Key points

  • Thirteen judges and other arbiters considered the landlord's application for dispensation from start to finish of the judicial process. Only three (the majority decision in the Supreme Court) found in the landlord's favour. It is therefore the view of many commentators that the landlord had a lucky escape
  • This landmark ruling clarifies how the Leasehold Valuation Tribunal (LVT) should exercise the discretion given to it by statute when landlords apply for a dispensation from the service charge consultation requirements
  • The dispensation procedure may prove a useful tool in certain cases where a landlord fails to comply with those consultation requirements (the Requirements). However, it will still always be preferable for a landlord to comply with the Requirements in full, rather than relying on the LVT to exercise its discretion in favour of the landlord

Background

Between them, the Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations 2003 impose a set of statutory requirements and restrictions on a landlord's ability to recover service charge contributions from tenants of residential properties. Unless the requirements are followed, or unless the landlord is granted a dispensation from following the requirements, the most he will be able to recover from each contributing tenant is £250.

In Daejan Investments Limited (appellant) v Benson and others (respondent) [2013] UKSC 14, the landlord applied for - and was eventually granted - a dispensation from following the consultation requirements to the letter. This meant that he could recover almost £46,000 from each of five liable tenants, rather than only £1,250 in total.

The requirement to consult

It has long been the case that a landlord must comply with certain rules and regulations when it comes to spending money on residential premises and then seeking to recover some or all of those costs from occupational tenants. The current set of requirements came into force in England on 31 October 2003. A new section 20ZA was introduced into the Landlord and Tenant Act 1985 (the 1985 Act) by the Commonhold and Leasehold Reform Act 2002. At the same time, the Service Charges (Consultation Requirements) (England) Regulations 2003 (the Regulations) came into force.

The Regulations apply whenever a landlord in England intends to enter into a "qualifying long term agreement" and/or to carry out "qualifying works". Both of these phrases are defined in section 20ZA of the 1985 Act. In either case, the landlord must proceed in accordance with the four stages laid down by the Regulations (set out in full in Part 2 of Schedule 4 to the Regulations, and summarised below). Reference to a "qualifying tenant" means any tenant who is liable to contribute towards the expenditure. For example, a tenant under a long lease of more than 21 years where only a ground rent (plus a service charge) is payable.

Not all tenants in a building will be liable to contribute, in which case they do not need to be served with the required notices, be involved in the discussions, etc. Reference to a tenants' association means any "recognised tenants' association" as defined by section 29 of the 1985 Act. Essentially, this is any association of which the landlord is aware, and of which qualifying tenants are members.

The consultation requirements

The main aims of the Regulations are to ensure that tenants only have to pay for works that are reasonably required, are carried out to an acceptable standard, and where the price is at an acceptable level. To achieve these aims, the landlord must take the following steps:

Stage 1: Notice of intention to do the works

The landlord must give to each tenant and to any tenants' association a notice which:

  • describes the works, or says where and when a description may be inspected;
  • states the reasons for the works; and
  • specifies where and when observations and nominations for possible contractors should be sent, allowing at least 30 days for them to be received.

The landlord must have regard to any observations made.

Stage 2: Estimates

The landlord must seek estimates for the works, including from any nominee identified by any tenants or the association.

Stage 3: Notices about estimates

The landlord must issue a statement to the tenants and any association. This should include two or more estimates, a summary of the observations, and its (the landlord's) responses to those observations. Any nominee's estimate must be included. The statement must also say where and when estimates may be inspected, and where and by when observations can be sent, again allowing at least 30 days for this. The landlord must have regard to such observations.

Stage 4: Notification of reasons

Unless the chosen contractor is nominated by a tenant or the association or submitted the lowest estimate, the landlord must, within 21 days of contracting, give a statement to each tenant and any association of its reasons for selecting that contractor. Alternatively, the landlord can serve a notice specifying where and when such a statement may be inspected.

If the landlord does not follow these steps, the statutory cap of £250 per liable tenant will apply to qualifying works unless the landlord is granted a "dispensation" from having to follow the requirements. This dispensation can be awarded in advance of expenditure (if, for example, the qualifying works need to be carried out as a matter of urgency) or after the works have already been completed and paid for.

When seeking a dispensation, a landlord will first apply to the LVT. Either party can appeal from the LVT's decision to the Upper Tribunal (Lands Chamber). After that, the matter will go to the Court of Appeal and, ultimately, to the Supreme Court (SC). Whichever tribunal or Court makes the decision, it must be "satisfied that it is reasonable" to grant the dispensation.

Facts of Daejan v Benson

Daejan Investments Limited (Daejan) was the owner of a building in Muswell Hill, north London. A connected company of Daejan was the managing agent of the building. The building comprised a ground floor retail unit, with seven flats above. Five of the flats were owned and/or occupied on long leases by qualifying tenants for the purposes of the 1985 Act and the Regulations. Those five tenants were the respondents to Daejan's application for dispensation.

As expected with leases of this type, Daejan was under an obligation to provide various services, including the repair and maintenance of the structure, exterior and common parts of the building. The tenants were each under an obligation to pay their due share of any service charge expenditure. All five were members of a recognised tenants' association, the Queens Mansions Residents Association (the Association).

