Landlords boosted by Supreme Court ruling on service charges

The Supreme Court has overturned the Court of Appeal and all other lower courts in a landmark ruling on residential service charges and compliance with statutory consultation requirements.

The decision – by a 3:2 majority – in Daejan Investments Limited (Appellant) v Benson and others (Respondents) [2013] UKSC 14 will be welcomed by landlords seeking to recover charges.

At issue was the width and flexibility of the Leasehold Valuation Tribunal’s jurisdiction to dispense with the consultation requirements in s. 20 of the Landlord and Tenant Act 1985, as well as the principles upon which that jurisdiction should be exercised.

Unless they comply with the consultation requirements or obtain a dispensation from the LVT, landlords are prevented from recovering more than £250 from each tenant in respect of works for which the service charge would otherwise be greater.

Under s. 20ZA(1) of the 1985 Act, the tribunal may dispense with the requirements if satisfied that it is reasonable to do so.

The case involved five flats in Queens Mansions, Muswell Hill that are held under long leases which provide for the payment of service charges. Daejan was the owner of the freehold and the respondents were the lessees.

By December 2005, four priced tenders had been received in relation to works to be carried out at Queens Mansions. The priced specifications were not available for inspection by the respondents until 11 August 2006.

However, by that date, the leaseholders had already been informed that the contract had in effect been awarded to a particular contractor and that the statutory consultation process had for all practical purposes ended.

This meant, in particular, that Daejan had failed to comply with the third of the four stages of the consultation requirements. Amongst other things, these required the landlord to issue a statement to the residents’ association with a summary of observations on the estimates, its responses to them and notice of where they would be available for inspection.

Daejan asked the LVT to grant it dispensation so that it could recover just under £280,000 from the respondents, rather than the £1,250 it would have been entitled to in the absence of dispensation. It also proposed a £50,000 deduction to the £280,000.

But the LVT found that Daejan’s failure to comply with the consultation regulations was a serious breach, amounting to serious prejudice, and declined to make an order for dispensation. The Upper Tribunal (Lands Chamber) and the Court of Appeal dismissed Daejan’s appeal.

However, the Supreme Court has today (6 March) allowed Daejan’s appeal by a majority and granted it dispensation on terms that the respondents’ aggregate liability for the works be reduced by £50,000 and the landlord pay the reasonable costs of the respondents in the proceedings before the LVT. Lord Hope and Lord Wilson gave dissenting judgments.

Lord Neuberger, who gave the majority judgment, said the correct question which the LVT should have asked was whether, if dispensation was granted, the respondents would suffer any relevant prejudice, and, if so, what relevant prejudice, as a result of Daejan’s failure to comply with the requirements.

“On the basis of the evidence before the LVT, it seems to me…..that it is highly questionable whether any such prejudice at all would have been suffered,” he said.

The only ‘specific prejudice’, the judge said, was that the respondents lost the opportunity of making out the case for using a different contractor to carry out the works, rather than the chosen one.

Lord Neuberger acknowledged that there was an “undoubted, albeit partial” failure by Daejan to comply with the third stage of the requirements. However, the relevant prejudice to the respondents could not be higher than the £50,000 discount offered by Daejan.

The judge added that the purpose of the requirements was to ensure that tenants were protected from paying for inappropriate works, or paying more than would be appropriate. He added that the right to be consulted was not a free-standing right.

Lord Neuberger rejected the approach taken in the LVT, Upper Tribunal and the Court of Appeal of distinguishing between a ‘serious failing’ and a ‘technical, minor or excusable oversight’. He argued that this would often lead to uncertainty and unpredictable outcomes.

The judge said the LVT was not constrained to a choice between dispensing with the requirements unconditionally or refusing dispensation. Instead it could grant dispensation on such appropriate terms as it thought fit, including imposing conditions.

Lord Neuberger added that once tenants had shown a credible case for prejudice, the LVT should look to the landlord to rebut it. The tribunal should also be sympathetic to the tenants’ case.

The judge continued: “Insofar as the tenants will suffer relevant prejudice as a result of the landlord’s failure, the LVT should, at least in the absence of some good reason to the contrary, effectively require the landlord to reduce the amount claimed as service charges to compensate the tenants fully for that prejudice.

“That outcome seems fair on the face of it, as the tenants will be in the same position as if the requirements have been satisfied, and they will not be getting something of a windfall.”

This did not mean a landlord could buy its way out of having failed to comply with the requirements, because a landlord faced significant disadvantages for non-compliance.

Lord Neuberger concluded: “All in all, it appears to me that the conclusions which I have reached, taken together, will result in (i) the power to dispense with the requirements being exercised in a proportionate way consistent with their purpose, and (ii) a fair balance between (a) ensuring that tenants do not receive a windfall because the power is exercised too sparingly and (b) ensuring that landlords are not cavalier, or worse, about adhering to the requirements because the power is exercised too loosely.”

In their dissenting judgments, Lord Hope and Lord Wilson argued, amongst other things, that the LVT should weigh the gravity of the non-compliance with the requirements in determining whether to grant dispensation.

They also concluded that the legislative history of the requirements suggested that the gravity of non-compliance was relevant, and substantial non-compliance with the requirements entitled the LVT to refuse to grant dispensation.

Commenting on the ruling, Douglas Rhodes, a property litigation associate at Trowers & Hamlins, said: "The Supreme Court's decision appears to open the door for landlords to apply for dispensation from the consultation requirements even in cases where there has been a serious breach, as long as they offer to reduce the overall bill to compensate for any prejudice to tenants and pay the tenants' reasonable legal costs.”

Rhodes added that, in practice, the ruling would reassure landlords that they can carry out necessary repair works to their properties and would be more likely to recover the cost through the service charge.
 
But he said: "Whilst this is good news for landlords, the decision leaves open the question as to what terms the LVT should grant dispensation upon, and landlords will be interested to see the price imposed in future cases by the LVT in return for granting dispensation. Our advice to landlords remains: consult properly or pay the price."