SERVICE CHARGES AND ESTATE MANAGEMENT
APRIL 2013 UPDATE
Daejan Investments Ltd v Benson  UKSC 14;  1 W.L.R. 854
By a majority (3:2) the Supreme Court overruled the decisions of all lower Courts and tribunals and granted the landlord dispensation on terms.
The landlord was the freehold owner of a building comprised of shops and seven flats, five of which were held by the tenants under long leases which provided for the payment of service charges. The landlord gave the tenants notice of its intention to carry out major works to the building and appointed a firm of surveyors (REA), at the tenants’ request, to prepare a revised specification of works and act as contract administrator. Four tenants nominated Rosewood Building Contractors as their preferred contractor. The landlord obtained four priced tenders for the work and instructed REA to prepare a tender report. The report stated that the choice was between Rosewood and Mitre (the landlord’s preferred contractor). The landlord gave the tenants a copy of Mitre’s tender and the tender report and the tenants requested copies of the other tenders; they particularly wanted to see Rosewood’s tender. The tenants then issued a s.27A application for a determination, inter alia, that the consultation process had not been complied with and that the cost of the major works was not reasonable. The landlord served a stage 2 notice which stated that the end of the relevant period for making observations was 31 August 2006. At a PTR in the LVT proceedings on 8 August 2006 (i.e. before the end of the relevant period), the landlord’s representative stated that the contract had already been awarded to Mitre. The LVT found that it was futile for the tenants to make further observations and that the landlord had failed to comply with the Consultation Requirements. The tenants’ contribution to the cost of the works (which was around £280,000 under the terms of their leases) was capped at £1,250 (£250 each). The landlord applied for dispensation pursuant to s.20ZA(1). It argued, inter alia: (i) that the failure to comply with the Consultation Requirements had not caused the tenants to suffer significant prejudice; (ii) that the financial consequences on the landlord of not granting dispensation was a relevant factor; and (iii) the offer to compensate the tenants for any prejudice by reducing the cost of the works by £50,000 was also relevant. At the dispensation hearing, the tenants were unable to identify what comments they would have made had they seen the Rosewood tender
The LVT held that “the cutting short of the consultation period by indicating that Mitre had been awarded the contract … removed from the leaseholders the opportunity to make observations on the estimates the fact that they did not have this opportunity amounts to significant prejudice”. It rejected the landlord’s offer to reduce the cost of the works by £50,000.
The Upper Tribunal followed Grafton Way and held that the financial consequences of refusing dispensation was not a relevant consideration. It was not an easy case because “the evidence of actual prejudice is weak”. Nonetheless, the LVT was “entitled to regard this as a [case involving a] serious breach, rather than a technical or excusable oversight”, as the tenants’ “right to make further representations [at stage 3] was nullified”. It was not for the tenants to show prejudice, but for the landlord to show that they had suffered no prejudice, as a result of the landlord 's default, and it was “enough that there was a realistic possibility that further representations might have influenced” the landlord’s decision to engage Mitre rather than Rosewood. The LVT was not entitled to accept a landlord’s offer to reduce the amount of the charge to reflect its view of any prejudice suffered.
The Court of Appeal upheld the LVT’s decision on essentially the same grounds as the UT. Gross LJ held that significant prejudice to the tenants is a consideration of first importance in exercising the dispensatory discretion under section 20ZA(1) and the landlord’s failure in this case constituted a serious failing and did cause the tenants serious prejudice. This was not a technical, minor or excusable oversight. The LVT was entitled not to speculate on what would have happened if there had been no breach, on the ground that the tenants’ loss of opportunity to make further representations and have them considered itself amounted to significant prejudice.
Gross LJ doubted that the LVT would have been entitled to accede to the landlord’s offer to reduce the chargeable amount by £50,000, and that, anyway, the LVT was entitled to reject that proposal
In the Supreme Court, Lord Neuberger identified three questions of principle:
- The proper approach to be adopted on an application under section 20ZA(1) to dispense with compliance with the Requirements;
- Whether the decision on such an application must be binary, or whether the LVT can grant a section 20(1)(b) dispensation on terms;
- The approach to be adopted when prejudice is alleged by tenants owing to the landlord's failure to comply with the Requirements.
Decision on Appeal
By a majority (3:2) the Supreme Court overruled the decisions of all lower courts and tribunals and granted the landlord dispensation on terms. Lord Neuberger (with whom Lord Clarke and Lord Sumption agreed) gave the leading judgment. Lord Hope and Lord Wilson delivered powerful dissenting judgments.
