Major works consultation: closing the section 20 bear-trap

Ranjit Bhose QC and Hugh Flanagan discuss how a recent decision of the Supreme Court has overhauled the way Leasehold Valuation Tribunals will approach the question of whether to dispense with the consultation requirements for major works service charges.

The consultation requirements imposed by s.20 of the Landlord and Tenant Act 1985 in respect of service charges for major works are a notorious pitfall for landlords.

On 6 March 2013 the Supreme Court handed down judgment in Daejan Investments Limited v Benson and others [2013] UKSC 14, which gave guidance on granting dispensation for failure to comply with the requirements. The approach taken by the Court marks a radical break from that adopted previously, and while the importance of consultation remains, the defaulting landlord (if well-advised) can look forward to a considerably softer landing than that previously experienced.

The statutory scheme requires landlords of residential premises to consult with tenants (usually, but not always, long lessees) who are liable to pay variable service charges, before undertaking works for which the cost exceeds a certain threshold. The threshold is currently set (by the Service Charges (Consultation Requirements) (England) (Regulations) 2003) as an amount which results in the service charge contribution of any tenant to the cost of the ‘relevant works’ being more than £250.

If the detailed consultation requirements set out in the Regulations are not complied with, the contribution of each tenant is limited to a maximum of £250, such that on a large project the landlord could be left drastically out of pocket in the event of the limitation applying. A landlord may, however, apply to a Leasehold Valuation Tribunal for dispensation from all or any of the consultation requirements. The LVT may grant such dispensation “if satisfied that it is reasonable to dispense with the requirements” (s.20ZA).

Landlords are also required to consult on ‘qualifying long term agreements’ where tenants are liable to pay more than £100 in any 12 month period. Failure to comply results in a £100 limit per lessee, subject only to the power to grant dispensation.

Prior to the decision of the Supreme Court, it had been held in a number of cases before the Upper Tribunal (Lands Chamber) that the overriding factor in the LVT’s discretion was whether or not tenants had suffered “significant prejudice”. Because the view was also expressed that the right to be consulted was, in itself, a substantive right, it had been held that a serious breach of the Regulations could itself cause significant prejudice to tenants, leading to a refusal of the dispensation application. This was so, even if the works needed to be done, had been done to a reasonable standard, and at a reasonable cost.

The result was a windfall for tenants, and landlords facing uphill battles to obtain dispensation for all but the most minor or technical of breaches. Satellite litigation grew up with LVTs being required to pick through consultation exercises to determine compliance, with tenants talking up, and landlords talking down, prejudice.

Daejan has changed that. The Supreme Court, by a narrow majority of 3:2, has established five important principles.

Firstly, the Court confirmed that the existence or absence of prejudice to tenants due to the non-compliance is the fundamental (and normally sole) consideration for the LVT when considering whether to grant dispensation. LVTs should not concern themselves, for example, with whether the non-compliance was serious and egregious or only technical and minor.

Secondly, and importantly, the requirements within the Regulations are a means to the end of protecting tenants in relation to service charges; the right to be consulted is not a free-standing right. Therefore, in a case where the extent, quality and cost of the works is not affected by the landlord’s failures to comply, it is hard to see why dispensation should not be granted.

Thirdly, the statutory discretion is not ‘all-or-nothing’. The LVT is able to grant dispensation on terms. In particular the LVT can grant dispensation on condition that the landlord deducts a certain sum from the service charges to reflect the extent of prejudice suffered. In Daejan itself the landlord’s offer of a 20% deduction was held appropriate.

Fourthly, dispensation can be granted on terms as to costs. Landlords should generally have to pay, as a condition of obtaining dispensation, the reasonable costs of tenants in investigating any prejudice they have suffered and testing the claim for dispensation.

Finally, the Court gave guidance on where the burden of proof lies in applications for dispensation. While the legal burden remains on the landlord, the factual burden of identifying some relevant prejudice lies on the tenants. At the same time, given that it is the landlord who is in default, the LVT should be sympathetic to points raised by tenants and once they have shown a credible case for prejudice, the LVT should look to the landlord to rebut it. Similarly on costs, save where the tenants’ expenditure is self-evidently unreasonable, it would be for the landlord to show that any costs incurred by tenants were unreasonably incurred before it could avoid the payment of those costs being a term of dispensing with the consultation requirements.

The decision is an extremely positive one for landlords. Previously a single breach in an otherwise well-conducted consultation could mean tenants’ contributions being capped at a tiny fraction of the total cost, leaving the landlord footing a huge bill for works which were both necessary and which the tenants had contracted to pay under their leases, and with the tenants enjoying a large windfall. In the case of publicly procured multi-million pound borough-wide (or stock-wide) framework or partnering qualifying long-term agreements, the costs consequences could be even starker.

This all-or-nothing jurisdiction has been replaced with a more flexible mechanism whereby the limitation on cost recovery by the landlord will be tied to the level of financial prejudice, focussed upon the end outcome. For example, if tenants are able to show that but for the consultation flaws the works in question could have been carried out at the same standard but for 10% less than was paid, the tenants’ contributions could be reduced by that amount.

The practical effect of this is that the consultation requirements may no longer add a great deal to the general requirement in s.19 of the 1985 Act that service charges are only payable by a tenant to the extent that the relevant costs are reasonably incurred and the works of a reasonable standard. A scenario is conceivable where little or no consultation has been undertaken in flagrant breach of the requirements, but dispensation is nevertheless granted because the works contract obtained was reasonable in scope and cost, such that tenants are unable to show prejudice.

This position should not be overstated, however. The Supreme Court noted that the more egregious the landlord’s failure, the more readily an LVT is likely to accept that the tenants had suffered prejudice. This factor, combined with the Supreme Court encouraging LVTs to be sympathetic to points raised by tenants, means that the seriousness and extent of the non-compliance may still influence the outcome of dispensation applications. The extent of the non-compliance is also likely to be relevant to what costs it is reasonable for the tenants to have expended responding to the application for dispensation. The Supreme Court envisages it being routine for tenants’ reasonable costs of “investigating and challenging” the application to be paid by the landlord. More extensive breaches of the consultation requirements are likely to lead to more extensive – and more costly - investigations of prejudice. These costs will of course be on top of the landlord’s own costs of applying for dispensation, which it is likely to have to bear itself.

The position created by Daejan is therefore more nuanced than it might first appear, imposing significant financial incentives for landlords to comply with the consultation requirements or at least to keep any breaches to the minimum.

The Lands Chamber has recently voiced concerns in a number of appeals about the standard of decision making in LVTs. Against this background the decision in Daejan is particularly welcome, lending greater certainty to dispensation applications by narrowing the range of relevant considerations on such applications to essentially one – prejudice in the end outcome. The scope for arbitrariness in the approach taken by different LVTs to dispensation is much reduced. The suggested costs condition (that the landlord pays the tenants’ reasonable costs) adds a further element of certainty to proceedings.

In short, while consulting fully and properly is required by statute, quite apart from aiding transparency and better decision-making, landlords can now be more certain as to the consequences of non-compliance and more hopeful that the consequences will be more proportionate. The bear-trap of s.20 non-compliance has closed.

Ranjit Bhose QC and Hugh Flanagan are barristers practising at Cornerstone Barristers specialising in property law, local government and public law. They can be contacted by email This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it. respectively.