

An incorporated body which proposes to take some action involving expense for the benefit, it hopes, of the class which it represents cannot - unless it has a contractual right to do so - call on its member for funds. In situations involving companies, such a right can only come from the company’s articles of association if it has been included there from its incorporation: articles of association are not allowed to be altered so as to impose additional financial burdens on members (see s.25 of the Companies Act 2006).

This often puts voluntary residents associations at a disadvantage in any dispute with an external landlord or managing agents. What tends to happen is that a minority of active and aggrieved lessees are faced with carrying the costs and burdens of litigating for the potential benefit of all. Not surprisingly, many give up before they start and where the litigation does proceed there is often a severe inequality of arms. In exceptional situations, where the dispute is sufficiently high in its value and the dispute is before a forum where costs are recoverable from the losing party, a ‘representative claim’ can be mounted with external funding – say from solicitors acting under a ‘conditional fee agreement’ supported by ‘after the event insurance cover’ and insurance cover too for ‘own disbursements’ – and with some flow of cash from somewhere to pay for disbursements in the meantime.

The law does not impose mandatory residents associations with powers to requisition funds for pursuing wrongdoers. There are ways for tenants to take over the management of their blocks – the (fault-based) right to seek appointment of a manager under the Landlord and Tenant Act 1987 and, more significantly, the Right to Manage under the Commonhold and Leasehold Reform Act 2002, and to force altering of the documents constituting their blocks, see below.

Upgrading of lessees’ rights in the long term

Rules of collective enfranchisement – for leaseholders to acquire the freehold of their block - and the right to manage indirectly provide ways of reconstituting matters so flat owners have greater rights. Those statutory schemes apply only in limited circumstances and they depend on a certain majority support. Blocks, for example, where the commercial element exceeds 25% of the interior spaces or that are not self-contained do not come under those statutory schemes. Where the block is enfranchised or the right to manage is requisitioned by only a fraction of all the lease owners this results in continuing tensions between the “haves” and the “have-nots”. For any block which qualifies under relevant laws, a bare 50% of the qualifying owners can stage a take-over of ownership via collective enfranchisement.

Another way for leaseholders possibly to improve their position is to take up the fault-based jurisdiction of the First-tier Tribunal to put management of a block in the hands of its own appointed manager. The right applies in respect of “premises consisting of the whole or part of a building if the building contains two or more flats.” The management functions concerned can be widely taken so as to include any functions which have a causal link to the premises, following a recent case. Such an appointment must still be found to be “just and convenient in all the circumstances of the case”, which can involve weighing up the effect it will have on the interests of non-residential owners and occupiers. However, in practice such forced management often fails to work.

The fault-based appointment of a manager can be a preliminary step to a potentially less expensive method of collective enfranchisement, namely “an acquisition order” under Part Three of the Landlord and Tenant Act 1987. Such an order can also be sought when the freeholder is in serious breach and shows a likelihood of so continuing. This is a remedy of the last resort. One of these orders obtains the freehold more cheaply than an ordinary “collective enfranchisement” because no marriage value is ever paid whereas in the latter it has to be paid in respect of the participating flats whose leases have 80 years or less to run. While suing for such an order carries with it a significant element of threat, the claimant parties should have made a Participation Agreement between themselves and they should have planned their funding for actually acquiring the freehold in case their claim succeeds. Without such an agreement and funding in place, it would be safer for claimant tenants to seek a more conventional style of legal relief or court order to enforce against their delinquent landlord’s conduct, such as an injunction order.

