By Nicholas Kissen, Senior Legal Adviser
The UK Supreme Court handed down judgment on 6th March 2013 in the case of “Daejan Investments Limited v Benson and others”. By a majority decision (3-2), the Court overturned earlier Leasehold Valuation, Upper Tribunal and Appeal Court judgments and granted dispensation on terms to the freeholders.
Section 20 of the Landlord and Tenant Act 1985 (as amended) and the Service Charges (Consultation Requirements) (England) Regulations 2003 require a landlord planning to undertake qualifying works, where any one leaseholder will be required to contribute over £250 towards those works, to consult the leaseholders in a specified form.
The consultation procedure entails the service of a sequence of notices:
- seeking comments on the proposed works
- informing leaseholders of the tenders obtained
The landlord must take into consideration observations received from the leaseholders.
Should a landlord not comply with the correct consultation procedure, it is possible to obtain dispensation from compliance with these requirements by application to to the Leasehold Valuation Tribunal (“LVT”) who may make such an order where it is satisfied that it is reasonable to do so.
In the absence of either a dispensation order or proper compliance with the Section 20 procedure, the contribution is capped at £250 per leaseholder.
The freeholders, Daejan Investments Limited (Daejan), owned the freehold of a building known as Queens Mansions in Muswell Hill, London. Five flats were held under long leases whereby the owners were obliged to pay service charges towards the cost of, among other things, the repair of the structure, exterior and common parts of the building.
Major works were embarked upon and there were various errors in the consultation process.
The costs involved were just under £280,000 and in the absence of a dispensation order Daejan would be limited to recovering £250 from each leaseholder; that is £1,250.
Daejan sought a dispensation order which was declined by the LVT, the Upper Tribunal (Lands Chamber) and the Court of Appeal.
The case came before the Supreme Court who granted dispensation on terms that the leaseholders’ overall liability would be reduced by £50,000 and Daejan would pay the reasonable costs of the leaseholders in relation to the application for dispensation that came before the LVT.
The Supreme Court stressed that statutory consultation should not be regarded as an end in itself but looked at in the context of the 1985 Act, which is directed towards ensuring that leaseholders of flats are not required:
- to pay for unnecessary services or services which are provided to a defective standard, and
- to pay more than they should for services which are necessary and are provided to an acceptable standard.
The obligation to consult in advance about proposed works addresses the issue of the appropriateness of those works, and the obligations to obtain more than one estimate and to consult about them address both the quality and the cost of the proposed works.
The court came to the following conclusions:
- The correct legal test on an application to the LVT for dispensation is:
“Would the flat owners suffer any relevant prejudice, and if so, what relevant prejudice, as a result of the landlord’s failure to comply with the requirements?”
- The purpose of the consultation procedure is to ensure leaseholders are protected from paying for inappropriate works or paying more than would be appropriate.
- In considering applications for dispensation the LVT should focus on whether the leaseholders were prejudiced in either respect by the landlord’s failure to comply.
- The LVT has the power to grant dispensation on appropriate terms and can impose conditions.
- The factual burden of identifying some relevant prejudice is on the leaseholders. Once they have shown a credible case for prejudice, the LVT should look to the landlord to rebut it.
- The onus is on the leaseholders to establish:
- what steps they would have taken had the breach not happened and
- in what way their rights under (b) above have been prejudiced as a consequence.
- Where relevant prejudice has been established the LVT should, in the absence of some good reason otherwise, require the landlord to reduce the amount of service charges claimed to compensate the leaseholders fully for that prejudice.
- Essentially the LVT is to reconstruct what would have happened had the consultation been followed properly and in deciding what conditions to impose the LVT should adopt a “sympathetic” approach to the leaseholders.
When faced with a landlord’s dispensation application based on procedural failings leaseholders should not assume that the seriousness of the breach will guarantee an order will not be granted.
In deciding whether to oppose such an application serious thought should be given as to whether the particular breach or breaches have affected the extent, quality and cost of the works. Even then the LVT can consider awarding dispensation on terms that could include payment of legal costs or reduction in the service charges.