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Service Charges Consultation

In a decision which most commentators consider is beneficial to landlords, the Supreme Court has delivered an important judgment on the requirements for consulting on service charges.

At present, landlords of residential blocks who intend to carry out qualifying major works must follow a strict consultation procedure with all the long leaseholders. Otherwise, the landlord may not be able to successfully recover the costs of the works through service charges, pursuant to section 20 of the Landlord and Tenant Act 1985 (the 1985 Act). Failure by a landlord to consult properly can result in landlords only being able to recover a maximum of £250 from each leaseholder irrespective of how much the works cost!

The 1985 Act does also provide that landlords can apply to the Leasehold Valuation Tribunal (LVT) for dispensation from the consultation procedure, under section 20ZA of the 1985 Act.

On 6 March 2013, the Supreme Court handed down a landmark decision on dispensation, in the case of Daejan Investments Ltd v Benson & Others. The Supreme Court overturned the earlier decisions of the LVT, Upper Tribunal and Court of Appeal on the question of how to determine applications by landlords for dispensation from the statutory service charge consultation procedure in relation to residential long leaseholders.

Despite the landlord failing to comply strictly with the consultation procedure, the Supreme Court granted it dispensation subject to terms.

By way of background, in 2005, the landlord Daejan (part of the Freshwater group of companies) decided to carry out major works costing around £280,000 at a block it owned in Muswell Hill, London. The works were completed in 2006. However, Daejan failed to comply strictly with the section 20 statutory consultation procedure. The five long leaseholders and their recognised tenants association applied to the LVT for a determination of the reasonableness of the landlord’s proposed charges for the works. The LVT held the landlord had failed to comply strictly with the consultation procedure, in particular it had failed to:

  • provide the leaseholders with a summary of all the observations it received at the first stage of the consultation process;
  • make all of the estimates available for inspection by the leaseholders;
  • give all of the leaseholders the full 30 days to inspect all of the estimates and make observations.

Daejan applied for dispensation but the LVT refused to grant it, resulting in the landlord being able to recover only the statutory capped contribution of £250 per leaseholder, whilst having to foot the rest of the cost of the works themselves.

Daejan’s subsequent appeals to the Upper Tribunal and the Court of Appeal were refused.

The Supreme Court overturned all of the decisions of the lower courts by granting Daejan dispensation enabling it to recover the service charges for the 2006 subject to various conditions. The Supreme Court held that the main purpose of the statutory consultation process was to protect leaseholders from paying excessive service charges or paying for inappropriate works. Non-compliance by a landlord with the consultation procedures did not in itself automatically prejudice leaseholders. The Court ruled that the real test that the LVT should apply in all future dispensation cases was whether the leaseholders had suffered actual prejudice. The Court also held that the LVT had the discretion to grant partial dispensation in some cases, impose caps on the amount of service charges a landlord could recover where there had been non-compliance, and that a landlord could be ordered to pay the leaseholders’ reasonable costs of the LVT proceedings as a condition to granting dispensation.

Whilst the decision of the Supreme Court in Daejan will come as welcome news to residential landlords, it would be wrong for landlords not to continue to follow the statutory consultation procedure when looking to recover service charges on the false assumption they will have a good chance of getting dispensation from the LVT. Instead, where a landlord has for whatever reason failed to comply fully with the consultation requirements, they should consider making an early application to the LVT for dispensation and be thinking about what conditions they can offer the leaseholders in return for being granted dispensation.

For further information on the statutory service charge consultation process or on residential landlord and tenant law generally, please contact Yezdan Izzet on 0207 288 4737 or YezdanIzzet@BoltBurdon.co.uk.

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