Daejan Investments Ltd v Benson & Ors (includes Costs Judgment) [2013] UKSC 14

The Supreme Court held, by 3-2, that when deciding whether to dispense with statutory consultation requirements under s.20ZA(1) of the Landlord and Tenant Act 1985, the LVT should focus on prejudice to tenants, not the gravity of the landlord's breach, and may grant dispensation on terms. Daejan's appeal was allowed.

Facts

Daejan Investments Ltd (“Daejan”) owned the freehold of Queens Mansions, Muswell Hill, a building comprising ground-floor shops and seven flats, five of which were let on long leases to the respondents. The leases obliged the landlord to repair and decorate the structure, exterior and common parts, and obliged the tenants to pay a fixed proportion of the cost by way of service charge. The building was managed by Freshwater Property Management (“FPM”), part of the same group.

Major works became necessary in 2005. At the tenants’ request, Daejan appointed Robert Edward Associates (“REA”) as contract administrator. Stage 1 and stage 2 of the statutory consultation requirements under Part 2 of Schedule 4 to the Service Charges (Consultation Requirements) (England) Regulations 2003 (SI 2003/1987) (“the Requirements”) were substantially complied with. Four tenders were received, the two leading ones being from Rosewood (£453,980, 24 weeks) and Mitre (£421,000, 32 weeks). The tenants and the Queens Mansions Residents Association (“QMRA”), chaired by Ms Marks, were given Mitre’s priced tender and REA’s report, but repeatedly asked in vain for Rosewood’s tender.

Two purported stage 3 notices were served. Rosewood’s tender was in fact only made available for inspection on 31 July 2006 and inspected on 11 August. However, at an LVT pre-trial review on 8 August 2006, and by letters of 10 August, the tenants were told the contract had been awarded to Mitre — which was untrue, the contract being placed only on 11 September 2006. The consultation was effectively aborted. The works were carried out by Mitre from October 2006.

Daejan’s potential recovery from the respondents was just under £280,000; without dispensation, s.20 and regulation 6 capped recovery at £250 per flat, i.e. £1,250 in total.

Procedural history

The LVT found breaches of stage 3 (no summary of observations; estimates not available when stated) and refused dispensation under s.20ZA(1), finding “substantial prejudice”. It rejected Daejan’s offer of a £50,000 reduction. The Upper Tribunal (Lands Chamber) ([2009] UKUT 233 (LC)) dismissed the appeal, though describing the evidence of actual prejudice as “weak”, and considered the LVT could not grant dispensation on terms. The Court of Appeal ([2011] EWCA Civ 38, [2011] 1 WLR 2330), principally per Gross LJ, dismissed a further appeal, holding the financial consequences to the landlord irrelevant and the breach a “serious failing” causing “serious prejudice”.

Issues

Lord Neuberger identified three questions of principle:

1. The proper approach to be adopted on an application under s.20ZA(1) to dispense with compliance with the Requirements;
2. Whether the decision on such an application must be binary, or whether the LVT can grant a s.20(1)(b) dispensation on terms;
3. The approach to be adopted when prejudice is alleged by tenants owing to the landlord’s failure to comply with the Requirements.

Arguments

Daejan (Mr Dowding QC and Mr Jourdan QC) argued that significant prejudice to tenants was of first importance; that the financial consequences to the landlord of refusal were relevant; and that the LVT could grant dispensation on terms, drawing an analogy with relief from forfeiture, where costs may be imposed as a condition of the indulgence (citing Factors (Sundries) Ltd v Miller [1952] 2 All ER 630).

The respondents (Mr Rainey QC, Mr Upton and Mr Fieldsend) argued that the LVT faced a binary choice — unconditional dispensation or refusal; that the consultation provisions served purposes of transparency and accountability in their own right; that assessing what would have happened absent the breach was “an invidious exercise in speculation” and unfair to tenants; that they had been deprived of their right to be properly consulted; and that it was difficult for them to identify quantifiable prejudice.

Judgment

The appeal was allowed by a majority of three (Lord Neuberger, with whom Lord Clarke and Lord Sumption agreed). Lord Hope and Lord Wilson dissented.

