May 2021
by Kavita Bharti and Nicholas Kissen
In the case of Aster Communities V Kerry Chapman And Others, the Court of Appeal (“the CA”) upheld decisions of the First-Tier Tribunal (Property Chamber) (FTT) and the Upper Tribunal (Lands Chamber) (UT) imposing conditions on a landlord when granting it dispensation from its service charge consultation requirements.
The background law
Section 20 of the Landlord and Tenant Act 1985 (“the 1985 Act”) and the Service Charges (Consultation Requirements) (England) Regulations 2003 state that if a landlord is planning to carry out works, where anyone leaseholder will have to contribute more than £250 towards the cost of those works, the landlord must follow a set procedure to consult with the leaseholders.
During the consultation procedure, the landlord must generally serve two notices one after the other on each leaseholder inviting their observations initially on the proposed works and subsequently on the estimates obtained.
The leaseholders must submit their observations by the deadline stated in the notice, and the landlord must take into consideration observations received from them.
There are financial consequences for the landlord should they fail to comply with the requirements of Section 20.
Generally, in the absence of proper compliance with the Section 20 procedure, a leaseholder’s payment for the works is capped at £250. For example, a building containing flats may have five leaseholders paying service charges including towards the cost of major works. If the works cost £280,000 then failure to follow the required consultation process would mean that the landlord would not be able to recover more than £1,250(Five x £250 each) from the leaseholders leaving a shortfall of £278,750. (£280.000-£1,250).
However, where a landlord fails to or is unable to comply with the correct consultation procedure, it seeks a ‘dispensation order’ from the FTT. To succeed, the landlord must persuade the FTT that it is reasonable in the circumstances to grant dispensation (section 20ZA of the 1985 Act).
The consequences of a dispensation order are that the landlord will not be required to follow those parts of the consultation procedure referred to in the order. Terms and conditions may be imposed on the landlord by the dispensation order. If so, then dispensation is effective only when the landlord has complied with those terms and conditions. Otherwise, dispensation takes effect on the date the dispensation order is made.
The facts
The property is a development of 160 flats built in the 1960s comprising five blocks in Andover, Hampshire, 114 of which are held by leaseholders on long leases. The freeholder/landlord of the development is Aster Communities (Aster).
In March 2016 Aster sent to the leaseholders a formal notice of intention to undertake works on the development. The notice listed several works including “concrete repairs and fairing coatings” and “Cavity fill extraction and replacement”. However, there was no specific suggestion in the notice of intention that the works would involve the replacement of the balcony asphalt.
In December 2016, the leaseholders were issued with a statement outlining three estimates for the work to be carried out. The statement listed the proposed works in the same way as in the notice of intention and again there was no reference to replacement of balcony asphalt although the priced specifications which were available for inspection did include provision for replacement of balcony asphalt.
In January 2017, an application to the FTT was made by the Aster to establish the reasonableness of on-account service charges demanded from the leaseholders including paying the cost of the complete replacement of the asphalt on balcony areas.
This application was disputed by several leaseholders who had obtained an expert report from a chartered building surveyor on which they relied in challenging whether the full replacement of all balcony asphalt was reasonable. The FTT ruled that full replacement of all balcony asphalt was unnecessary.
It was also noted that the replacement of the balcony asphalt was not part of the section 20 consultation.
“ Even if Aster can eventually justify some or complete balcony asphalt replacement based on what has been discovered in the course of the works, and seeks to recover the cost from the lessess, an application for dispensation would seem to be required.”
Following on from that FTT decision , Aster applied for dispensationin relation to the replacement of the balcony asphalt at four of the blocks.
What happened at the First-tier Tribunal?
Some leaseholders challenged the dispensation application arguing that the failure to consult with them deprived them of the chance to obtain expert advice on the balcony works and to judge whether there was a more economic approach.
Decision of the First-tier Tribunal
The FTT reached the view that the leaseholders had established a credible case of ‘relevant prejudice’ – namely that they were being asked to pay for inappropriate works, due to the lack of consultation. The FTT relied on the evidence of one leaseholder who said that had the scale and extent of the balcony works been properly communicated at the start of the consultation process, she would have referred the issue to an expert.
