Help for Landlords Recovering Cost of Major Works

Landlords are generally aware of the need to consult with tenants if they are to recover the costs of building works or other major works through the service charge.  Section 20 of the Landlord and Tenant Act 1985 and the regulations under it provide that tenants’ contributions towards “qualifying works” (broadly speaking, major building works) will be limited to £250 unless the consultation requirements have been complied with or dispensed with by agreement or by the Leasehold Valuation Tribunal (“LVT”). 

Last month the Supreme Court handed down its much-anticipated judgment in the case of Daejan Investments Limited v Benson and others [2013] UKSC 14.  By a 3:2 majority, the Supreme Court overturned the earlier decisions of the LVT and Court of Appeal preventing Daejan from recovering anything other than £250 from each tenant for its failure to consult. 

Daejan did not comply fully with the consultation requirements and sought to recover nearly £280,000 from the five tenants of Queens Mansions.  The LVT and the Court of Appeal held that the Daejan was not entitled to recover more than the statutory limit, being a total of £1,250.  This clearly left Daejan in difficulty – it was obliged under the terms of the leases to maintain and repair the building and yet was unable to recover the costs of the same.

In what some see as a controversial decision, the Supreme Court allowed Daejan’s appeal and granted it dispensation from the consultation requirements on the following terms:

1.       that the cost of the works be reduced by £50,000 (i.e. to £230,000); and

2.       Daejan to pay the reasonable costs of the tenants in relation to the dispensation proceedings before the LVT.

Lord Neuberger sets out the majority judgment, stating that the LVT should have asked itself “whether the respondents [i.e. the tenants] would suffer any relevant prejudice and, if so, what relevant prejudice, as a result of Daejan’s failure to consult”.  Lord Neuberger concluded that it was “highly questionable whether any such prejudice at all would have been suffered”.

The tenants of Queens Mansions had a preferred contractor to carry out the works for only £230,000.  The Supreme Court has therefore put the tenants in the best position in which they would have been had the consultation requirements been satisfied and had their contractor been selected.  The decision also prevented the tenants from obtaining a windfall, namely the benefit of the works being carried out without the financial burden.

The Supreme Court concluded that the LVT has the power to grant dispensation from consultation requirements on appropriate terms and can impose conditions on the grant of dispensation, including a condition that Daejan pay the tenants’ reasonable costs incurred in connection with the dispensation application.  This is a departure from the normal costs position in the LVT, whereby (generally) the parties each bear their own costs of the proceedings. 

The LVT may now grant dispensation to the landlords more frequently, although it can impose conditions to the dispensation.  Landlords may also be ordered to pay tenants’ reasonable costs in addition to their own costs. 

In essence, the Supreme Court has ruled that tenants must have suffered actual financial prejudice before the LVT will conclude that a landlord’s failure to meet, wholly or in part, the section 20 consultation requirements should incur sanctions.

The Daejan case has confirmed that landlords should continue to observe the statutory consultation procedure if they wish to be sure of being entitled to recover the full costs of qualifying works through the service charge.  However, if they fail to do so, Daejan has paved the way for dispensation to be granted and reimbursement made, at least on terms that will ensure a fair outcome for all concerned.

 

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask for your usual Goodman Derrick contact.