Service Charges & Estate Management Update – August 2013
1st August 2013
Daejan Investments Ltd v Benson  UKSC 54
The Supreme Court has handed down an addendum judgment on the form of order; the liability to pay the (tenants’ and the landlord’s) costs of the hearing regarding compliance with the consultation requirements; the interaction between conditions relating to costs and an order pursuant to s.20C; and the date dispensation takes effect.
The Supreme Court handed down judgment ( UKSC 14) on 6 March 2013 and invited the parties to file submissions on the form of order and costs.
Both parties agreed that the Supreme Court’s judgment ( UKSC 14) required the landlord to pay the tenants’ costs of the dispensation hearing. The parties disputed the wording of the condition to be included in the court’s order. The landlord argued that the tenants 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”, whereas the tenants submitted that their costs should be recoverable from the landlord 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.” 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 s.20C.
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, as in the instant case, for the purpose of determining when interest on the late payment of service charges becomes payable.
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. It will be available on Tanfield Chambers’ website soon.
Arnold v Britton  EWCA Civ 902
On their proper interpretation the service charge clauses in the leases of holiday chalets at a leisure park provided for the payment of an annual sum which increased at the rate of 10 per cent per year.
The appellant lessees appealed against Morgan J’s decision ( EWHC 3451 (Ch) – summarised in the December 2012 update) on the interpretation of their leases. The leases were long leases of holiday chalets at a leisure park. The service charge clauses were not in precisely the same terms for each lease, but the essential issue was whether the clauses provided for annual compounded increases, at the rate of 10 per cent, in the charges payable, as the respondent landlord contended (and Morgan J held); or whether the figure given in the clauses was a cap up to which the landlord could recover the actual expenditure on the provision of services. The tenants’ case was that the effect of compounding was that the service charge was already over £3,000 per annum for the relatively limited services provided for the holiday chalets and, by the last year of the lease, the total would be over £1 million. The tenants argued that this was uncommercial and nonsensical and so required the clause to be regarded and read as a cap. The landlord submitted that there was no evident ambiguity or mistake in the wording; the landlord’s interpretation was not absurd since at the time the leases were made and at times thereafter annual inflation exceeded 10 per cent.
Held (Richards, Davis & Lloyd Jones LJJ)
Dismissing the appeal, although the court’s conclusion was not attractive, the lessees’ argument would involve subverting the proper process of construction of the language actually used and would in truth involve the court rewriting the bargain the parties have made. The court cannot properly, under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain: to do so would involve distortion of all correct legal principles.
Although the issue on the appeal was the construction of specific clauses in various leases, the decision on the principles of construing service charge provisions is of wider significance. The court rejected a submission that service charge clauses are to be construed restrictively and should not be construed, in the absence of clear wording, so as to entitle the landlord to a profit over and above his actual outlay in providing the contracted services. The court approved Morgan J’s statement in para 43 of his judgment ( EWHC 3451 (Ch)) and held that a service charge clause in a lease is not subject to any special principle of construction.
(1) BDW Trading Ltd (2) Comet Square Phase 2 Block Management Co Ltd v South Anglia Housing Ltd  EWHC 2169 (Ch)
Summary: The consultation requirements in respect of qualifying long term agreements (“QLTAs”) 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.
The first claimant (BDW) constructed an estate which included four residential blocks of flats. Three of the blocks were held on a long lease to BDW, and two of those blocks were held on an underlease granted to the defendant. BDW held the freehold interest in the fourth block. BDW entered into an agreement with a third party, Utilicom Ltd, under which Utilicom would provide hot water (for space heating and domestic water services) and electricity to each of the residential flats on the development and BDW would pay a monthly charge. Those costs were ultimately invoiced to the lessees. At the time the agreement was entered into there were no lessees in any of the flats.
If the consultation requirements did apply, then since consultation was impossible in the absence of any tenant, BDW would have to seek a dispensation under s.20(1) of the 1985 Act, failing which it could not recover more than the statutory cap (£100) from any later tenant. BDW submitted that the section could not apply because the definition of a QLTA in s.20ZA referred to “the landlord”, denoting an existing tenancy. The tenants argued that “the landlord” had to include future or prospective landlords, since otherwise there would be a major gap in the legislation; that there was provision for a tribunal to dispense with consultation if it was impossible; and that the 2003 Regulations assumed that the 1985 Act did apply to buildings not yet in existence or not yet let and the 1985 Act was to be construed consistently with the Regulations.
Held (N Strauss QC)
The consultation requirements had no application to the instant case. Since “landlord”, “tenant”, “lease” and “tenancy” were defined in s.30 and s.36 of the 1985 Act in conventional terms, it seemed inconceivable, if it was intended that the legislation apply to agreements entered into when the property was not built or let, that the draftsman would not have so provided in clear terms. The section does not say that “the landlord” is someone who may in future become a landlord and there was no proper basis for stretching its meaning. Further, although landlords could easily avoid the requirement to consult by entering into long-term agreements before letting flats, tenants would still have the protection of s.19 if costs were unreasonable. Also, if an agreement was in place, tenants could enquire about the level of charges before they entered into a lease.