Commonhold ownership is a better system than leasehold in many respects, albeit it lacks the ability at present to allow shared-ownership and it’s not fully accepted by mortgage lenders. Developers shun commonhold and new laws will have to be passed to stop them doing so. Under commonhold, titles to units last in perpetuity, all unit owners participate in owning and controlling their block, there is no ‘forfeiture’, there are no rules as there are under leasehold law enabling communal charges to be challenged under grounds of reasonableness and failure to give consultation notices and litigation is more difficult to access. But commonhold is not necessary for blocks of 4 units or less where the owners have 999 year leases, amicable relations over all management decisions and they enter into a pragmatically worded deed of trust – in these instances it would be an excessively burdensome arrangement. Commonhold is particularly attractive for blocks of 5 flats and more over where there is a concern that present amicable relations could later be spoiled by factions arising and legalistic points being taken over management matters. Commonhold becomes less attainable the larger the block due to the need for 100% unanimity to change to it and the fact that some mortgage lenders do not accept it as security.

Legal intervention in the internal decisions of groups

For small blocks of flats – where there are up to 4 flats - the freehold can more cheaply be owned through a trust arrangement rather than through any company or commonhold association. Trustees are subject to the court’s supervision in the event of any internal dispute. Any trustee or person interested in the trust property can apply to a court for directions under the Trusts of Land and Appointment of Trustees Act 1996. Usually the court will go with the majority, however. Any personal gains at the expense of the whole or a minority would have to be very great before a court will intervene.

There may be a participation agreement in force between persons who have joined together to acquire their block’s freehold and there may even be a deed of trust.

There is no close parallel jurisdiction, equivalent to the above, for the court to resolve disputes among members of a company. In the context of a company any disagreement is liable to be resolved by its decision-making organ concerned – usually the directors – and any minority needs to show a breach of fiduciary duties, or companies legislation or shareholders’ agreement in order to challenge a decision in court (claiming ‘unfair prejudice’). Disagreements over a company’s management decisions are generally not of interest to a court. Furthermore, such litigation is extremely expensive.

Two or more ‘qualifying tenants’ of dwellings (homes) can require a management audit or if there is only one tenant of the relevant premises this can be required by that tenant alone. A notice has to be given under s.80 of the Leasehold Reform, etc Act 1993. The auditor (who must be a qualified accountant or surveyor) can require the landlord to provide a summary of costs which form part of the service charge and will have a right to reasonable facilities for inspecting documents supporting the summary. This must be done within a month and after 2 months a court can make an injunction order to enforce compliance.

Recognised residents associations

An association of residential leaseholders can apply to the block’s landlord for formal recognition. Once an association has membership from at least 60% of the lessees in its block, it can obtain a certificate of recognition from a Rent Assessment Panel under section 29 of the Landlord and Tenant Act 1985. In exceptional situations a Panel can grant recognition to an association that has less than 60% membership.

Such a formally recognised association has various legal rights. These are: (i) to receive any consultation notice regarding future service changes and long term agreements concerning management matters under section 20ZA of the Landlord and Tenant Act 1985, (ii) to give notice requiring the landlord to produce a summary of service charge expenditure, (iii) to require consultation about the appointment or reappointment of managing agents, and (iv) to appoint a qualified surveyor who will then have a right, upon giving notice, to inspect accounts and receipts in relation to service charge expenditure. Only the third of these rights is not already held by individual lessees and a right to be consulted does not amount to much. (The fourth is often expressly provided in leases and would be available through rules of disclosure in any legal challenge to service charges and so this statutory right therefore all this rule does is impose a system for pre-litigation disclosure – but under the Pre-Action Protocol and rules for pre-action disclosure it would be very hard for a landlord to avoid giving this any way if pressed by one lessee or a group of lessees acting without having appointed such a surveyor.)

Such formal recognition carries no further significance in giving the association concerned any title to sue. By way of example, if there is a claim in negligence against a manager appointed by the LVT – and presumably later removed from office - that claim will reside in the lessees and have to be prosecuted by them individually unless of course they each assign it to some other person.

