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The Supreme Court on Service Charges
Daejan Investments Limited v Benson [2013] UKSC 14
In this decision the Supreme Court gives guidance on the correct approach to be taken by the LVT when faced with an application to dispense with the consultation requirements in s20 of the Landlord and Tenant Act 1985 (as amended) when dealing with a dispute over service charges.

The Facts
  • Daejan Investments (the Appellant) is the freehold owner of Queens Mansions ('the property') which consists of a shop and seven flats.
  • 5 of the 7 flats are held on long leases by the 5 Respondents. The leases oblige the landlord to provide services including repair and decoration to the structure, exterior and common parts and the tenants are required to pay a fixed proportion to the cost of the services.
  • In 2005 it became apparent that major works were required to the building and the landlord began the consultation exercise that was necessary if the landlord wished to recover the cost of the works as a service charge.
  • A stage 1 notice of intention to do the works was sent out and tenders were sought and received from 4 contractors.
  • The 2 tenders that appeared to be the most competitive were Rosewood who quoted £453,980 for a 24 week contract period and Mitre who quoted £421,000 for a 32 week contract period.
  • The tender from Mitre did not comply entirely with the tender directions and the Respondents were only provided with the price specification of Mitre and not of Rosewood (their preferred tenderer), despite asking on at least 5 occasions for the specification.
  • 1 of the Respondents made a number of observations about the proposed works but made it clear that these were provisional until she had seen all the priced tenders.
  • On 28th July 2006 the landlord served a stage 3 notice purporting to give details about the estimates and the Respondents 30 days (as required) to inspect the estimates.
  • On 8th and 10th August 2006 the landlord stated that the contract had already been awarded to Mitre. This meant that the consultation period had been cut short unilaterally by the landlord. (The statement that the contract had at that stage been awarded to Mitre was incorrect but the Respondents did not know this and it was never corrected).
  • An application was made to the LVT in respect of the service charges and 1 of the issues was whether the consultation requirements had been complied with and if not whether they should be dispensed with.
  • The LVT found that there had been a serious breach of the requirements (as opposed to a technical or excusable oversight). The LVT also found that there was significant prejudice to the tenants in not having the right to inspect the estimates and make observations on the same. The LVT therefore refused to order dispensation.
  • The effect of the LVT's decision was that the landlord would only be entitled to recover £1,250 from the tenants (5 x £250) as opposed to £280,000, which they otherwise would have been entitled to recover under the lease.
  • The landlord appealed and both the Upper Tribunal and the Court of Appeal dismissed their appeals finding that the LVT was entitled to find that there had been a serious breach as opposed to a technical or minor oversight and that the Respondents had suffered significant prejudice.
  • The landlord appealed to the Supreme Court and was given permission subject to terms as to costs.

The Issues
Lord Neuberger giving the judgement of the majority identified 3 questions of principle that arose for the determination of the court (Para 38), being:
  1. The proper approach to be adopted on an application under s20ZA(1) L&TA 85 to dispense with the consultation requirements in a service charge case.
  2. Whether the decision on such an application must be all or nothing or whether dispensation could be granted on terms.
  3. The approach to be adopted when prejudice is alleged by a tenant arising from a landlord's failure to comply with the consultation requirements.

The Decision
The Supreme Court was divided 3:2 in favour of allowing the appeal and Lord Neuberger gave the sole judgment of the majority (with Lord Hope and Lord Wilson giving dissenting judgments). The points of principle or guidance from that judgment are as follows:

Issue 1

  • The only express statutory stipulation on the LVT is that it must be "satisfied that it is reasonable" to dispense with the consultation requirements.
  • It is important that decisions on this topic are reasonably consistent and predictable but equally any principles derived should not be regarded as representing rigid rules.
  • The relevant provisions (ss19 - 20ZA) are concerned with "ensuring that tenants of flats are not required (i) to pay for unnecessary services or services which are provided to a defective standard, and (ii) to pay more than they should for services which are necessary and are provided to an acceptable standard." (Para 42).
  • The purpose of the Requirements is therefore to ensure that tenants are protected from (i) paying for inappropriate works or (ii) paying more than would be appropriate. "The issue on which the LVT should focus when entertaining an application by a landlord under s20ZA(1) must be the extent, if any, to which the tenants were prejudiced in either respect by the failure of the landlord to comply with the Requirements." (Para 44)
  • It is not "convenient or sensible" to distinguish, as the LVT, Upper Tribunal and Court of Appeal did, between a serious failing on the one hand and a technical, minor or excusable oversight on the other. (Para's 47 - 49).
  • The landlord was wrong in its contentions that the financial consequences to it were relevant and/or that the nature of the landlord was relevant (Para 51).
Issue 2

  • "The LVT... has power to grant a dispensation on such terms as it thinks fit - provided, of course, that any such terms are appropriate in their nature and their effect." (Para 54).
  • Where there is relevant prejudice caused to the tenants by the failure to consult, the LVT should, in the absence of some good reason to the contrary, reduce the amount claimed as service charges to compensate the tenants fully for that prejudice. (Para 71).
  • The LVT does have the power to impose a condition on granting dispensation that the landlord pays the tenants reasonable costs of investigating and challenging the application for dispensation, including the costs of a surveyor and solicitor (Para's 59, 61, 69 and 73). Such an order does not offend the usual costs rules in the LVT because it is not a free standing costs order but a term on which the LVT grants "the statutory indulgence of a dispensation".  
Issue 3

  • It was recognised by the Supreme Court that "there may often be a dispute as to whether, and if so to what extent, the tenants would relevantly suffer if an unconditional dispensation was accorded." (Para 65). The correct approach to such situations was therefore analysed.
  • The legal burden of proof will remain throughout on the landlord, but the factual burden of originally identifying some relevant prejudice that would or might have been suffered would be on the tenants (Para 67).
  • In considering this issue "The LVT should be sympathetic to the tenants not merely because the landlord is in default of its statuory duty to the tenants and the LVT is deciding whether to grant the landlord a dispensation." (Para 68).
  • Once the tenants have shown a credible case for prejudice the LVT should look to the landlord to rebut it.
  • Save where the expenditure is self-evidently unreasonable it will be for the landlord to show that any costs incurred by the tenants were unreasonably incurred before it could avoid paying them as a term of dispensation.
The Outcome

In this case the tenants had not identified any relevant prejudice which they had suffered or may have suffered as a result of the landlord's failure. Further, the landlord had offered to reduce the aggregate sum claimed by £50,000 in the LVT to compensate for any relevant prejudice and there was no evidence that the tenants had suffered relevant prejudice worth as much as that. The Supreme Court therefore granted dispensation on terms that the landlord reduced the aggregate liability by £50,000 and paid the reasonable costs of the tenants.
Russell James
Russell is a civil practitioner who specialises in all areas of property litigation including housing and homelessness, landlord and tenant, boundary disputes, restrictive covenants and the specialist tribunals. Russell is recommended in Legal 500.

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On Appeal
  • There was no justification for the following assumptions - If experts were liable to be sued they would be discouraged from acting. Immunity ensured that the expert performed his duty to the court. Immunity allowed the expert to give an opinion adverse to the client's case.
  • There was no conflict between the duty owed to the client and to the court.