Property Law UK

Introduction

Section 20 and the subsequent sections of the Landlord and Tenant Act 1985 (as amended) contain detailed provisions requiring the landlord to carry out consultations with the tenants when planning to carry out major works.

These are supplemented by the Service Charges (Consultation Requirements) (England) Regulations 2003; The Service Charges (Consultation Requirements) (Amendment) (No. 2) (England) Regulations 2004. For the Welsh regulations click here

The consultation requirements in respect of qualifying long-term agreements do not apply to agreements entered into in relation to buildings which have not yet been constructed or which are not let at the time of the agreement. (BDW Trading Ltd v South Anglia Housing Ltd ).

Consultation process

Repeat of stage two?

Reedbase Ltd v Fattal
[2018] EWCA Civ 840

Summary: When determining whether a landlord should repeat stage two of the consultation process concerning qualifying works under the Service Charges (Consultation Requirements) (England) Regulations 2003, the test was whether the tenants had been given sufficient information by the first set of estimates of the cost of proposed works, and if obtaining fresh estimates was likely to increase the protection afforded by the consultation process.

Dispensing with consultation requirements

Prejudice to the tenants flowing from the failure to consult

Dispensation on terms

Daejan Investments Ltd v Benson
[2013] UKSC 14

Summary

The landlord had not followed all the stages of the correct procedure to consult with tenants prior to imposing service charges. By a majority the Supreme Court (overruling the decisions of all lower Courts and tribunals) granted the landlord dispensation on terms. There is no justification for treating consultation or transparency as appropriate ends in themselves. The sole question for the LVT when considering how to exercise its jurisdiction in accordance with section 20ZA(1) is the real prejudice to the tenants flowing from the landlord’s breach of the consultation requirements. The financial consequences to the landlord of not granting a dispensation is not a relevant factor. The nature of the landlord is not a relevant factor. In this very important case the Supreme Court went on to give guidance on a number of matters that arise in these cases.

Facts

The landlord (L) was the freehold owner of a building comprised of shops and seven flats, five of which were held by the tenants (Ts) under long leases, which provided for the payment of service charges. L gave Ts notice of its intention to carry out major works to the building and appointed a firm of surveyors (REA), at the tenants’ request, to prepare a revised specification of works and act as contract administrator. Four tenants nominated Rosewood Building Contractors (Rosewood) as their preferred contractor.

L obtained four priced tenders for the work and instructed REA to prepare a tender report. The report stated that the choice was between Rosewood and Mitre (L’s preferred contractor). L gave Ts a copy of Mitre’s tender and the tender report and the Ts requested copies of the other tenders; they particularly wanted to see Rosewood’s tender.

The tenants then issued an application under s27A of the Landlord and Tenant Act 1985 for a determination, inter alia, that the consultation process had not been complied with and that the cost of the major works was not reasonable.

L served a stage 2 notice which stated that the end of the relevant period for making observations was 31 August 2006. At a pre-trial review in the LVT proceedings on 8 August 2006 (i.e. before the end of the relevant period), L’s representative stated that the contract had already been awarded to Mitre.

The LVT found that it was futile for Ts to make further observations and that L had failed to comply with the Consultation Requirements. The tenants’ contribution to the cost of the works (which was around £280,000 under the terms of their leases) was capped at £1,250 (£250 each). L applied for dispensation pursuant to s20ZA(1) of the Landlord and Tenant Act 1985. It argued, inter alia:

That the failure to comply with the Consultation Requirements had not caused the tenants to suffer significant prejudice;
That the financial consequences on L of not granting dispensation was a relevant factor; and
The offer to compensate Ts for any prejudice by reducing the cost of the works by £50,000 was also relevant.

At the dispensation hearing, Ts were unable to identify what comments they would have made had they seen the Rosewood tender.

Issues for Supreme Court

In the Supreme Court, Lord Neuberger identified three questions of principle:

The proper approach to be adopted on an application under s20ZA(1) to dispense with compliance with the Requirements;
Whether the LVT had to either refuse or allow such an application, or whether it could grant a dispensation on terms;
The approach to be adopted when prejudice is alleged by tenants owing to the landlord's failure to comply with the requirements.

Supreme Court

By a majority (3:2) the Supreme Court overruled the decisions of all lower courts and tribunals and granted L dispensation on terms, which included the discount of £50,000 offered by L. Lord Neuberger gave the leading judgment.

Issue: proper approach to dispensation

The Court held that sections 20 and 20ZA are intended to reinforce and to give practical effect to the purpose of s19(1), namely by ensuring that tenants of flats are not required to pay:

More than they should for works/services which are necessary and are provided to an acceptable standard (19(1)(a)); and
For unnecessary works/services or works/services which are provided to a defective standard (s.19(1)(b)).

