Dispensation from section 20 and the concept of ‘prejudice’ continues to be a hot topic in the tribunals following the leading case of Deajan. This was again considered by the Upper Tribunal in the recent case of Steanu Properties Limited v Leek and Others [2010] UKUT 478 (LC).

In Steanu, the LVT was asked to determine the reasonableness of service charges under section 27A, which included sums for major works to which the statutory consultation requirements of section 20 applied.

The LVT found the charges to be justified and reasonable. However, it found that no real effort had been made by the landlord to comply with the statutory requirements of section 20, a finding which was accepted by the landlord. As such, the landlord was limited to recovering just £250 per leaseholder towards the works. The landlord made an application under section 20ZA for dispensation.

The LVT dismissed the application on the basis that the landlord could not explain its failure to consult. The landlord appealed the LVT’s decision on the basis that dispensation should not be refused unless the failure to consult had caused some ‘significant prejudice’ to the leaseholders, following the decision in Daejan. The landlord argued that the LVT had failed to consider whether any prejudice had in fact been caused and that prejudice could not be presumed.

The Upper Tribunal dismissed the appeal.

The Upper Tribunal accepted that the LVT had not explicitly set out the issue of prejudice, however it found that prejudice had nonetheless been considered. The Upper Tribunal went on to say that where there is a minor breach of the consultation procedure, it will be important for a tribunal to find evidence that the leaseholders were prejudiced or disadvantaged. Where the breach has been substantial, it may be reasonable to assume prejudice. Even in cases where it is possible to show that following the correct procedure would have made no difference to the end result, it still does not follow that there could be no prejudice. Indeed, even if the end result probably would have been the same without the tenant’s participation, the Upper Tribunal held that it was very arguable that such tenants who are substantially deprived of their right to be included in the decision-making process are genuinely prejudiced.

The Upper Tribunal reiterated that “the effect of a properly conducted consultation process should be to give the tenants confidence in the decisions that are reached and leave them feeling as comfortable as they can be with the services charges that are likely to flow from those decisions. The opportunity to participate in a meaningful way in the decision-making process is of real value.”

The Upper Tribunal held that it could be inferred that the LVT had considered the breach to be so substantial that prejudice must be taken to have flown from it.

Steanu is a model illustration of the tribunals’ general reluctance to grant dispensation to defaulting landlords. It is particularly concerning that evidence of prejudice may not even be required where the breach of procedure has, in the opinion of the tribunal, been so substantial that prejudice can be assumed.

The case is a timely reminder to residential landlords and managing agents of the importance of following section 20, and the draconian consequences which follow for failure to comply.