Landlords win the Daejan

13 March, 2013
by: Cripps Pemberton Greenish

In our Spring 2011 edition we reported on the Court of Appeal’s decision in Daejan Investments v Benson. This concerned the circumstances in which a landlord should be granted dispensation from the statutory service charge consultation requirements that apply to residential long leases (referred to in this article as the Requirements).

On appeal, the Supreme Court has now given its much anticipated judgment, overruling the decisions of the lower courts and tribunals and finding that the landlord was entitled to dispensation from the Requirements.

As readers may recall, the landlord carried out major works to the building at a cost of almost £280,000 and expected to recover that cost from the lessees. These amounted to “qualifying works” i.e. works of repair, maintenance and improvement carried out on a building and where each tenant’s contribution towards the cost exceeded £250.  In consequence the landlord was obliged to follow the Requirements.

If the Requirements are not complied with, a landlord can only recover £250 from each lessee, unless and until these are dispensed with by the LVT.   Although Daejan made an attempt to consult, it did not follow the procedure correctly. The lessees therefore argued they should only be required to contribute £250 each (equating to £1,250 in total) towards the cost of the works.

The landlord applied to the LVT for dispensation but this request was refused, a decision followed by the Upper Tribunal and the Court of Appeal.  The tribunal reasoned that the landlord’s failure to comply with the Requirements had caused serious prejudice to the lessees and that the financial consequences for the landlord if the LVT refused to give dispensation were irrelevant. The stakes for Daejan were thus high.

So what did the Supreme Court say?
The Supreme Court disagreed.   The court granted the landlord dispensation on terms that (1) the lessees’ aggregate contribution to the cost of the works be reduced by £50,000 (in the course of the proceedings the landlord had already offered to deduct £50,000) and (2) the landlord pay the reasonable costs of the lessees in relation to the LVT proceedings.

It confirmed that, in considering a request for dispensation, the LVT must focus on whether the lessees suffered actual prejudice (in terms of paying for inappropriate works or paying more than would be appropriate) by the landlord’s failure to comply with the Requirements.

The onus is on the lessees to show that there has been some prejudice. Once the lessees have demonstrated this, the LVT should reduce the amount claimed to compensate the lessees for the prejudice in question. It did agree with the lower courts’ view that the financial consequences for the landlord, if dispensation was refused, were irrelevant.

To the delight of Daejan, the Supreme Court found that the offer of £50,000 to the lessees far exceeded any prejudice they may have suffered.

The reaction from the stands…
The case is of course welcome news for landlords. Some say it has shifted the balance of power back in favour of landlords while others argue that it simply strikes a better balance between the interests of landlords and tenants. The legislation is complex and it is not difficult to see how an innocent landlord could get it wrong with potentially devastating financial consequences.

After all, if tenants can show that they have been prejudiced by a landlord’s failure to consult, the LVT can and should compensate the tenants for that prejudice by limiting the costs that the landlord can recover.  However, there’s now flexibility to reduce these to a level that reflects the prejudice suffered rather than a blanket £250 cap per tenant, conferring a welcome discretion on the tribunal.

The decision raises many questions on the LVT’s future conduct.  In particular, how it will exercise its discretion to attach conditions to any dispensation? Will the LVT’s new discretion to reduce costs mean the £250 cap becomes, in all reality, obsolete? How will the LVT put a value on the prejudice suffered by the tenants?

Presumably the reduction in the recoverable costs will be proportionate to the prejudice suffered as a result of the breach of the Requirements, rather than the severity of the breach itself. So, in theory, although a breach might be relatively minor, if a tenant can show that but for the breach it would have been in a better position, the reduction in the costs could be significant.

For the time being, it is very much a case of watch this space!