Daejan Investments Limited v Benson

Where landlords of long residential leases carry out “qualifying works” or enter “long term agreements”, statute imposes requirements on them which substantially restrict their ability to recover service charge from their tenants unless certain consultation requirements are complied with or dispensed with by the Leasehold Valuation Tribunal (LVT).

In Daejan the landlord was required to consult with five tenants of a block of flats before carrying out proposed works (valued at £280,000), but failed to fully comply with the consultation requirements. It was a term of the lease that the cost of the work was recoverable as service charge from the tenants.

Daejan asked the LVT for a dispensation, so that it would be able to recover the full amount of £280,000 from the five tenants rather than £250 from each of them which it would otherwise be able to recover. The LVT initially regarded Daejan’s failure as a serious breach of the consultation requirements, which amounted to serious prejudice to the tenants. Accordingly, the LVT refused dispensation and, on appeal, the Upper Tribunal and the Court of Appeal agreed with this refusal.

The Supreme Court has now overruled the lower courts and awarded dispensation to Daejan, subject to conditions, and in doing so provided helpful guidance as to the dispensation process.

The Court considered that the purpose of the consultation requirements is to ensure that tenants are protected from paying for inappropriate works or paying more than would be appropriate. In considering dispensation requests, the LVT should focus on whether the tenants were prejudiced in either respect by the failure of the landlord to comply with the requirements. There is therefore no need to draw a distinction between serious failings and minor oversights by the landlord, except to the extent that the question relates to prejudice to the tenants.

The court suggested that, insofar as tenants will suffer prejudice, the LVT should, in the absence of some good reason to the contrary, effectively require the landlord to reduce the amount claimed as service charge to compensate the tenants fully for the prejudice incurred as a condition of the award of dispensation by the LVT. The court noted that such a condition should take into account the tenants’ costs of challenging the dispensation. In Daejan, the landlord had offered to reduce the amount it sought to recover from the tenants by £50,000 and this may well have influenced the court’s decision to grant dispensation.

The Supreme Court’s decision achieves a fair balance between ensuring that tenants do not receive a windfall out of proportion to their potential loss and ensuring that landlords cannot be cavalier about observing the consultation requirements.