The Regulations and the consultation paper issued by the Office of the Deputy Prime Minister on the proposed regulations in August 2002 (which contains the same provision that became Regulation 3(1)(d) except that there was no exemption for agreements for less than 5 years) were admissible as an aid to interpretation on the ground that they were sufficiently contemporaneous with the 1985 Act. It was undeniable that reg.3(1)(d) assumed that the 1985 Act did apply to agreements entered into where there were no tenants. Where, however, as in the instant case, there was little doubt as to the meaning of the Act and considerable stretching of the language was required to produce an ambiguity, any admissible documents were likely to be of very little weight. Neither the Regulations nor the consultation document had any persuasive power as an aid to the interpretation of the Act, and did not come remotely near dislodging what was otherwise the clear meaning of s.20ZA.
This decision accords with plain common sense. It would be absurd to interpret the consultation provisions as imposing an obligation to consult with non-existent consultees. Developers are well advised to enter into long term agreements before granting leases to tenants so as to avoid the consultation requirements.
Jastrzembski v Westminster City Council  UKUT 0284 (LC)
(1) There is no requirement as to what address the landlord must give in a s.20 notice as the address to which the tenant may send observations; (2) While there is no specified time limit for the service of a s.20 notice, the relevant time periods for the work to be undertaken is months rather than years; the passage of time between 2007 and 2009, combined with the change in the works meant that the 2007 notice was invalid for the purpose of works carried out in 2009; (3) the tenant was in the same position he would have been in had the consultation requirements been fully complied with and, accordingly, the LVT had not erred in granting dispensation.
The appellant tenant sought a determination as to the reasonableness of an estimated service charge of £9,199.15 for the cost of major works and his liability to pay that estimated service charge. The LVT determined that the estimated service charge was reasonable and that the tenant was liable to pay the respondent landlord, Westminster City Council. The tenant argued before the LVT that the s.20 notice served by the Council in 2009 with respect to works under contract reference Q102 had not been served upon him. The Council’s contention was that it had. Rather than deciding this question of fact, the LVT took a point of its own motion by determining that the 2009 notice was invalid by reason of it “inviting observations to be sent to someone no longer involved”. The LVT went on to determine that a s.20 notice that had been served upon the tenant by the Council in 2007 with respect to works under contract reference M111 was a “perfectly good notice”. Further, if wrong about that, the LVT held that they would have granted dispensation pursuant to s.20ZA of the 1985 Act.
Permission to appeal was granted on the basis that it was arguable that the LVT erred in law when concluding that a consultation notice (M111) sent two years before a later invalid notice (Q102) which related to a greater works contract and identified substantially lower estimated service charge costs was a valid notice for the purpose of s.20 and the later works the subject of the invalid notice. Further, when deciding to exercise its discretion to dispense with the consultation requirements and concluding that the tenant had suffered no prejudice it was arguable that the LVT failed to have proper regard to the tenant’s arguments as to the reasonableness of the works the subject of the invalid notice.
- The LVT’s determination that the 2009 notice was invalid amounted to a procedural irregularity because the Council not been prepared for that issue and was thereby denied the opportunity to call any evidence with respect to any arrangements that were in place, or could have been put in place, to ensure that any observations sent to the address included on the notice were sent on to the Council.
- A s.20 notice was not invalid because the address given for the tenant to send observations to was an address of a party no longer involved in the works. There is no requirement as to what the address must be (for example it does not specify that it must be the address of the landlord; the landlord’s managing agent; or landlord’s project manager). It is simply an address for service of the observations and such an address was provided.
- While there is no specified time limit for the service of a s.20 notice, there needs to be some consideration as to what is an appropriate time. One indication of the appropriate time period between service of the notice of intention and the works is the time specified for providing observations or suggestions for contractors. That is specified on the notice as being 30 days. This indicates that the relevant time periods for the work to be undertaken is months rather than years. The longer the period between the service of the notice of intention and the works, the more changes could have taken place which will impact the way in which a tenant will view the works. In the instant case, the passage of time between 2007 and 2009, combined with the change in the works caused by the removal of three of the blocks from the contract, meant that the LVT failed to properly balance the material factors and that its determination that the 2007 notice was valid for the purpose of the 2009 works was wrong.
- As regards the grant of dispensation, the tenant was aware that major works were planned to be carried out on his block and he attended a consultation meeting at which meeting he made observations with respect to the proposed works. The appellant argued that he would have made other, and further, observations had he been in receipt of the 2009 notice but the Upper Tribunal found no evidence to support that contention. In a letter to the Council sent after the tenant finally received the notice of intention the tenant set out the “observations which [he] would have made … had the Notice been served or within a month of service (but prior to the Estimate).” The tenant did not seek to raise any query with regard to the scope of the works or set out that the works were not necessary in his letter. In the circumstances, the tenant had not suffered relevant prejudice as he was not under a disadvantage that he would not have suffered had the consultation requirements been fully complied with. The tenant was in the same position he would have been in had the consultation requirements been fully complied with. Accordingly, the LVT had not erred in determining that that 2009 notice be dispensed with pursuant to the s.20ZA of the 1985 Act.
The decision that the 2007 notice was invalid is potentially very significant. It is now arguable that the consultation requirements have not been complied with if there is a significant delay between the service of notices and the commencement of the works.