Lord Neuberger (majority)

Reading ss.19, 20 and 20ZA together, he held that sections 20 and 20ZA are intended to reinforce and give practical effect to the two purposes in s.19(1): that tenants should not pay for unnecessary or substandard works, nor pay more than appropriate. Accordingly:

“Given that the purpose of the Requirements is to ensure that the tenants are protected from (i) paying for inappropriate works or (ii) paying more than would be appropriate, it seems to me that the issue on which the LVT should focus when entertaining an application by a landlord under section 20ZA(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.”

He rejected refusal of dispensation merely because of a serious breach:

“The Requirements are a means to an end, not an end in themselves, and the end to which they are directed is the protection of tenants in relation to service charges, to the extent identified above.”

He considered the distinction drawn below between “a serious failing” and “a technical, minor or excusable oversight” unhelpful save as to prejudice, being subjective, unpredictable and capable of producing inappropriate outcomes. He noted that Parliament had replaced the former test (“the landlord acted reasonably”) with the present test in 2002, presumably intending a different test. He rejected the suggestion, arguably supported by Lewison J in Paddington Basin Developments Ltd v West End Quay Ltd [2010] EWHC 833 (Ch), [2010] 1 WLR 2735, that transparency and accountability were free-standing purposes: “The sections are not concerned with public law issues or public duties”. He also held that neither the financial consequences to the landlord nor the nature of the landlord was relevant.

On the second issue, he held the LVT is not confined to a binary choice: it “has power to grant a dispensation on such terms as it thinks fit”, provided the terms are appropriate in nature and effect. There were no clear words precluding terms; the range of circumstances (including urgent, prospective applications) made conditional dispensation practically necessary. The LVT may also impose a condition that the landlord pay the tenants’ reasonable costs of the application. That is not a free-standing costs order and so is not precluded by the limited costs jurisdiction in para 10 of Schedule 12 to the 2002 Act. The analogy with relief from forfeiture (Egerton v Jones [1939] 2 KB 702; Howard v Fanshawe [1895] 2 Ch 581; Factors (Sundries) Ltd v Miller) supported this: a party seeking an indulgence should pay the other side’s reasonably incurred costs.

On prejudice, the legal burden remains throughout on the landlord, but the “factual burden of identifying some relevant prejudice that they would or might have suffered would be on the tenants”. The LVT should view tenants’ arguments sympathetically, resolving doubts in their favour, and “the more egregious the landlord’s failure, the more readily an LVT would be likely to accept that the tenants had suffered prejudice”. Once tenants show a credible case for prejudice, the LVT should look to the landlord to rebut it.

Overall, this produced a proportionate outcome, avoiding results “disproportionately damaging to the landlord, and disproportionately advantageous to the lessees”, while the landlord still bears its own costs, the tenants’ costs, and a full compensatory reduction.

Applying this, the courts below had erred by treating gravity as free-standing, by treating the mere speculative possibility of prejudice as sufficient, and by doubting the power to impose terms. Rather than remit, the Court decided the matter itself: the tenants had identified no relevant prejudice approaching £50,000; the £11,000 tender differential was substantially less; the overrun was unquantified and prejudice fell to be measured at the date of breach; and the tenants had in fact had substantial opportunity to comment. Dispensation was granted on terms that the respondents’ aggregate liability be reduced by £50,000 and that Daejan pay the respondents’ reasonable costs of testing the dispensation claim and canvassing prejudice.

Lord Hope (dissenting)

He emphasised that s.20ZA(1) is “open-ended and unqualified” and entrusts fact-sensitive questions to an expert tribunal, warranting judicial restraint (citing R (Cart) v Upper Tribunal [2011] UKSC 28, [2012] 1 AC 663 and Ravat v Halliburton Manufacturing and Services Ltd [2012] UKSC 1, [2012] ICR 389). He would not rule out refusal of dispensation solely on the ground of the seriousness of the breach, in extreme cases, “in the interests of preserving the integrity of the legislation”. He would have upheld the LVT’s rejection of the £50,000 offer.