Residents associations as landlords and managers

Many recent changes to the law have been hostile to landlords and enable lessees to buy their landlords’ reversions, with the result that a large and growing proportion of blocks of flats are coming under lessees’ control - though often this is with less than full participation by all lessees in the block. This change-over from having an external investor as the landlord to having the lessees themselves or their nominated body is far from an end to all problems. In reality it only exchanges one set of problems with another. One new problem is the lack of a decisive single voice or, put in another way, the arrival of potentially endless conferring and debate and internal politicking over freehold and management matters.

Once the lease owners own the right to manage or the freehold, any victory in a management dispute for an individual lessee will be at the group’s expense. Suppliers of works and services still have to be paid regardless of any irregularity in the administration of the service charges or other internal dispute. Moreover, some defaulting suppliers disappear or become insolvent - although this is avoidable by agreeing not to pay until value is received. Minority, non-participating, owners can jeopardise the freehold ownership by the majority by taking points over their service charge liabilities that can force the majority to subsidise the services in order to avoid the worse fate of their association becoming insolvent. Thus a residents association which succeeds in taking over the right to manage or ownership of the block’s freehold is no longer able to represent the lessees individually: it may take positions in regard to regulating or managing the estate which are in conflict with individual flat owners’ wishes. If the lessees’ management company were a party to litigation over land rights, the lessees would need to be joined as parties some how, if they are to be bound by the resulting judgment. Judgments in land actions operate only on people (in personam) and not on the land itself (in rem).

Having such an association as the landlord can arguably affect the interpretation of the leases for the flats. In Embassy Court Residents’ Association v Lipman (1984) 271 EG 545 a vaguely worded “sweeping-up clause” in the service charge provisions enabled a residents association as landlord to recover managing agents’ fees, while this outcome would not have arisen if the reversions had been owned by an external landlord. In Hannon v 169 Queen’s Gate Limited [2000] 1 EGLR 40 it was held, in the context of a dispute over a landlord’s right to build an additional flat in retained space, that ownership of the lease reversions by a lessees’ company is a factor in favour of implying such a right to build. But such an argument was rejected by the Supreme Court as having any bearing on the application of statutory rules for pre-notifying major works to lease-owners, in Daejan Investments Limited v Benson [2013] UKSC 14.

Drafting the constitutional documents for lessee owned blocks

Those who found and design residents associations should consider how to minimise the potential for litigation to arise later over any internal matters using state-of-the-art drafting. This can ensure matters such as: transparency of decision-making (so that board papers and records are fully publicised to members, perhaps on a secure website), equality of information and influence among all members (so that each member is a director in small to medium sized associations), safeguards against any one party buying up any significant or controlling number of flats, and enabling service charges to provide 100% coverage for all communally incurred costs.

One inconsistency which the law produces if it is not altered by express drafting is that at a company meeting any vote on a show of hands is taken to be on the basis of ‘one member/one vote’ whereas under a poll it is one vote per share. This is the effect of s.284 of the Companies Act 2006. It can easily be modified so there is one vote per share whichever way votes are cast.

A particular category of costs which will be new to the mix, in that they would certainly have been regarded as unacceptable if charged by an outside landlord but they become acceptable and indeed necessary once the landlord entity is owned by the lessees in the block, is costs of complying with the requirements of companies legislation (e.g. the auditing of accounts and the preparation and filing of accounts and annual returns).

The statutory restrictions in favour of individual lessees are extremely difficult to lift because it would involve an attempt to oust jurisdictions of courts and tribunals. In any case of a communally owned leasehold estate such exclusion would make good sense and bring the estate into line with similar freehold estates of houses and commonhold blocks of flats – where decisions are reached by majority vote without being challengeable in any legal forum.

Costs incurred in the conduct of any litigation are regulated under section 20C of the Landlord and Tenant Act 1985: the court or tribunal has a power to decide whether they shall be included in the service charge accounts. While that section is an important weapon for tenants against their landlords for so long as they are excluded from the ownership and management of their reversion, it becomes a weapon against them once they enfranchise. There is a question whether the judicial right of intervention laid down by section 20C can be excluded by agreement. The short answer is that it can probably be influenced by such a contractual provision but it cannot be excluded.

