Service Charge Disputes, Section 20C Orders and the Hidden Risks for Resident-Owned Companies
Leaseholders are often told that if they successfully challenge a service charge at the First-tier Tribunal (FTT), they can seek a section 20C order to prevent the landlord’s legal costs being recovered through the service charge. That is correct — but what is less well understood is what can happen after such an order is made, particularly where the landlord is a resident-owned company, an RMC, or an RTM company.
What is a section 20C order?
A section 20C order (under the Landlord and Tenant Act 1985) prevents the landlord from recovering its legal costs of tribunal proceedings through the service charge. These orders are often requested by leaseholders who successfully challenge service charge demands.
However, while section 20C protects leaseholders from paying those costs via the service charge, it does not make the costs disappear.
What happens in practice?
In many cases, by the time a section 20C order is made, the legal costs will already have been paid by the landlord, RTM or RMC — usually using service charge funds. Once the order is granted, the leaseholder can then seek reimbursement of their share of those costs.
If the company has a Ground Rent income it may be able to cover the costs from the company, but only if there is sufficient money.
If the company has no other income, assets or reserves, it may suddenly find itself unable to repay that money. At that point, the company is technically insolvent.
For resident-owned companies, this can create a serious problem.
To avoid insolvency, the directors may have no choice but to approach the other leaseholders and say, in effect:
“We need everyone to contribute £X to cover this shortfall that X leaseholder is claiming back because otherwise the company cannot function.”
If those funds are not raised voluntarily, the consequences can be severe:
- the company may be unable to insure the building;
- it may be unable to manage or maintain the property;
- mortgage lenders may be unwilling to lend; and
- sales of flats can be delayed or fall through altogether.
While these additional payments are typically voluntary, refusing to contribute can ultimately leave all leaseholders in a worse position.
Is the position different for commercial landlords?
Yes. Where the landlord is not resident-owned, they may have assets such as the freehold or a head lease that can potentially be sold or charged to raise funds. Even then, most landlords would prefer to avoid that scenario and will usually look first to recover the money by other means.
Is there another way to raise funds?
Possibly — but this depends on company law rather than landlord and tenant law.
A key Court of Appeal case, Morshead Mansions Ltd v Di Marco, is often cited in this context. The case confirms that there is a clear legal distinction between:
- sums demanded from leaseholders under a lease (service charges); and
- sums demanded from members of a company under its Articles of Association.
In Morshead, the court confirmed that a company can, if its Articles allow, require members to contribute funds in their capacity as shareholders, rather than as leaseholders. These contributions are not service charges and are not subject to the statutory protections that apply to service charges.
This can provide an alternative route for RMCs or freehold companies to raise money, but only if their Memorandum and Articles of Association are properly drafted and the correct procedures are followed.
A word of caution
Section 20C orders can be extremely damaging for resident-owned landlords, RTMs and RMCs if the wider consequences are not properly understood. Tribunals are aware of this and will consider all the circumstances when deciding whether to grant such an order. Importantly, a leaseholder “winning” a service charge case does not automatically mean a section 20C order will follow.
Final thoughts
Service charge disputes are rarely just about the immediate issue being argued. For resident-owned buildings, the financial and practical consequences can affect everyone in the block.
Understanding the difference between leaseholder obligations and company member obligations and taking early advice on leases and Articles of Association is essential to avoiding unintended and costly outcomes.
