Introduction

Guidance from the Supreme Court on applications for the dispensation of the consultation requirements (the “Requirements”) in residential service charges was handed down last week.  The Supreme Court, which heard the appeal in Daejan Investments Limited v Benson on 4 December 2012, ruled in favour of the landlord by a majority of three to two, reversing the decisions of both the LVT and Court of Appeal which had left the landlord with a huge shortfall in service charge recovery.  Daejan has been granted dispensation from the Requirements on terms that (i) the leaseholders’ aggregate liability to pay for the works be reduced by £50,000, and (ii) Daejan pay the reasonable costs of the leaseholders in relation to the proceedings before the LVT.  This means that, instead of only being able to recover the statutory minimum of £250 per leaseholder (totalling £1,250), Daejan will in fact be able to recover some £230,000 towards the cost of works.

Background

The right of a landlord to recover service charges ultimately depends on the terms of a particular lease, however certain statutory requirements and restrictions in the Landlord and Tenant Act 1985 impinge on its ability to recover service charges.  Unless the Requirements are complied with by the landlord or are dispensed with by the LVT, the landlord cannot recover more than £250 per leaseholder towards the cost of the works, regardless of how much the works actually cost the landlord.  Daejan Investments Limited v Benson concerned the width and flexibility of the LVT’s jurisdiction to dispense with the Requirements, and the principles upon which that jurisdiction should be exercised.  Previous case law on this point has been very restrictive and unhelpful for landlords.  The Supreme Court, however, has clarified that the LVT has much wider and more flexible powers to dispense with the Requirements than previously understood.

The Judgment

The Supreme Court ruled on three main issues:

  1. The proper approach to be adopted on an application to dispense with compliance with the Requirements.

The purpose of the Requirements is to ensure that leaseholders are protected from paying for inappropriate works, or paying more than would be appropriate.  The Requirements are a means to an end and therefore the right to be consulted is not a free-standing right.  The LVT should focus on whether the leaseholders were prejudiced in either respect.  In addition the LVT should not distinguish between the landlord committing a serious failing verses a minor oversight of the Requirements, as this could lead to uncertainty.

  1. Whether the LVT can grant dispensation subject to terms.

The Court decided that the LVT does have the power to grant dispensation on appropriate terms.  It can also impose conditions on the grant of dispensation, including that the landlord pays the leaseholders’ reasonable costs incurred in connection with the dispensation application.

  1. The approach to be adopted when prejudice is alleged by the leaseholders due to the landlord’s failure to comply with the Requirements.

The Court considered that the tenants could only rely on “relevant prejudice” (that is, to say, a prejudice which they would not have suffered if the Requirements had been fully complied with, but which they will suffer if an unconditional dispensation were granted).  The LVT should, in the absence of some good reason to the contrary, effectively require the landlord to reduce the amount claimed to compensate the leaseholders fully for that prejudice.  In Daejan, the only specific prejudice was a matter of speculation, namely that the leaseholders lost the opportunity of making out the case for using one contractor over another.  Daejan had offered a £50,000 reduction to the amount claimed, which more than covered that prejudice.

And the winner is?

On balance landlords will benefit the most from the decision.  A relatively minor failure to comply with the Requirements will not leave the landlord unable to recover more than the statutory minimum from leaseholders, a landlord will only have to reduce the amount claimed to compensate leaseholders for actual prejudice suffered.  However the leeway comes at a price, a landlord will have to pay its own costs of the dispensation application and the tenants’ costs of investigating and challenging the application.  Overall the judgment in Daejan restores a fairer balance ensuring that leaseholders do not receive an unjustifiable bonus and that landlords are careful about observing the Requirements.