Consult or be Daejaned
The service charge consultation requirements that apply to most long residential leases have never engendered a sense of calm in landlords. Now a recent Court of Appeal decision has raised the bar. The case of Daejan Investments v Benson is a cautionary tale for landlords and their agents and shows that landlords ignore the requirements (or simply get them wrong) at their peril. Landlords are unlikely to be excused for failing to comply with the strict consultation requirements, even where they will suffer severe financial hardship as a result.
The consultation process should be followed where the proposed works will result in any tenant having to contribute more than £250 to the cost of those works. Broadly, it involves 3 stages. First, the landlord gives notice to the tenants of its intention to carry out works explaining why the works are necessary. The tenants can then make comments and nominate alternative contractors from whom the landlord must obtain estimates. Second, the landlord provides details of the estimates obtained, the observations he has received and his response. The tenants should be given 30 days to inspect and comment upon the estimates, and the landlord has to have regard to any comments before a contractor is selected. Third, the landlord notifies the tenants and gives reasons for the selection of the chosen contractor.
In this case, Daejan was the freehold owner and landlord of a block of shops and flats in Muswell Hill and Benson and others were the long leaseholders of 5 of the 7 flats in the block. Under their leases, each one was required to contribute to maintenance costs through the payment of a service charge. Daejan carried out major works to the building, fully expecting to recover the cost of those works through the service charge. However, the tenants argued that they were not required to pay anything more than £250 each because Daejan had not consulted them properly.
There is of course a very good incentive for the landlord to comply with the consultation requirements – if it doesn’t do so, there is a risk that each lessee’s contribution towards the cost of the works will be limited to £250. And therein lies the sorry tale of Benson.
The landlord sought solace at the leasehold valuation tribunal and asked for the usual consultation requirements to be dispensed with. In certain cases, a tribunal can excuse a landlord from the requirement to consult its long lessees but only if it is satisfied that it is reasonable to do so. Much hinged on the tribunal’s decision in this case – the works undertaken by Daejan cost £270,000. If its application was unsuccessful, the lessees’ combined contribution would be limited to £1,250 (£250 per tenant).
Unfortunately, for Daejan, its application failed. The tribunal decided the landlord’s conduct had caused the lessees such serious prejudice, there was to be no dispensation. The Court of Appeal agreed – Daejan’s errors were grave and there were no grounds for excusing it from the usual requirement to consult. Significantly, the court held that the dire financial consequences for the landlord were not relevant to its duty to consult the lessees.
So what went wrong?
Daejan made some mistakes prior to selecting a contractor to carry out the major works. It complied with the first stage of the consultation process, but things went downhill after that. It failed to provide details of, and its response to, the observations received following the first notice, it only offered inspection of the estimate obtained from the preferred contractor and it selected that preferred contractor before the end of the 30 day period.
Helpfully, the Court of Appeal did give some guidance on the types of situation where a landlord might be able to avoid consultation – if the works are urgent, where there is realistically only one contractor who can carry out the works, or where there has been a very minor breach of the consultation requirements causing no prejudice to the tenants. But of course the majority of cases will fall outside of these situations.
The overwhelming message from the Court of Appeal is consult your tenants. If for some reason consultation is not feasible (and, according to the Court of Appeal, those situations should be few and far between), landlords should, where possible, apply for dispensation before they enter into the contract.
If in any doubt, it will always pay to consult your lawyer!