In the recent case of Daejan Investments Ltd v Benson , the Supreme Court granted a landlord dispensation from service charge consultation requirements, overturning the decisions of the Leasehold Valuation Tribunal (LVT) and the Court of Appeal.
The consultation requirements
Where service charge costs exceed certain thresholds, landlords of residential premises can only recover those costs from tenants following a prescribed consultation process. If a landlord does not comply with the consultation process, the LVT has the power to limit the amount of service charge recoverable from each tenant.
However, s20ZA Landlord and Tenant Act 1985 allows the LVT to grant a landlord dispensation from these consultation requirements if it is reasonable to do so - and it was the grant of dispensation that was the main focus of the Daejan case.
The landlord planned works to a block of flats amounting to £280,000, which it intended to recover from its tenants pursuant to the service charge provisions in their leases. The landlord duly followed the first stages of the consultation requirements, which included the provision of a specification and estimates for the works.
However, he failed to comply with all stages of the requirements by failing to provide the tenants with a summary of observations on the estimates and a notice of where they would be available for inspection.
The landlord applied for dispensation to the LVT and, as a condition of the dispensation, proposed a £50,000 deduction from the costs of the works in order to compensate the tenants for any prejudice they had suffered.
The LVT did not grant dispensation and reduced the tenants' liability to the statutory cap of £250 each, which meant that the landlord was only able to recover £1,250 towards the costs of the works. The landlord appealed to the Court of Appeal, which upheld the LVT's decision, leaving the landlord with a massive potential shortfall.
The Supreme Court takes a fresh look
The Supreme Court, however, ruled in favour of the landlord. It found that although the landlord had failed to comply with the consultation requirements, there was little evidence of prejudice to the tenants. The key question for the court was whether the tenants would suffer any relevant prejudice if dispensation from the requirements was granted.
The court also stated that it was for the tenants to establish the factual burden of identifying the relevant prejudice. Once that had been identified by the tenants, the LVT would require the landlord to rebut it.
Although the landlord had not fully complied with the consultation requirements, the Supreme Court granted dispensation on two terms. First, the tenants' total liability would be reduced by £50,000 and secondly, the landlord was ordered to pay the tenants' reasonable costs in making the application to the LVT.
What does this mean for residential landlords?
This is not an unqualified result for landlords - they still need to have proper regard to their statutory obligations to consult with their tenants.
Although the Supreme Court's decision appears favourable for landlords, the court did state that the LVT should remain sympathetic to tenants when considering whether to grant dispensation from the service charge consultation requirements. Some commentators are also of the opinion that the judgment may widen the scope for argument as to whether a relevant prejudice has been suffered by tenants.
What this does show is that the consultation process is complex and very procedural. Landlords of residential property should take proper advice when planning major works to ensure that they do not fall foul of the rules and risk significant financial penalties as a consequence.