The proper approach to dispensation
Sections 20 and 20ZA are intended to reinforce and to give practical effect to the purpose of section 19(1), namely:
- ensuring that tenants of flats are not required to pay more than they should for works/services which are necessary and are provided to an acceptable standard (19(1)(a)); and
- ensuring that tenants of flats are not required to pay for unnecessary works/services or works/services which are provided to a defective standard (s.19(1)(b)).
There is no justification for treating consultation or transparency as appropriate ends in themselves (Lewison J was wrong to hold so in Paddington Basin Developments Ltd v West End Quay Ltd  EWHC 833 (Ch),  1 WLR 2735).
The main, indeed normally, the sole question for the LVT when considering how to exercise its jurisdiction in accordance with section 20ZA(1) is the real prejudice to the tenants flowing from the landlord’s breach of the Consultation Requirements.
The financial consequences to the landlord of not granting a dispensation is not a relevant factor. The nature of the landlord is not a relevant factor.
It is not appropriate to distinguish between “a serious failing” and “a technical, minor or excusable oversight”, save in relation to the prejudice it causes.
Dispensation should not be refused solely because the landlord seriously breached, or departed from, the Consultation Requirements. Grafton Way may have been rightly decided but, if so, it was for the wrong reasons.
The LVT has power to grant a dispensation on such terms as it thinks fit – provided that any such terms are appropriate in their nature and their effect
Thus, the LVT can require a landlord to reduce the recoverable cost of the works by an amount equivalent to the additional cost of the works caused by the failure to comply with Consultation Requirements.
The LVT has power to impose a condition that the landlord pays the tenants’ reasonable costs (including surveyor and/or legal fees) incurred in connection with the landlord’s application under section 20ZA(1).
The approach to prejudice
The legal burden of proof remains throughout on the landlord. The factual burden of identifying some ‘relevant’ prejudice that they would or might have suffered is on the tenants. ‘Relevant’ prejudice is given a narrow definition; it means whether non-compliance with the Requirements has led the landlord to incur costs in an unreasonable amount or to incur them in the provision of services, or in the carrying out of works, which fell below a reasonable standard, in other words whether the non-compliance has in that sense caused prejudice to the tenant.
Lord Neuberger anticipates that LVTs will view the tenants' arguments sympathetically, for instance by resolving in their favour any doubts as to whether the works would have cost less (or, for instance, that some of the works would not have been carried out or would have been carried out in a different way), if the tenants had been given a proper opportunity to make their points. The more egregious the landlord's failure, the more readily an LVT would be likely to accept that the tenants had suffered prejudice.
Where the tenants were not given the requisite opportunity to make representations about proposed works to the landlord, the tenants have an obligation to identify what they would have said, given that their complaint is that they have been deprived of the opportunity to say it.
Once the tenants have shown a credible case for prejudice, the LVT should look to the landlord to rebut it.
The Dissenting View
In strong dissenting judgments, Lord Hope and Lord Wilson held that Lord Neuberger’s conclusion that the gravity of the landlord’s non-compliance with the Consultation Requirements is relevant to dispensation not of itself but only insofar as it causes financial prejudice to the tenant “subverts Parliament’s intention”. Lord Neuberger’s conclusion that real prejudice to the tenant should normally be the sole consideration for the LVT departs from the width of the criterion (“reasonable”) which Parliament has specified. Lord Neuberger’s inevitable further conclusion that the “factual” burden lies on the tenant to prove such prejudice, as a matter of reality, reverses the burden of proof which Parliament has identified. The hypothetical exercise in which Lord Neuberger’s conclusions require the parties to engage and the LVT to adjudicate upon fails to recognise the complications in comparing estimates. It is very doubtful whether a tenant can often discharge the burden which Lord Neuberger has cast upon him. A serious failure of the landlord does not need to be described as amounting to “prejudice” to the tenant but the LVT should weigh the gravity of the non-compliance with a consultation requirement in determining whether to dispense with it along with any prejudice in the narrower financial sense (which will often be a matter of prime importance).
Many landlords will welcome this decision. Dispensation is likely to be granted in far more cases, albeit on terms. Landlords are likely to have to pay their own costs of the application for dispensation and the tenants’ reasonable costs in so far as they reasonably tested its claim for a dispensation and reasonably canvassed any relevant prejudice which they might suffer but it is difficult to envisage many situations whereby a tenant’s contribution to the cost of major works will be capped at £250.
Tenants will be able to identify what they would have said with the benefit of hindsight and assisted by a surveyor. If and to the extent that tenants establish relevant (financial) prejudice, dispensation will be granted on condition that the recoverable costs are reduced to compensate such prejudice.
