Would you like ketchup with that hat?

Ok. Confession time. For the last year or so, I have been confidently predicting (often vocally and to unsuspecting passers-by) that the landlord would lose its appeal in Daejan Properties Ltd v Benson [2013] UKSC 14. Well, the landlord won.* And so I have a veritable brimful** of hats to consume over the next few weeks.

The Landlord and Tenant Act 1985 is the primary statute governing service charges and protections for leaseholders. Sections 20 and 20ZA deal with consultation before certain costs are recoverable. In outline, if a landlord wants to recover more than £250 per leaseholder in respect of works, he needs to consult them in the prescribed manner as detailed in regulations. For your “normal” works by a private sector landlord, there are three main stages. At stage 1, the landlord has to tell you what works he is planning and why and give you the opportunity to comment and nominate a contractor. Stage 2 involves an analysis of the quotes. Stage 3 obliges the landlord to give reasons for his choice of contractor, if he has not chosen either the cheapest or someone nominated by the leaseholders. The LVT has power to dispense with some or all of the consultation requirements if it reasonble to do so.

In this case, the landlord wanted to do some £400,000 of works, of which £280,000 was anticipated to be recoverable from leaseholders as a service charge. The LVT found that there had been non-compliance with the consultation regulations as it appeared that the decision as to who to award the works contract to had already been made before the conclusion of the statutory consultation period. The LVT, UT and CA all refused to grant dispensation (see our notes here and here).***

The Court of Appeal was particularly interesting. In short, it was held that consultation was a good in and of itself and that any breach was prima facie prejudicial to the leaseholders. It was not for leaseholders to prove prejudice, but for landlords to show there was none. The financial consequences – to either party – of granting or refusing dispensation were irrelevant.

And so, off to the Supreme Court. Where Daejan win. Lord Neuberger gives the majority judgment.

His first point is that s.20 consultation is an adjunct to s.19 (reasonableness) and has to be seen in that context, such that the purpose of s.20 is to ensure that leaseholders don’t pay for poor quality or unnecessary works:

Thus, the obligation to consult the tenants in advance about proposed works goes to the issue of the appropriateness of those works, and the obligations to obtain more than one estimate and to consult about them go to both the quality and the cost of the proposed works”

[43]

It follows from this (so says Lord Neuberger) that the question of whether or not to grant dispensation involves consideration of those issues, and those issues alone.

Given that the purpose of the Requirements is to ensure that the tenants are protected from (i) paying for inappropriate works or (ii) paying more than would be appropriate, it seems to me that the issue on which the LVT should focus when entertaining an application by a landlord under section 20ZA(1) must be the extent, if any, to which the tenants were prejudiced in either respect by the failure of the landlord to comply with the Requirements

[44]

So, if the breach of the regulations had not impacted adversely on either of these questions, dispensation should be granted.

Thus, in a case where it was common ground that the extent, quality and cost of the works were in no way affected by the landlord’s failure to comply with the Requirements, I find it hard to see why the dispensation should not be granted (at least in the absence of some very good reason): in such a case the tenants would be in precisely the position that the legislation intended them to be – ie as if the Requirements had been complied with.

[45]

In direct disagreement with the Court of Appeal, the Supreme Court held that the consultation process was not an ends in itself and there was no inherent value to the process, save insofar as it went to the two issues under s.19. There was no basis for distinguishing between minor, technical or substantial breaches of the regulations ([46]-[47]).

When considering the issue of prejudice, the legal burden to establish some prejudice rested with the leaseholders, with the landlord then being required to meet it later. The prejudice had to be directed to the two issues under s.19. There was not an enormous hurdle for the leaseholders to overcome and the LVT was likely to look reasonably favourably on the leaseholders ([65]-[69]).

Turning to the powers of the LVT on dispensation. The LVT was entitled to grant dispensation on terms. Those terms could be (i) a shortened consultation process; (ii) a requirement that the landlord cap the recoverable costs; and/or (iii) that the landlord pay the leaseholders reasonable costs of testing the application for dispensation.

On the facts of the case, a discount of £50,000 on the recoverable works, plus a requirement that the landlord pay the reasonable costs of the leaseholders in testing the application were adequate conditions on which to grant dispensation.

