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.