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|The Supreme Court on Service Charges
|Daejan Investments Limited v Benson  UKSC 14
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.
- 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
- 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 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.
Neuberger giving the judgement of the majority identified 3 questions
of principle that arose for the determination of the court (Para 38),
- The proper approach to be adopted on an application under s20ZA(1)
L&TA 85 to dispense with the consultation requirements in a service
- Whether the decision on such an application must be all or nothing or whether dispensation could be granted on terms.
- The approach to be adopted when prejudice is alleged by a tenant
arising from a landlord's failure to comply with the consultation
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:
- The only express statutory stipulation on the LVT is that it must be
"satisfied that it is reasonable" to dispense with the consultation
- 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."
- 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).
- "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".
- 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
- 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
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.
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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