Tobicon Limited v Collinson  UKUT 047(LC)
Where a party is not served with the proceedings but is aware of them and chooses not to take part, the UT has a discretion whether to allow an appeal.
The Appellant landlord applied for permission to appeal against the LVT’s determination of the tenants’ liability to pay service charges on the ground that it had not been served with notice of the proceedings and had no knowledge of them. Permission to appeal was granted and the landlord was permitted to call evidence on the issue of service.
The landlord’s registered office is in Jersey. The address for service given in the leaseholders’ s.27A application (which named the landlords and their two agents as respondents) to the LVT was out of the UK. Reg 5(1) of the LVT Procedure (England) Regulations 2003 requires the LVT to send a copy of the application to the each named respondent. The proceedings were not served on the landlord at its registered address in Jersey and no order was made dispensing with service or for substituted service pursuant to regulations 23(4)(a)(iii) and 23(5) of the Procedure Regulations. The Tribunal did, however, send copies of the application to the agents to inform them of the application and the date for the PTR. Neither of the agents had been appointed to act on the landlord’s behalf for the purposes of reg 23(1)(c). In the circumstances, there was no service on the landlord in accordance with the 2003 Regulations.
On appeal, HHJ Robinson found that it was inconceivable that neither of the agents would have informed the landlord of the existence of the proceedings. She held that the landlord was well aware of the proceedings but chose not to take any part in them.
The issue was whether the UT had a discretion whether to allow the appeal in circumstances where a party had not been served with the proceedings but was aware of them and chose not to take part.
Decision on appeal
Having considered Nelson v Clearsprings (Management) Limited  2 All ER 407, CA and Al-Tobashi v Aung (1994) The Times, 10 March, HHJ Robinson held that the UT did have such a discretion. The UT dispensed with the requirement of service of the proceedings on the landlord and dismissed the appeal.
Carey-Morgan v de Walden  UKUT 0134 (LC)
The freeholder had threatened to forfeit the intermediate landlord’s headlease if, in breach of covenant, no full time resident caretaker was employed. In the circumstances, it was reasonable to include the cost of a full time resident caretaker in the estimated service charge payable on account notwithstanding the fact that both the headlessee and the tenant agreed that a cleaner would suffice.
A headlease contained a covenant on the part of the headlessee to employ a full-time caretaker to reside in the basement flat throughout the term.
The underleases contained a covenant by the lessees to contribute towards the costs of the services provided by the landlord. The services included “employing such staff as the landlord may in its absolute discretion deem necessary to provide caretaking services for the Building … including … where accommodation is provided for the use of occupation of such person a sum equivalent to the market rent of such accommodation”.
Despite these covenants, the basement flat was let to obtain a commercial rent. In 2008 the headlessor (Cadogan) threatened to apply for a declaration that the headlessee was in breach of covenant. As a result, the headlessee decided to employ a full time resident caretaker. The caretaker’s contract of employment required her to live in the basement flat.
The headlessee then sought to recover the cost of doing so and also a sum equivalent to the market rent of the basement flat from the leaseholders. This greatly increased the total estimated service charge from around £8,000 to £56,000 per year.
The leaseholders contended that they were not liable to pay through the service charge for the costs of the caretaker or for the market rent of the basement flat. The headlessee accepted that, given a free hand, it would not have thought it appropriate to employ a full time resident caretaker.
On the issue of the reasonableness of the estimated service charges, the LVT accepted that the headlessee had grounds for concern that the headlessor might try to forfeit the headlease. It concluded that it was prudent (viewed from the headlessee’s perspective) to employ a resident caretaker. It was not, however, necessarily reasonable, within s.19(2), to impose upon the leaseholders the full costs of taking the commercial decision to employ a resident caretaker. The LVT concluded it was reasonable to employ – and therefore to budget for – a cleaner rather than a resident caretaker and that the reasonable estimated costs of employing a cleaner were properly to be included within the estimated on account service charges. Having reached these conclusions, the LVT decided that as the costs of employing a resident caretaker were not properly recoverable there could be no recovery of the notional amount of the market rent of the basement, such that it was not necessary to consider the question of whether this notional rent was capable of being challenged under .s.19.
Decision on Appeal
HHJ Huskinson held that the LVT had fallen into error. The LVT found that the building does not need a resident caretaker and that only a cleaner is required. This, however, was a finding that only a cleaner, rather than a resident caretaker, is required if one is considering the matter on the basis of what is required for the proper day-to-day running of the building rather than considering whether a resident caretaker is required for some other reason.
