Legal brief: Victory for landlords … but at a price

The Supreme Court has ruled 3-2 in the landlord’s favour in the case of Daejan Investments Limited vs Benson and others [2013] UKSC 14, marking a major shift in the court’s approach to the law on residential service charges.

In the case, the landlord, Daejan, sought to recover £270,000 of service charges from its tenants in respect of works carried out to the common parts of the building. Pursuant to service charge consultation legislation, Daejan was required to consult with its tenants before carrying out the works.

Daejan cut short the consultation process by informing tenants who the contract would be awarded to before the time limit for tenants to make observations had expired. This meant the landlord would only be entitled to recover £250 per tenant in respect of the works, unless the Leasehold Valuation Tribunal (LVT) granted dispensation from the consultation requirements. Dispensation is only to be granted by the LVT if it is “satisfied that it is reasonable to dispense with the requirements”.

Daejan applied to the LVT, who refused dispensation on the basis that the failure to comply with the consultation requirements had caused substantial prejudice to the tenants. The Upper Tribunal and the Court of Appeal both upheld the LVT’s decision.

In its judgment on 6 March 2013, the Supreme Court overturned all previous decisions in the case, granting dispensation to the landlord on terms that they reduce the overall cost by £50,000 and pay the tenant’s reasonable legal costs.

This ruling will reassure landlords that they can carry out necessary works to their properties and will be more likely to recover the cost through the service charge.

Lord Neuberger’s majority judgment appears to open the door for landlords to apply for dispensation from the consultation requirements even in cases where there has been a serious breach, as long as they offer to reduce the overall bill to compensate for any prejudice to tenants and pay the tenants’ costs.

However, it leaves open the question as to what terms the LVT should grant dispensation upon and landlords will be interested to see the price imposed in future cases by the LVT in return for granting dispensation. In this case, Daejan had offered to reduce the overall cost by £50,000 so it was an easy decision for the Supreme Court to make. In many cases it will be far more difficult to quantify the prejudice suffered by tenants and there is doubt here as to whether Lord Neuberger’s stated aim of avoiding unpredictable outcomes will be met, given the wide discretion afforded to the LVT.

The judgment also does not consider whether, in cases where advance dispensation is applied for, the LVT is entitled to require amendments to the terms of the contract itself, for example the pricing of energy contracts where the overall cost is difficult to quantify.

It remains the case that any failure to properly consult will carry a cost and prevention is still far better than the cure.

Our advice to landlords remains: consult properly or pay the price.

Douglas Rhodes is a property litigation associate at law firm Trowers & Hamlins