Lord Wilson (dissenting)

He gave a fuller factual account, concluding that “Daejan aborted the stage 3 consultation”. Tracing the legislative history from s.91A of the Housing Finance Act 1972 (inserted by the Housing Act 1974) through Schedule 19 to the Housing Act 1980 to the 1985 and 2002 Acts, he held that the link between the consultation requirements and the s.19 “basic jurisdiction” was broken in 1980, when an independent sanction was attached. He agreed with Lewison J’s analysis in Paddington Basin and considered that gravity of non-compliance remains independently relevant. He agreed that conditions may be attached to dispensation, but considered the LVT entitled to reject the £50,000 offer without knowing its proportion to the overall cost of the works.

Costs judgment [2013] UKSC 54

Lord Neuberger (with whom all members agreed) settled the consequential order: the respondents’ wider formulation of recoverable LVT costs was preferred; there was to be no order for costs in the UT, Court of Appeal or Supreme Court; a s.20C(1) order was granted; the dispensation takes effect only once all conditions are determined and satisfied, with contractual interest at 14% running only from fourteen days thereafter; and the matter was remitted to the LVT, not necessarily to the original panel.

Implications

The decision recasts the approach to s.20ZA(1) dispensation applications. The central inquiry is now whether, and to what extent, tenants suffered relevant prejudice — i.e. paying for inappropriate works or paying more than appropriate — rather than the gravity of the landlord’s breach as an end in itself. This significantly reduces the risk that a landlord’s procedural failure will result in the service charge being capped at £250 per flat where no substantive prejudice flows from the breach.

Importantly, the Court confirmed that the LVT’s jurisdiction is not binary: dispensation may be granted on terms, including a reduction in the recoverable sum and a condition that the landlord pay the tenants’ reasonable costs of investigating and resisting the application. That costs power sits outside, and is unaffected by, the limited statutory costs jurisdiction under para 10 of Schedule 12 to the 2002 Act.

The decision matters to landlords, managing agents and leaseholders alike. Landlords gain a proportionate route to recovery after procedural default, but at a real price: their own costs, the tenants’ reasonable costs, irrecoverability of those costs through the service charge, and a full compensatory reduction assessed with sympathy towards the tenants. Leaseholders retain protection, but must now articulate credible, ideally quantifiable, prejudice rather than relying on the loss of the consultation opportunity as such.

The limits should be noted. The majority did not lay down rigid rules; Lord Neuberger stressed that circumstances “could be almost infinitely various” and that principles “should not be regarded as representing rigid rules”. The legal burden remains on the landlord throughout. The Court did not decide that Camden London Borough Council v Leaseholders of 37 Flats at 30-40 Grafton Way was wrongly decided on its facts, only that its reasoning was wrong. The dissents of Lord Hope and Lord Wilson, emphasising respect for the expert tribunal’s evaluative judgment and the free-standing statutory importance of consultation, remain influential commentary but are not the law. Finally, the Court’s decision to determine the £50,000 question itself, rather than remit, turned on the particular evidential vacuum in this case and should not be read as a general licence to dispense with remission.

Verdict: The appeal was allowed by a majority of three to two (Lord Neuberger, with whom Lord Clarke and Lord Sumption agreed; Lord Hope and Lord Wilson dissenting). The orders of the LVT, the Upper Tribunal (Lands Chamber) and the Court of Appeal were set aside, and dispensation from the consultation requirements was granted under s.20(1)(b) of the Landlord and Tenant Act 1985 on terms that (i) the respondents’ aggregate liability for the works be reduced by £50,000 (pro rata) and (ii) Daejan pay the respondents’ reasonable costs of reasonably testing the dispensation claim and canvassing relevant prejudice. In the subsequent costs judgment ([2013] UKSC 54), the Court settled the consequential order: no order for costs in the Upper Tribunal, Court of Appeal or Supreme Court; a s.20C(1) direction in the respondents’ favour; Daejan barred from recovering the relevant costs through the service charge; the dispensation to take effect only once all conditions are determined and, where appropriate, satisfied, with contractual interest at 14% running only from fourteen days thereafter; and the outstanding issues remitted to the LVT (not necessarily the original panel).

Source: Daejan Investments Ltd v Benson & Ors (includes Costs Judgment) [2013] UKSC 14