If those founding the company wish to ensure that individual member/owners never take a technical objection to defeat the wishes of the company’s board over management decisions and their implementation – for example by challenging service charges under any of the available statutory grounds – then, first, there should be a prohibition clause to this effect in a members’ agreement and, second, every member should be required under that agreement to hold office as a director.

There can be a general power to requisition funds in the company’s articles of association but s.25 of the Companies Act 2006 stipulates that this such a new provision is only binding on members who have joined the company after it is embodied in the articles and on members who have agreed to it in writing. Thus, such a provision cannot be forced on an existing company member by a special majority passing a change in its articles. Such a power was upheld as a way of raising funds for repairs free of the restrictions from the law of lease service charges Morshead Mansions Limited v. Di Marco [2008] EWCA Civ 1371. This reported case is part of a long-running war between those parties.

Since Di Marco v. Morshead Mansions Limited [2013] EWHC 1608 (Ch) we know that sections 18 to 30 of the Landlord and Tenant Act 1985 do not apply to a company raising money through its articles of association and such money is not held on the statutory trust under s.42 of the Landlord and Tenant Act 1987.

Directors’ personal liabilities

Tenants’ management companies tend to have limited powers, particularly in their ability to raise funds and therefore their directors need to be ever watchful that they are not incurring personal liabilities.

Here is an example of how it can happen. Tenants form an RTM company - which under section 72 of the Commonhold, etc Act 2002 and its ancillary statutory instrument must and can only have articles of association in a specified form. This form does not enable the company to raise any funds from members beyond their service charge contributions per the leases. The company decides to carry out an improvement to the common areas of the state – such as by taking away some bushes, moving the dustbin area and thereby create new parking spaces. Unfortunately this amounts to trespass against the freeholder, for which damages and costs are payable. The company has no power to compel its members to contribute to meet those liabilities. Accordingly, the directors may incur a personal liability to the freeholder.

Insurance should therefore be taken out by the company for the protection of its directors and any one asked to be a director should first insist on having such insurance cover in place. A question arises whether the leases’ service charge provisions are wide enough to enable the premiums for such cover to be charged.

Internal management disputes

Typical issues that can give rise to internal disputes include:-

  • differential alterations to different flats resulting in some owner claiming unfavourable treatment;
  • an allegation that a lessee has committed a breach of a lease covenant;
  • the association’s failure to take action against a particular lessee or supplier of services in alleged breach of duties;
  • the development of retained space or its annexation to a flat, likewise in regard to the common parts;
  • terms on which the association may agree to sell some land, rights or air space or grant a personal licence (such as for scaffolding or siting of a building works compound) to a neighbour;
  • the fall-out from a tax demand on the company from the company being temporarily struck-off the register at Companies House due to its annual return or accounts not being filed;
  • a secret profit being made by a director or trustee in the placing of a contract;
  • choice of insurance cover and premium level;
  • a landlord’s request for dispensation against the need to have given notices about major works and estimates for those under s.20 and s.20ZA of the Landlord and Tenant Act 1985 and its regulations; and
  • alleged negligence by a director or trustee.

Internal disputes call into play the rules of contract and trusts or company law as well as the interpretation of leases of individual flats. The existence of these parallel regimes combined with the annual recurring nature of service charge disputes and the complexity of questions in dispute can make any litigation protracted and expensive, sometimes giving rise to a succession of claims over several years. The Court of Appeal’s judgment in Morshead Mansions Limited v. Mactra Properties Limited [2007] 2 BCLC 88 shows up the vast costs of such litigation, referred to there as a blood bath. It arose from an earlier case which had been comprised by the tenant party receiving a write-off of certain service charges and it was specifically caused when the landlord company exercised a right under its articles of association to make a levy for the same amount against the tenant (as a company member) as what had been written-off. The tenant argued that such a levy was to be disallowed by the earlier compromise of landlord and tenant claims. However, the tenant lost. This is a warning of the need for far-reaching advice when considering the scope of any proposed litigation and terms for settlement.