There is no justification for treating consultation or transparency as appropriate ends in themselves (Lewison J. was wrong to so hold in Paddington Basin Developments Ltd v West End Quay Ltd [2010] EWHC 833 (Ch), [2010] 1 WLR 2735). The main, indeed normally, the sole question for the LVT when considering how to exercise its jurisdiction in accordance with section 20ZA(1) is the real prejudice to the tenants flowing from the landlord’s breach of the consultation requirements.

The financial consequences to the landlord of not granting a dispensation is not a relevant factor. The nature of the landlord is not a relevant factor.

It is not appropriate to distinguish between “a serious failing” and “a technical, minor or excusable oversight”, save in relation to the prejudice it causes.

Dispensation should not be refused solely because the landlord seriously breached, or departed from, the consultation requirements. The Court held that Grafton Way may have been rightly decided but, if so, it was for the wrong reasons.

Issue: conditional dispensation

The Court held that the LVT has power to grant a dispensation on such terms as it thinks fit, provided that any such terms are appropriate in their nature and their effect. Thus, the LVT can require a landlord to reduce the recoverable cost of the works by an amount equivalent to the additional cost of the works caused by the failure to comply with consultation requirements.

The LVT has power to impose a condition that the landlord pays the tenants’ reasonable costs (including surveyor and/or legal fees) incurred in connection with the landlord’s application under section 20ZA(1).

Issue: approach to prejudice

The Court held that the legal burden of proof remains throughout on the landlord. The factual burden of identifying some “relevant” prejudice that they would or might have suffered is on the tenants. The court considered that “relevant” prejudice should be given a narrow definition; it means whether non-compliance with the consultation requirements has led the landlord to incur costs in an unreasonable amount or to incur them in the provision of services, or in the carrying out of works, which fell below a reasonable standard, in other words whether the non-compliance has in that sense caused prejudice to the tenant.

Lord Neuberger anticipated that LVTs will view tenants' arguments sympathetically, for instance by resolving in their favour any doubts as to whether the works would have cost less (or, for instance, that some of the works would not have been carried out or would have been carried out in a different way), if the tenants had been given a proper opportunity to make their points. The more flagrant the landlord's failure, the more readily an LVT would be likely to accept that the tenants had suffered prejudice.

Once the tenants had shown a credible case for prejudice, the LVT should look to the landlord to rebut it.

Comment

Many landlords will welcome this decision. Dispensation is likely to be granted in far more cases, albeit on terms. Landlords are likely to have to pay their own costs of the application for dispensation and the tenants’ reasonable costs in so far as they reasonably tested its claim for a dispensation and reasonably canvassed any relevant prejudice which they might suffer but it is difficult to envisage many situations whereby a tenant’s contribution to the cost of major works will be capped at £250.

Tenants will be able to identify what they would have said with the benefit of hindsight and assisted by a surveyor. If and to the extent that tenants establish relevant (financial) prejudice, dispensation is likely to be granted on condition that the recoverable costs are reduced to compensate such prejudice.

Costs following decision on dispensation

Daejan Investments Ltd v Benson
[2013] UKSC 54

Summary

The Supreme Court considered the terms of orders as to costs and other issues following its earlier decision to allow a landlord dispensation from consultation requirements so as to be able to recover service charges.

Issue

Both parties agreed that the Supreme Court’s judgment required the landlord (L) to pay the tenants’ (Ts’) costs of the dispensation hearing. The parties disputed the wording of the condition to be included in the court’s order:

L argued that the Ts were only entitled to their costs in the LVT “insofar as those costs were incurred in reasonably testing the landlord’s claim for dispensation or in reasonably canvassing any prejudice which the tenants might suffer”.
Ts submitted that their costs should be recoverable from L insofar as they were incurred “in reasonably investigating and establishing non-compliance with the Regulations, investigating or seeking to establish prejudice, and investigating and challenging the landlord’s application for dispensation.”

Decision

The Supreme Court preferred the tenants’ (wider) formulation and clarified that the landlord was required to pay the tenants’ costs in reasonably investigating and establishing non-compliance with the consultation requirements as a condition of dispensation, even though these costs were incurred in earlier separate proceedings.

The Supreme Court also clarified that the landlord should be prevented from recovering its costs in resisting a determination that it failed to comply with the consultation requirements as a condition of dispensation. Notwithstanding these conditions, it was also appropriate to make an order pursuant to s20C of the Landlord and Tenant Act 1985 (i.e. that these are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge).

As regards the effective date of dispensation, the Supreme Court held that dispensation will take effect once all conditions subject to which the dispensation is granted have been determined (and, where appropriate, satisfied). This may be important for the purpose of determining when interest on the late payment of service charges becomes payable.

Comment

The Court’s Order is likely to be used by parties and tribunals as a precedent as to how to give effect to decisions granting dispensation on conditions.

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