Comment: This really is remarkable. It’s now almost impossible to imagine circumstances in which the £250 recoverable limit will apply. You’d need the most flagrant breach which led to the most incredible waste of money on the works to get that result. Most cases are going to result in dispensation being granted on relatively minor financial terms.

I’m very, very uncomfortable about the approach to prejudice. If the focus is on nature and quality of works, what does s.20 add to s.19? Leaseholders are already protected against paying for unnecessary or poor quality works under s.19. What is the point of s.20? The answer is, as Lewison J (as he was then) said in Paddington Basin Developments (our note here), that transparency is itself a virtue and one that Parliament has encouraged landlords to buy into. The Supreme Court has blown that out of the water.

The decision that the LVT can grant dispensation on terms as to costs is totally confused. The analogy that is drawn is with forfeiture cases, but I can’t believe that anyone buys it.

The real winners are, I think, lawyers and surveyors. A successful dispensation application will now be granted on terms relating to the payment of certain costs incurred by the leaseholders. Surely it will now be more common for leaseholders to instruct both lawyers and surveyors to resist dispensation applications?

Finally, we now know that Daejan were granted permission to appeal to the CA and SC on terms that they would not seek to recover their costs if successful – in short, (broadly) reflecting the position in the LVT and UT; might this become a general practice for landlord appeals to the higher courts?

Lords Hope and Wilson dissented. Frankly, their judgments are much, much better. But, sadly, not the law. Might Parliament be persuaded to intervene and overturn this decision?

* well, numerically it lost 10-3, but Neuberger is worth 9 normal votes, sort of like the ultimate Top Trump (LVT 3-0 to tenants; UT(LC) 2-0 to tenants; CA 3-0 to tenants; SC, 3-2 to Landlord).

** is that the right collective noun?

*** and this is why I predicted they would lose; if Daejan get dispensation, then surely everyone gets dispensation.

Posted in Housing law - All, Leasehold and shared ownership, Uncategorized.

About J

J is a barrister in London. He loves service charges and all things leasehold law related. He also likes beating rogue landlords and mortgage companies.

16 Comments

  1. My biggest issue with this decision is that there is more to s20 than s19. When complied with, s20 provides protection against demands for work that hasn’t been carried out or over-specified in the invoice to the Landlord. In other words protection against fraud.

    Also, if s20 is merely an adjunct to s19, with an s27A application by the leaseholder the leaseholder has to prove unreasonable costs. With s20 the leaseholder is able to put a lower limit than just ‘reasonable’ costs.

    Having said that I am not sure the Supreme Court Decision has been properly reported. I know I am in the minority (of 1) but I don’t feel that Lord Neuberger’s comments necessarily give rise to the above shortcomings.

    I am encouraged by his comments that the burden of proof remains with the landlord and the leaseholder needs to show that he might have suffered prejudice (para. 67). In para. 83 he says that the tenants needed to at least advance some evidence/argument that they may well have suffered prejudice.

    Also encouraging is the comment in para. 67 “the landlord can scarcely complain if the LVT views the tenants’ arguments sympathetically, for instance by resolving in their favour any doubts as to whether the works would have cost less”

    Perhaps it is enough for leaseholders to simply suggest the work carried out in the invoice produced by the landlord was not carried out in full? As Lord Neuberger says, the burden of proof is still on the Landlord.

    Also, what happens when, in the case where no consultation is carried out, and the s27a application and application for dispensation comes many years later? Would this prompt the LVT to give the benefit of doubt to the leaseholder?

    • I agree that s.20 adds to (and is not merely an aspect of) s.19, although I’d doubt that fraud is the primary protection. Fraud is one of those allegations that people like to throw around but rarely gets proved. The real value is transparency, as Lewison J (as he was then) said in the Paddington Basin case.

      Lord Neuberger is treating prejudice in the same way as the burden of proof (such as it is) exists in service charge cases (see Yorkbrook v Batten). There is a factual burden on the tenant to make out a prima facie case, but, if that is done, it falls on the landlord to explain himself adequately. The problem is that the tenant will struggle to articulate that prejudice, as it has to be prejudice in terms of the scope and quality of the work. In reality, that’s pretty hard to do without a good surveyor to give evidence on your behalf.