Parties in these disputes often play for high stakes. Landlords attempt to forfeit leases. Tenants can seek an acquisition order under sections 25 to 34 of the Landlord and Tenant Act 1987, alleging recalcitrant breaches of duty.

Landlords can fortify themselves in anticipation of such disputes by including provisions in leases to allow their legal costs to be recovered through the service charges. This has been upheld as valid by the Lands Tribunal in Schilling v. Canary Riverside Developments PTE LRX/65/2005.

In extreme cases of mismanagement it can be worthwhile for individual residents to use the fault-based appointment of manager procedure, under the Landlord and Tenant Act 1987. This involves serving a preliminary warning notice on the landlord (and on any mortgagee) unless it is not reasonably practicable to do so. After a reasonable period the tenant or tenants can apply to the Tribunal, nominating a particular person to manage, showing their grounds and that such appointment will be ‘just and convenient’. However, even if that were successful, such an appointment is always liable to be trumped eventually by the majority of residents. The majority can set up an RTM (right to manage) company and again take back a management of the block from the Tribunal-appointed manager; section 97 of the Commonhold and Leasehold Reform Act 2002 provides that the Tribunal-appointed manager may no longer exercise any functions of the RTM company. It would be a nightmare of course for these scenarios to unfold within a block where the freehold is already owned by residents. The possibility of them stands as a warning to residents that they should resolve their differences without litigation. Conversion to commonhold should always be sought but unfortunately it requires 100% support from all stake-holders.

Confidentiality of professional advice

Trustees can seek such professional advice as they see fit and rely on either a provision in the trust instrument or an order of the court - under the Trusts of Land and Appointment of Trustees Act 1996 (generally) or a ‘Beddoes Order’ (in advance of litigation) - to recoup the costs from trust assets. Dissenting minority trustees are able to be excluded from being privy to the advice taken by the majority by virtue of the simple fact that they are not the solicitor’s client in that situation.

The position is more difficult when the reversion is owned through a company and the board is divided over some litigious issue, with one faction wishing to spend company money on the litigation. In this scenario, it will be the company that retains solicitors rather than any individuals. When the majority of a board of directors seek legal advice at the company’s expense and want to keep the advice confidential from a dissenting director, this effectively divides the board because the advice is privileged against disclosure to the person it is directed against.

Company law normally gives the power of decision whether or not to sue to a company’s board of directors, though this may be constrained by a special resolution (75% of votes) passed by the general meeting of members.

Once solicitors correspond or issue proceedings on a company’s behalf they warrant their authority. This assertion of authority by solicitors should not be challenged except on the clearest of evidence.

Alternatives to litigation

Litigation, however “civil”, should be seen as a last resort method for dispute resolution - only to be used if all else fails, due to its large and often disproportionate expense and risks, its habit of polarising the parties further and its lack of dignity and privacy. It has also become a less accessible process due to the ‘Jackson’ reforms of 2013. It is now a most difficult obstacle course for any party to manage, with significant risks of falling foul of procedural rules and incurring loss unrelated to the merits of a case.

Disputes involving neighbours within a block of flats or a private estate are additionally unsuitable for litigation, with questions of costs very often quickly overshadowing the original dispute. There is nothing to prevent parties agreeing ad hoc to try out alternatives even if on the face of things litigation is the normal way forward.

There is a long menu of options for different ways to resolve a dispute appropriately. Here follows a brief summary.

The first alternative to litigation is of course neighbourly discussion – initially without involving solicitors and then, if necessary, putting agreed questions and the full range of views and information before solicitors for advice. If this does not resolve the matter then the disputing factions will usually go to separate solicitors for advice and representation, and the board of directors or a majority of that body may use the company’s funds to pay for legal services - depending on what the constitutional documents have to say on this.