While the FTT was satisfied that it was reasonable to grant dispensation to Aster, it was only reasonable “on terms that will remove possible prejudice to the lessees”. This led to dispensation being granted subject to three conditions:
- Aster should pay the leaseholders’ reasonable costs of an expert nominated by the leaseholders to consider and advise them on the necessity of replacing all the balcony asphalt at the main blocks;
- Aster should pay the leaseholders’ reasonable costs incurred in the application to dispense
- The costs of the application should not be recoverable by Aster from the leaseholders through their service charges.
Aster appealed to the Upper Tribunal.
Decision of the Upper Tribunal
UT dismissed Aster’s appeal.
UT ruled that Aster had failed to consult the leaseholders adequately and then undertook the works to the balconies with the intention of recovering its costs through the service charge.
The leaseholders had not had the opportunity to consult their expert on the works carried out, in circumstances where the FTT had already found that complete replacement of the balcony asphalt was unnecessary.
There was it felt, and to say the least, a credible case of “relevant prejudice”.
UT felt that that prejudice could be best remedied by the leaseholders instructing their expert to conduct a survey of the balconies throughout the main blocks. That would place the leaseholders:
- In the position they would have been in had there been proper consultation; and
- In a position to decide whether and, if so, how the landlord could be challenged in its attempt to charge the works to them.
Aster challenged the UT’s decision in the CA.
The judgment of the Court of Appeal
CA dismissed Aster’s appeal.
Three issues were considered and resolved:
- Was the FTT wrong in concluding that the leaseholder would have acted differently if properly consulted?
The Court of Appeal decided that the FTT had been entitled to find on the facts that the leaseholder in question would have commissioned a surveyor’s report had the landlord’s first consultation notice being the notice of intention referred to the balcony works.
The leaseholder had indeed said so in a formal statement of case confirmed by a statement of truth.
Furthermore, Aster had not objected to the dispensation application being decided without a hearing, so the leaseholder was not cross-examined.
The leaseholder went to the trouble of inspecting estimates and putting in observations, which made it the more plausible that she would have instructed an expert.
- Could a leaseholder rely on the fact that another leaseholder would have acted differently if the consultation requirements had been followed?
The consultation under Section 20 of the 1985 Act was a group process.
A landlord was required to supply each leaseholder with notice of their intention to carry out works and a “paragraph b statement” which includes, among other things, a summary of observations made by other leaseholders.
In addition, a landlord seeks a dispensation order against leaseholders generally.
If all leaseholders suffer prejudice because of a defect in the consultation process meant one of them did not persuade the landlord to limit the scope or cost of works in some respect, the Court of Appeal could not see why the FTT should be unable to make dispensation conditional on every leaseholder being compensated.
The reduction in the scope or cost of works would have accrued to the benefit of each of the leaseholders, and so, if dispensation is to be granted against them all, the totality of the prejudice should be addressed.
- Was it in any event impermissible for the FTT to impose the first two conditions in the circumstances?
In the specific circumstances, the FTT was entitled to impose the condition on Aster of paying for the leaseholders’ reasonable costs of instructing an expert.
The FTT was effectively proceeding on the basis that the potential prejudice to the leaseholders remained to be addressed, with any future application to the FTT providing a forum for the investigation into prejudice which might otherwise have been undertaken, at the landlord’s expense, in the context of the dispensation application.
Given the circumstances in which a dispensation application was made could be almost infinitely various, so any principles that could be described should not be regarded as rigid rules, and as the FTT had power to grant a dispensation on such terms as it deemed fit, provided that any such terms were appropriate in their nature and effect, the imposition of this condition could not be faulted.
Regarding the condition imposed that Aster pay the leaseholders’ costs in respect of the dispensation application, they were asking for an indulgence and so could fairly be expected to bear the leaseholders’ costs of the application. Moreover, the fact that the leaseholders succeeded in having the first condition imposed confirms that this was not a case in which there was nothing relevant for them to say in response to the dispensation application.
TAKE-AWAYS FOR LEASEHOLDERS:
- Leaseholders faced with a dispensation application in the FTT, and consider the works are unnecessary and/or can be done more economically, should consider the FTT’s power to make the order conditional;
- The FTT has wide powers to impose conditions when a landlord is seeking a dispensation order; and
- A condition could be a requirement for the landlord to pay for leaseholders to instruct an expert to advise them on the works, including whether they are unnecessary and/or too costly;
Further information:
