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SERVICE CHARGES FOR RESIDENTIAL PROPERTIES

10th October, 2013

On 6 March 2013, the Supreme Court delivered its judgment in the case of Case of Daejan Investments Ltd v Benson and by a majority overturned the earlier decisions of the Court of Appeal and tribunals.

In doing so, it set out some of the key principles to be applied when considering applications for dispensation from statutory consultation with leaseholders in residential service charge cases.

The Facts

Daejan Investments Ltd (the Landlord) which owned the freehold of a block of shops and flats gave notice to the long leaseholders of the flats that it intended to carry out major works and sought to recover just under £280,000 from the tenants in relation to those works. However, the Leasehold Valuation Tribunal (LVT) found the landlord had not complied properly with the statutory consultation requirements under s20ZA(1) of the Landlord and Tenant Act 1985 and accordingly reduced the tenants’ liability to £250 each.

During the LVT proceedings, the Landlord applied for dispensation from compliance and offered a £50,000 reduction to the £280,000 cost of works. The LVT regarded the Landlord’s failure as a serious breach which would cause prejudice to the tenants and refused dispensation. The Upper Tribunal and the Court of Appeal agreed with this refusal.

The Supreme Court

The Supreme Court granted the Landlord dispensation from the requirements on terms that the tenant’s aggregate liability for the works be reduced by £50,000 and that the landlord pay the tenants’ reasonable costs in relation to proceedings before the LVT.

In overturning the previous decisions, the Supreme Court held that the lower courts had placed undue emphasis on the Landlord’s failure to comply with the requirements. The purpose of the consultations is to protect tenants in relation to service charges from paying inappropriate or over the odds for works. As such, the correct legal test when considering if dispensation should be granted is whether the tenants would suffer any relevant prejudice.

Importantly, the Supreme Court held that the LVT:

• Has a discretion to grant partial dispensation on appropriate terms from the consultation requirements including the imposition of conditions,
• Has the power to reduce the amount that a landlord can recover via the service charge to compensate fully for the relevant prejudice,
• Can, and normally should, order a landlord to pay the tenants’ reasonable legal costs in respect of the dispensation application.

Commentary

The reasoning applied indicates that the courts should seek to strike a fair balance between protecting the tenants’ rights to exercise the power yet not receive a windfall and ensuring that landlords do are not cavalier in adhering to the requirements.

On 9 September 2013 the Supreme Court made an order in the case of Daejan Investments Ltd v Benson following on from its earlier decision. The form of order is likely to be used by parties and tribunals as a precedent as to how to give effect to decisions granting dispensation on conditions.

TOMORROW

We look at the change of use provisions from offices to residential under planning laws.

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