The second alternative to litigation is pre-action correspondence and voluntary disclosure of information. A court can even make an order for pre-action disclosure as a way to enforce this. It is therefore necessary for the pre-action correspondence to be as objective as possible so that the real causes of underlying conflict - whether of fact, law, expert opinion in a particular field, or a mixture of those - can be clarified, investigated and hopefully resolved.

If the pre-action correspondence route fails then parties should next consider mediation, early neutral evaluation and binding expert determination.

Mediation involves a neutral expert hosting a negotiation and helping the parties to reach a compromise. In the right hands mediation is very effective but it can be used cynically by wealthy and risk-seeking litigants.

Mediators are skilled at helping the parties to appreciate their opponents’ viewpoint, spelling out the drastic consequences of going to law, and looking for innovative ways to bring parties together. Mediators often succeed in forging a compromise without expressing their own opinions of the merits of the matter before them, and there is a strong body of opinion that this is preferable and more conducive to achieving resolution. There are at least three different styles of mediation and it is worth considering which style your dispute should best be subjected to. First there is what is known as facilitative mediation – in which the key element is to encourage the parties to see the cake as being enlarged before it is divided. Second, there is evaluative mediation, which as its name implies involves the mediator expressing his or her opinions to the parties about the merits of their cases, and which is often overseen by retired judges, some of whom have little regard to the alternatives and their benefits. A third style, most suited to disputes where the parties have to carry on living and functioning close together, is transformative mediation – that seeks to make the parties better people and kinder to each other.

Early neutral evaluation, whether by a specialist barrister or a recently retired judge, or by an acknowledged expert in some technical field, is an effective way of addressing disputes on esoteric questions of law or science - particularly questions that can be narrowly defined. Even though it may not be binding, to hear an authoritative critique of one’s position can sometimes move an otherwise determined disputing party.

Binding expert determination represents another way of resolving disputes without full litigation. It is particularly helpful in disputes over accounting for money and quality of building works, where statutory adjudication may any way apply.

The RICS has a hybrid ADR scheme which involves the preparation of an expert’s report to the parties which then becomes available to the court to read in litigation in case the dispute is not settled.

Full arbitration under the Arbitration Act 1996 is as expensive as litigation if not more so – due to the high fees of an arbitrator and the need to hire a venue – and so is not usually put on the list of alternatives to litigation. Its major advantages are secrecy and relative finality - there being limited avenues of appeal. It has procedural and substantive characteristics and limitations which I cannot even summarise here.

Alternative dispute resolution should be attempted early. It should ideally be taken up once the issues and the parties’ cases have been clearly formed and before large costs have been incurred. An obvious stage is at the close of the pre-action correspondence or, in cases where the issues only fully materialise during pleadings, then between disclosure and the exchange of statements.

Recoverability of legal costs through service charges

Questions can arise as to the meaning, effect and enforceability vis-à-vis the Unfair Terms in Consumer Contracts Regulations 1999 of lease clauses that enable a landlord’s legal reasonable legal expenses to be recovered via the service charges. It is always a good start though for the landlord to have one of these clauses in its leases. Once the residents own the freehold through a company they should consider varying the leases to include such a clause, among other possible improvements as well. This can help to reduce the incidence of litigation between factions of residents, although its operation will always be reviewable by the court or the tribunal.

There has been much discussion and litigation in recent years over the enforceability against an individual lease owner of one of these covenants to pay the landlord or managing party’s fees in the event of any conflict, especially as such conflicts will often fall to be resolved by Small Claims litigation or in the Lower Tribunal, both of those being normally without any costs shifting in their outcomes. The settled view seems to be that such covenants are to be enforced but when the value of claim is small there shall be an ‘anxious scrutiny’ of the amount of such costs so that only the bare minimum reasonably necessary shall be awarded (their amount is always able to be assessed by a court).