In February 2005, Daejan's agent sent an initial specification of proposed works to the Association, and discussions commenced. Daejan agreed to appoint, as contract administrator in relation to the works, someone who was nominated by the tenants (something which it did not have to do). A formal stage 1 notice was not, however, served until July 2005.

Although Daejan complied with stages 1 and 2, it failed to make all of the estimates available for inspection at the place, during the hours and for the period specified in the stage 1 notice. It also failed to give the tenants and the Association the full 30 days to inspect all of the estimates and make comments on them. Nor did it provide a summary of the observations received.

In addition, Daejan incorrectly indicated - before the 30 days were up - that it had already placed the building contract. This made the tenants think that there was no point in trying to make further observations. This effectively cut short the consultation period. The works finally commenced in October 2006.

Daejan sent demands for payment to the tenants, seeking to recover the full cost of the works (an amount just under £280,000) from them. The tenants resisted the demands for payment on the ground that the Requirements had not been fully satisfied.

Daejan made an application under section 20ZA(1) of the 1985 Act to the LVT, asking it to grant it a section 20(1)(b) dispensation in lieu of compliance with the Requirements.

During the course of the proceedings before the LVT, Daejan proposed a £50,000 reduction in the sum being claimed to cover any prejudice which the tenants might have suffered. The LVT ignored this offer, and found that it was sufficient simply for Daejan, as landlord, not to have complied with the requirements. It held that, by this failure, the tenants had automatically suffered prejudice and therefore it was not reasonable for dispensation to be granted. The Upper Tribunal (Lands Chamber) agreed with the LVT, as did the Court of Appeal. Daejan appealed to the Supreme Court.

The SC felt that the issues before it were:

  • Whether it was appropriate to grant dispensation, and the approach to be adopted when considering a landlord's application for that grant.
  • Whether it was permissible for the LVT to grant a dispensation "on terms".
  • What was the approach to be adopted when prejudice, arising out of the landlord's failure to comply, is alleged by the tenants.

Judgment

By a majority decision of three to two, the SC allowed the appeal. It granted dispensation to Daejan from the Requirements, but only "on terms" (as opposed to an outright, unconditional relief). The terms were that:

  • the overall contribution to be paid by the five tenants would be reduced by the £50,000 that Daejan had offered; and
  • Daejan should pay the reasonable costs of the tenants in relation to the proceedings.

After all, said the SC, if Daejan was seeking the indulgence of the Court for a failing on its part, it should be prepared to meet the costs of that application.

The SC held that the correct question to ask in cases where the landlord was seeking a dispensation was: if the landlord is granted a dispensation, will the tenants suffer any relevant prejudice as a result of the landlord's failure to comply with the Requirements? And, if they will, what is that prejudice?

In the present case, the Court found it difficult to say that any such prejudice had actually been suffered by the tenants. Yes, there had been a partial failure by Daejan to comply with stage 3, but any relevant prejudice to the tenants could not be higher than the £50,000 deducted from the amount with the landlord was seeking to recover. That was felt to be more than adequate compensation.

The SC held that, when considering requests for dispensation, the LVT should focus on whether the tenants were actually prejudiced in relation to any of these issues by the landlord's failure to comply strictly with the Requirements. It held that compliance with the Requirements is the means by which to protect tenants, but it is not an aim of the Requirements in itself. To which end, it would not be either "convenient or sensible" (to quote Lord Neuberger, President of the SC) to distinguish between a serious failing and a minor oversight. It is the consequences of the failure - and not its degree in the first place - which is important.

Because the SC found that a dispensation can be awarded "on terms", the Court had (and, in future cases, the LVT will have) the right to take the extent of the consequences - including the amount of prejudice to the tenants - into account when deciding what the "terms" should be. While the legal burden is on the landlord, the factual burden of showing what prejudice has been suffered is on the tenants.

For example, if the tenants are saying that they were deprived of the opportunity to comment on an estimate, then they are under an obligation to identify what they would have said. Once the tenants have shown a credible case for prejudice, it is for the landlord to rebut that. In the SC's view, it is for the LVT to be sympathetic to the tenants' case and to find in the tenants' favour if there is doubt.

Overall, the SC felt that it is for the LVT to find a fair balance between ensuring that tenants do not receive a windfall purely because of the landlord's non-compliance, and ensuring that landlords are not cavalier about observing the Requirements. Insofar as the tenants have suffered prejudice, the LVT should ensure they are compensated for that prejudice, in order to put them in the position they would have been in had the landlord complied with the Requirements.

Things to consider

A landlord who does not comply with the Requirements is likely to suffer some form of loss even if a dispensation is granted. For example, a condition of the grant may be that there is a discount in the amount which the landlord can recover from the tenants. And he can expect to be held liable for the tenants' costs for some, if not all, of the litigation process. Such costs will, of course, be in addition to spending time and money in preparing and pursuing his own side of the claim.

And, if a landlord has to fall back on the dispensation procedure, he will still be placing himself at the discretion of the LVT and other Courts and tribunals. There is no guarantee of what the outcome might be, despite the SC's landmark ruling in this case. In particular, the SC stated that the financial consequences to the landlord - and the nature of the landlord - will not be taken into account when considering whether a dispensation should be awarded or not.