6 March 2013

Supreme Court's judgment in Daejan Investments Ltd is good news for landlords

The Supreme Court has today handed down its decision in the case of Daejan Investments Ltd v Benson & Others [2013]. The Court has overruled the decisions of the LVT, the Upper Tribunal and the Court of Appeal by granting Daejan Investments Ltd, the landlord, dispensation from the consultation requirements under Section 20 of the LTA 1985.

Essentially the Supreme Court's judgment is good news for landlords. Tenants will find it much harder to avoid paying service charges based purely on technical or procedural irregularities. Tribunals will now have to consider whether the tenants have suffered any prejudice and can impose conditions where they do dispense with the statutory requirements in order to remedy any prejudice suffered. It does appear to be a fairer test but since it is more subjective it may lead to greater uncertainty and thus more disputes in the long run.

In Daejan the tenants applied to the LVT for a determination as to the reasonableness of the landlord's proposed charges for major works in the sum of just under £280,000. The LVT held that the landlord had not complied with the statutory consultation requirements by failing to provide a summary of the observations received from the tenants and by not making all of the estimates available for inspection. The LVT also held that the consultation requirements could not be dispensed with due to the fact that the landlord's failure had caused "substantial prejudice" to the leaseholders.

In upholding the LVT and Upper Tribunal's decisions, Gross LJ in the Court of Appeal commented in respect of the dispensation application that the financial effect on the landlord of refusing dispensation was irrelevant and that the landlord's failure was serious, not a "technical, minor or excusable oversight".

The Supreme Court considered three questions of principle:

1) the proper approach to be adopted when considering an application to dispense with the consultation requirements;

2) whether the LVT can grant dispensation subject to conditions; and

3) the approach to be adopted where prejudice is alleged by the tenants.

On the first question they found that the LVT should look at the extent, if any, to which the tenants' protection from paying for unreasonable works, or paying more than necessary, has been prejudiced. If there is no prejudice dispensation should be granted. They did, however, agree that the financial effect on the landord was irrelevant and clarified that the nature of the landlord (i.e. whether it was tenant owned) is equally irrelevant. As such, it no longer appears to matter whether the breach is substantial or a "technical, minor or excusable oversight", what is relevant is the prejudice suffered by the tenants as a result.

On the second question, they held that the LVT has the power to grant dispensation on such appropriate terms as it thinks fit. This means that the LVT can grant dispensation but only if certain conditions are met. As a result, Daejan's dispensation was conditional upon it paying the tenants' reasonable costs, and the cost of the works that it was entitled to recover was reduced by £50,000.

Finally, on the third issue they decided that the factual burden of establishing prejudice was the tenants' responsibility, and only when a credible case for prejudice was established should the LVT look to the landlord to rebut it.

The decision will no doubt come as a welcome relief for landlords following the recent High Court case of Phillips and Goddard v Francis [2012] in which it was decided that they will be required to consider qualifying works as a whole throughout the accounting period in question when consulting with tenants.

As a result of Daejan, the LVT will be able to interpret the statutory consultation requirements in a more commercial and flexible manner. However, the fact that Tribunals can impose conditions means that landlords will still face potentially significant financial disadvantages if they fail to consult properly.

To read Natasha Rees' comments on the case in the Solicitors Journal click here

For more information please contact Natasha Rees or Emma Gosling

Our Insights

"One of the powerful forces in the London market"
Chambers HNW Guide