The recent Supreme Court decision earlier this year in the case of Daejan v Benson established that a procedural omission on the part of the landlord when complying with the statutory service charge requirements applicable to residential properties will not necessarily prevent the landlord from recovering the cost of the works where not to do would provide its tenants with a "windfall" as a result of non recovery. This was considered by the Upper Tribunal last month in Voyvoda v Grosvenor West End Properties and 32 Grosvenor Square Limited in relation to a dispute as to the correct deferment rate to be applied to the value of the intermediate landlord's interest in respect of a lease extension of a flat in prime central London.

The Appellant argued that the 5% deferment rate for flats established in the 2007 case of Cadogan v Sportelli should be increased by a further 0.25% to reflect management risks in addition to those already considered in Sportelli. This approach was applied in the 2011 Upper Chamber decision in Calthorpe v Zuckerman and endorsed, subject to qualification, in the 2012 decision of City and Country Properties v Yeats which gave guidance on the matters to be taken into account when choosing the deferment rate in connection with the enfranchisement of flats.

In a decision that will be welcomed by landlords, the Upper Chamber held in favour of the Respondents that the deferment rate applied in Sportelli should apply in this case, and should not be further increased, on the basis that:

  • The only factor relied upon by the Appellant not already in existence and taken into account Sportelli was the market perception of the service charge regime, namely that the market had become more aware of the dangers posed by the regulations than was the case in Sportelli.
  • Whilst this change in market perception may have been applicable when both Yeats and Zuckerman were decided, this factor had now been removed by the Supreme Court decision in Daejan v Benson and that, provided proper procedures were in place, compliance with the 2003 Regulations was straightforward.
  • Accordingly, the risk profile that formed the basis of both Yeats and Zuckerman had been changed to such an extent that, although there is still an element of risk, the level of risk is now adequately covered by the 0.25% uplift established in Sportelli.