      Historic dispensation – well, much will turn on the facts. My instinct though is that, after this case, all dispensation is more likely.

      • pm, thanks for your comment.

        Yes, I agree with your point about the throwing around of allegations of fraud, but obviously it does happen on occasion.

        My concern is that the protection that s20 gave leaseholders, despite it not being the primary protection given, has now disappeared. I think of the issue from my own point of view. I sublet my flat in a building where the Landlord owns the other flats. I have very little idea whether what I am being charged for has actually been done.

  2. This piece is spot on. The Supreme Court has changed the law, not just interpreted it. As the piece notes, there is almost no likelihood of the £250 limit ever being imposed now, yet it was the will of Parliament that it should be imposed. It was a draconian penalty for a purpose – to ensure consultation, not make it an option that could be mitigated by a bit of compensation. As Hope said, this destroys the integrity of the original Act. As to Parliament intervening, I can’t see the current government being anything other than happy with the Supreme court’s striking down the will of Parliament in this case (less so in human rights cases of course…)

    • I agree. I am afraid that the majority have engaged in judicial legislating. But that is now the law. Will Parliament intervene? Possibly. I hear there is some interest in amending the consultation regs to deal with Philips v Francis, so it may be that this can be revisited as well. No chance of this for at least a year though I’d have thought, as there is some detailed consultation needed.

      • Alrich’s post has got me thinking about the intentions of parliament with the original legislation. My initial thought was that the fact they allowed dispensation if the LVT considered it reasonable meant they didn’t intend the legislation to be a penalty for failure to consult. We are talking about two different things i) limitation of service charges for failure to consult ii) dispensation from having to consult

        Now I’m wondering if they even intended s20ZA to be used retrospectively and if so whether they intended it to be used after a £250 s20 decision had been made in regard to a s27a application. I know that has been happening but that means very little.

        Surely, even now, once the s27a order has been made by the LVT an s20ZA order for dispensation is too late to affect it.

  3. Pingback: Daejan Investments v Benson: Supreme Court flies in face of the legislation | Thinking legally

  4. Well, if the invoiced work was not carried out, you don’t need s.20. That’s a straight s.19 issue (which is part of my objection to this judgment as it blurs the two provisions). But I do caution against blindly stating that it is for the landlord to prove – the burden of proof in LVT cases is much more nuanced than that. In service charge cases, there is an obligation for the tenant to make out an arguable or prima facie case (Yorkbrook v Batten, 1985, CA). In dispensation, there is a similar initial/prima facie/factual burden on leaseholders (Daejan). Then, in each case, the landlord responds.

    • Hi J,

      I have a feeling that rupu’s posts may be some sort of automated bot because they are just parts of comments that have already been made. This one was from me earlier.

      This burden of proof issue does not sit well with me. I think with s20ZA the intention of the legislation was that the landlord to convince the LVT that it is reasonable to dispense with consultation. The Supreme Court appear to have turned that on its head.

      I’m not sure how s27a applications work as the burden seems to have been put on the leaseholder even when the LL makes the application.

      The problem for the leaseholder in both cases is producing evidence. It’s all very well a surveyor looking at a job (if he is allowed access) after the event but how can he tell what has actually been done. Especially after a number of years have passed.

  5. Some further thoughts…

    What gives the LVT jurisdiction to make s27a type decisions in response to a s20ZA dispensation application?

    If the LVT have already limited the service charges to £250 in response to a s27a application, is not a subsequent s20ZA application re-litigation? (I know this is not new)

    What happens if a flat has changed hands between the LVT limitation to £250 and the s20ZA dispensation?

    Why should leaseholders have to employ surveyors, solicitors, obtain quotes, etc. when there is no guarantee the LVT will take these into account when setting conditions on giving dispensation? What if the cost of all this investigation is more than the dispensation being sought?

    • I agree with what you are saying the effects of this judgement
      will be badly felt by leaseholders, I would strongly advise leaseholders to only buy a freehold, ovoid years of having to spend a fortune at the LVT.

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