Service charges: dispensing landlords from the consultation requirements of the Landlord and Tenant Act 1985 (England)

In Daejan Investments Ltd v Benson ([2013] UKSC 14) Daejan owned the freehold of a building with shops at the ground floor level and seven flats above, five of which were held on long leases. Works had to be carried out on the block. While there was a considerable degree of dialogue with, and disclosure to, the representative of the Residents’ Association, the consultation requirements made under section 20ZA(4) of the Landlord and Tenant Act 1985 (‘the Act’) had not been followed to the letter. Where the consultation requirements apply, section 20(1) severely limits the landlord’s ability to recover expenditure under a service charge unless the requirements have been satisfied. The leasehold valuation tribunal may, however, dispense landlords from all or any of the consultation requirements (section 20(1) of the Act). The tribunal can dispense from the requirements when it is reasonable to do so (section 20ZA(1) of the Act).

The Supreme Court had to consider:

1. the proper approach to deciding whether it was reasonable to dispense from the requirements;

2. whether the answer had to be either yes or no, or whether, by contrast, it was possible to grant dispensation on terms;

3. the approach to considering whether the tenant had been prejudiced by a failure to comply with the consultation requirements. ([38] Lord Neuberger).

The majority of the Supreme Court agreed with Lord Neuberger’s judgment, Lords Hope and Wilson dissented. First there should be a dispensation should be available where the extent, quality and cost of the works were not affected by a failure to comply with the requirements ([45]). The question is whether the tenants suffered real prejudice as a result of the breach ([50]). Second, the leasehold valuation tribunal can grant a dispensation on such terms as it sees fit provided they are appropriate in their nature and extent ([54]). It is legitimate to require the landlord to pay the costs incurred by the tenant in opposing an application for dispensation ([61]). Third, the onus would be on the tenant to show some ‘relevant ‘ prejudice ([67]).

Lord Neuberger summarised his conclusion thus:

‘If a landlord fails to comply with the Requirements in connection with qualifying works, then it must get a dispensation under section 20(1)(b) if it is to recover service charges in respect of those works in a sum greater than the statutory minimum. Insofar as the tenants will suffer relevant prejudice as a result of the landlord’s failure, the LVT should, at least in the absence of some good reason to the contrary, effectively require the landlord to reduce the amount claimed as service charges to compensate the tenants fully for that prejudice. ‘ ([71])

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