The leaseholders’ lease must be construed against the factual matrix in which it was executed, which includes (a) that it was an underlease where the immediately superior title was a headlease which contained express covenants by the headlessee to employ a full time resident caretaker and (b) it was an underlease of a unit in a building which, looked at solely as regards physical extent and nature of amenity, was a building where a full time resident caretaker would not be needed for the day-to-day enjoyment of the building.
HHJ Huskinson held that it was reasonable for the headlessee to employ a full time resident caretaker in order to remedy a breach of covenant in the headlease and to avoid the risk of forfeiture proceedings. Accordingly, despite the fact that a full time resident caretaker was not needed for the proper day-to-day enjoyment of the building, those costs would be costs which were reasonably incurred within section 19(1)(a). Therefore an estimated amount for the on account service charges which included an amount for the costs of employing a full time resident caretaker would be in principle a reasonable amount. The headlessee was not limited to including in the estimated on account service charges only an amount in respect of the costs of employing a cleaner.
The leaseholders accepted that if the LVT's decision was wrong, such that the costs of employing a full time resident caretaker can reasonably be included in an estimated on account service charge, then so also can there be included a sum in respect of the notional loss of the market rent of the basement flat.
This case illustrates the landlord’s margin of appreciation on the issue of reasonableness: see Forcelux Limited v Sweetman  2 EGLR 173.
Hillfinch Properties Ltd v Lessees of Southbourne Court  UKUT 096 (LC)
The LVT had erred in failing to consider whether the tenants’ ability to afford the works when determining that the works were reasonably incurred.
The landlord applied for a determination under s.27A(3) that the cost of proposed major works were reasonably incurred and that the overall costs were reasonable. None of the tenants contended that the proposed works were unnecessary or that the scope was excessive or that the cost was unreasonable. The only concern was one of affordability.
The LVT found the costs of the work to be reasonable but, in a somewhat cryptic paragraph of the decision in which the LVT referred to Garside v RFYC & Maunder Taylor  UKUT 367 (LC), it was not clear whether the LVT had decided the affordability point.
The appellant sought permission to appeal from the LVT, one of the grounds being whether the LVT did or should have taken into account the question of affordability. In refusing permission, the LVT said its comments on Garside were obiter; it was not necessary to decide the affordability point so it had not done so and, in any event, the point was not properly raised or argued.
Decision on Appeal
HHJ Mole QC held that the affordability point had been raised and argued and it was necessary for the LVT to determine the issue. The case was remitted to the LVT.
Brickfield Properties Limited v Botten  UKUT 0133 (LC)
The LVT has jurisdiction to order a variation of leases to take effect from a date prior to the LVT’s decision and prior to the application to vary.
The freeholder of 56 flats contained in seven blocks had granted long leases with a covenant to repair and maintain the buildings and a concomitant covenant by the lessees to contribute towards the service charge. Qualifying tenants in one of the blocks exercised their right to collective enfranchisement of their block. As a consequence, the total expenditure incurred by the freeholder in maintaining the remaining six blocks of flats was less than it would have been if the freeholder had been obliged to continue to maintain seven blocks rather than six. Thus, the total expenditure by the freeholder which was capable of being recovered through the service charge provisions decreased. A further consequence concerned the relevant proportions paid by each of the lessees in the remaining six blocks. If the proportions for each of these flats were added together they now added up to less than 100%.
The freeholder subsequently grated a headlessee to the appellant. In consequence, the rights and obligations of the freeholder under the various long leases of the flats became vested in the appellant. After attempts to agree variations with the lessees failed, the appellant applied to the LVT seeking variations of the relevant leases with effect from the date of the transfer pursuant to the collective enfranchisement (“the Transfer Date”) so as to re-establish the 100% total for the proportionate contributions to the service charge expense.
- Did LVT have jurisdiction to order a variation of leases to take effect from a date prior to the LVT’s decision and prior to the application to vary; and
- If so, whether such jurisdiction should be exercised in the instant case.
The LVT ordered a variation of the leases but ordered such variations were to have effect from the date of the decision, not the Transfer Date as sought in the application. It did not expressly consider whether it had jurisdiction to order that the variation was to be effective from the Transfer Date, but appears to have concluded that it did have jurisdiction to do so. The LVT decided it should not exercise its discretion because of the delay in making the application and having regard to the contra proferentum rule.
Decision on Appeal
HHJ Huskinson accepted that the LVT did have jurisdiction to order a variation of leases to take effect from a date prior to the LVT’s decision and prior to the application to vary. There was no justification for refusing to order the variation to take effect from the Transfer Date. The appeal was allowed.
This is the first known decision of the Upper Tribunal on this issue. It affirms what many LVT’s have considered the position to be.