 Under section 20C of the Landlord and Tenant Act 1985 a tenant can obtain an order that the landlord’s costs in any Court, tribunal or arbitration proceedings shall not be included within the service charge payable by the tenant or any other person specified. This section has been understood to override any contractual provision which conflicts with it.

The statutory discretion under section 20C is wide and to be exercised according to what is just and equitable in the circumstances and so is not easy to predict. It has been said that when a landlord has had costs awarded against it in litigation with its tenant it “should not get through the back door what has been refused by the front”. The LVT however cannot award costs and so this maxim will often not be relevant. There is no principle here that costs follow the event although a landlord who has behaved improperly or unreasonably cannot normally expect to recover his costs of defending such conduct. The court or tribunal can take into account matters such as the size of the costs involved relative to the landlord’s income from ground rents, any loss which the landlord has to carry, and intransigence on the tenants’ part. The test has been reduced in Tenants of Langford Court v. Doren Limited (a decision of the Lands Tribunal, LRX/37/2000) to asking whether in the circumstances and even though costs have been properly and reasonably incurred by the landlord it would be unjust that the tenants or some particular tenant should have to pay them.

Thus, where a minority tenant has litigated against the majority in their guise as landlords - typically through a company - and succeeded there is authority that the successful tenant can be given an individual exemption from paying for the landlord’s costs through his service charges. There is no correlative power to ensure in such a case that those tenants who have supported the action should be left to pay the costs and so the likelihood is that these costs will still have to be met by the landlord from cash reserves or shareholders’ funds or sale of an asset, if it is not to become insolvent.

Document-altering remedies from Courts and Tribunals

The can be the remedy of rectification for errors on the face of documents, compared to how their parties clearly intended for them to be – which is a subject that is far too large to attempt any summary here.

A court can intervene and alter the service charge percentages between flats in a block where there has been some alteration to the respective sizes of the flats, as confirmed in Pole Properties Limited v. Fineberg (1981) 43 P&CR 121. Where the service charge percentages are inequitable from the outset of a block’s creation, as can happen when a developer has kept back a flat for himself, the court will not intervene – the rule caveat emptor or “buyer beware” applies.

The First-tier Tribunal has powers under sections 35 to 40 of the Landlord and Tenant Act 1987 to order leases within a block to be altered. The power arises, first where it finds that they fail to make satisfactory provision concerning a list of estate management issues laid down in s.35. Secondly, it arises if an application to vary terms of all leases in a block is brought by 75% of owners within that block provided that the objecting owners are fewer than 10% under s.37. (In blocks of 9 flats or less the variation can be obtained if there is only a single objecting owner.) The majority or applicant then must show that “the object to be achieved by the variation” – which must therefore be clearly identified and kept clearly distinct – “cannot be satisfactorily achieved unless all the leases are varied to the same effect”. This involves taking the Tribunal through the existing lease scheme and convincing it that the test is satisfied. Once this is done, the minority or respondent party can still defeat the claimed variation if he/she shows that it is substantially prejudicial and that an award of compensation would be inadequate or that it would not be reasonable in the circumstances. These hurdles proved to be insurmountable by the applicant majority in the case of Shellpoint Trustees Limited v. Barnett [2012] UKUT 375 (LC), which must have incurred very large costs since there were hearings before 2 tribunals.

There is as yet no learning on how the First-tier Tribunal should exercise this power to refuse such an amendment to leases because it would cause substantial prejudice and compensation would be either not adequate or not reasonable in the circumstances.

When a long lease owner claims a 90 year lease extension under the Leasehold Reform, Housing and Urban Development Act 1993, that claiming owner or any respondent party can apply to the First-tier Tribunal under s.57(6) of that Act for the terms of the lease to be varied on its renewal because of some defect or some anachronism that has come to light from changes that have occurred.