Dispensation from service charge consultation requirements

The Court of Appeal has recently considered the circumstances in which the First-tier Tribunal may grant a landlord dispensation from the service charge consultation requirements prescribed by s. 20 of the Landlord and Tenant Act 1985. Philip Rainey QC and Robyn Cunningham examine the ruling.

Sections 20 and 20ZA of the 1985 Act provide that the service charge contribution of lessees towards “qualifying works” will be limited to the “appropriate amount” (currently prescribed by regulations as £250) unless the “consultation requirements” are: (a) “complied with” by the landlord; or (b) “dispensed with” by the FTT. The consultation requirements are set out in part 2 of schedule 4 to the Service Charges (Consultation Requirements) (England) Regulations 2003 (“the Consultation Requirements”).

The leading case on dispensation is the Supreme Court’s decision in Daejan Investments Ltd v Benson [2013] UKSC 14, [2013] 1 WLR 854 (“Daejan”). In Daejan Lord Neuberger made clear that in determining an application for dispensation the FTT’s focus must be on what prejudice, if any, the lessees have suffered as a result of the landlord’s failure to comply with the consultation requirements. To oppose an application for dispensation the lessees must prove that they have suffered some “relevant” prejudice. The “prejudice” is the inappropriate works; such prejudice is “relevant” if it flows from the failure to comply with the consultation requirements. For the prejudice to flow from the failure to consult the lessees must prove that they would have acted differently had the landlord carried out a consultation.

Further, in Daejan the Supreme Court held that the FTT could require a landlord to comply with certain terms as a condition to the grant of dispensation provided “any such terms are appropriate in their nature and their effect.”

In Aster Communities v Chapman & Others [2021] EWCA Civ 660 (“Aster”) the appellant landlord carried out a s. 20 consultation in relation to a package of major works concerning several blocks of flats (“the s.20 Consultation”). It was held in earlier FTT proceedings, brought by the landlord pursuant to s. 27A of the 1985 Act to establish the reasonableness of on-account service charge demands, that the landlord had failed to include the replacement of balcony asphalt in the s.20 Consultation and that the full replacement of all balcony asphalt which the landlord had carried out was, on the available evidence, unnecessary. The landlord, Aster Communities, then applied to the FTT for dispensation.

The FTT held that if the landlord had complied with the Consultation Requirements then one of the lessees, a Miss Motovilova, would have acted differently: she would obtained a surveyor’s report and therefore relevant prejudice was established. In the circumstances the FTT granted the landlord dispensation but on certain terms. On appeal the landlord challenged two of these terms:

1. A requirement that the landlord pay the reasonable costs of an expert report advising the lessees on the necessity of replacing the balcony asphalt.
2. A requirement that the landlord pay the lessees reasonable costs of the application.

The landlord’s appeal to the Upper Tribunal (Lands Chamber) was dismissed but His Honour Judge Bridge granted permission to appeal to the Court of Appeal. In the Court of Appeal the appellant landlord, Aster Communities, raised three principal issues.

First, the appellant landlord argued that the FTT was wrong to conclude that Miss Motovilova would have acted differently if the notice of intention in the Consultation had referred to the replacement of the balcony asphalt. On the facts of the case the Court of Appeal dismissed this argument.

Secondly, the appellant landlord argued that the issue of “relevant prejudice” must be separately assessed for each lessee. The appellant landlord contended that each lessee must show that they as individuals would have acted differently had the Consultation Requirements been complied with. The Court of Appeal rejected this argument and adopted the analogy (a hypothetical block of 20 identical flats) put forward by Counsel for the respondent lessees:

“Say one lessee is a retired surveyor, and had they been told that proposed qualifying works included item alpha, they would have pointed out why item alpha need not be done, which would have omitted £100,000 from the major works package. None of the other lessees would have made that point because none had that personal expertise. The Appellant seems to think that only the retired surveyor would have £5,000 knocked off his bill as a condition of dispensation. This is wrong. All 20 lessees suffered the same prejudice; all are entitled to the benefit of the same condition that their service charge be reduced by £100,000 (pro-rated).”

As Newey LJ explained at [44]:

“The consultation for which the 2003 Regulations provide is a group process… a landlord seeks dispensation against tenants generally. If all tenants suffer prejudice because a defect in the consultation process meant that one of their number did not persuade the landlord to limit the scope or cost of works in some respect, I cannot see why the FTT should be unable to make dispensation conditional on every tenant being compensated.”

Finally, the appellant landlord argued that, in any event, it was impermissible for the FTT to impose conditions (i) and (ii). The Court of Appeal dismissed this contention. The Newey LJ found condition (i) which required the landlord to pay for an expert report was “a condition which the FTT was entitled to impose in the specific circumstances of this case” (paragraph [50]). The Court of Appeal noted that condition (ii) which required the landlord to pay the lessees’ costs of the application was along the lines of a condition imposed by the Court in Daejan and on that basis should be upheld.

Philip Rainey QC and Robyn Cunningham are barristers at Tanfield Chambers successfully represented 33 of the Respondent lessees in Aster Communities v Chapman.

(Philip Rainey QC also represented the lessees in Daejan v Benson, with James Fieldsend and Jonathan Upton)