Landlord and tenant – Service charges – Interim payments – Respondent tenants challenging reasonableness of interim service charge payments – First-tier tribunal holding payments unreasonable and refusing application for dispensation from consultation requirements for additional works – Appellant landlord appealing – Whether appropriate to grant dispensation from consultation requirements – Whether respondents providing evidence of prejudice – Appeal allowed
The appellant was the freeholder of 12 and 12A Cross Street, Hove, a mid-terrace Victorian house of four storeys, which had been converted into two maisonettes: number 12 on the ground floor and lower ground floor, of which the appellant held a long lease, and 12A on the upper floors of which the respondents bought the long lease in March 2016.
Under the lease of 12A, the appellant was to maintain the building and the respondent lessees were to maintain the interior of 12A; and the respondents were to pay 50% of the appellant’s expenditure in complying with his obligations. Interim payments were to be made in June and December each year, on account of the appellant’s expenditure in the next six months.
In summer 2019, work commenced on the external redecoration of the building. It was not disputed that the work would cost each leaseholder more than £250 and engaged the consultation requirements of section 20 of the Landlord and Tenant Act 1985 and of the Service Charges (Consultation Requirements) (England) Regulations 2003. The appellant complied with those requirements and engaged R to do the work. When R was unable to complete the work, the appellant engaged different contractors to finish the job.
The respondents challenged the reasonableness of four service charge interim payments between June 2018 and December 2019. The appellant appealed against a decision of the First-tier Tribunal (FTT) concerning the reasonableness and payability of the payments and the FTT’s refusal to grant him a dispensation from the consultation requirements in respect of the additional works.
Held: The appeal was allowed.
(1) By section 19 of the Landlord and Tenant Act 1985, service charges in leases were payable only to the extent that they were reasonably incurred on services or works of a reasonable standard. Section 27A gave the FTT jurisdiction to determine the reasonableness and payability of service charges. Section 20 of the 1985 Act, together with the 2003 Regulations, provided that a tenant could not be charged more than £250 for qualifying works unless consultation requirements had been complied with.
A landlord could apply under section 20ZA of the 1985 Act for dispensation from the consultation requirements, which would normally be given unless the tenant could show that they had been prejudiced by the failure to consult, by showing for example that consultation would have enabled them to suggest a cheaper contractor or a better way of doing the work. The loss of opportunity to participate in the consultation process was not a relevant prejudice, nor was the “prejudice” of having to pay for the work: Daejan Investments Ltd v Benson [2013] UKSC 14; [2013] 2 EGLR 45; [2013] EGILR 4 applied.
(2) Although both the reasonableness requirement and the consultation requirement were imposed on landlords in order to protect tenants, they were not the same. The fact that a landlord had consulted on works by sharing estimates and chosen a contractor in the light of their estimate, did not mean that the cost of the work would be reasonable. Nor did it mean that nothing would go wrong and that an estimate would never be exceeded. An estimate was an estimate; if it was exceeded, that did not of itself make the cost unreasonable.
What the two requirements had in common was that in order to use them as a basis of challenge a tenant had to engage with some evidence. He or she had to demonstrate some prejudice, beyond the simple fact of not having been consulted or of having had to contribute to the cost of the works. While the legal burden of proof of entitlement to a dispensation was on the landlord, the factual burden of identifying some relevant prejudice was on the tenants. Equally, a tenant’s challenge to the reasonableness of a service charge had to be based on some evidence that the charge was unreasonable. The burden was on the landlord to prove reasonableness, but the tenant could not simply put the landlord to proof: Daejan applied.
(3) In the present case, the FTT found that there was prejudice to the respondents but nothing in the evidence indicated any prejudice. In the absence of any such suggestion there was no reason not to grant a dispensation. Further, the FTT’s decision about the reasonableness of the interim service charges rested upon the irrational decision about the charges for the external work.
The FTT’s decision was set aside, including its orders under section 20C of the 1985 Act and paragraph 5A of schedule 11 to the Commonhold and Leasehold Reform Act 2002 relating to the recovery of the appellant’s costs of the proceedings by way of service or administration charge, since those orders were made as a result of the substantive decisions being set aside.
(4) This was an application for the determination of the reasonableness and payability of service charges. There were three charges now in dispute (since the charge for June 2018 had been paid and was not now payable). There was no reason why a fresh consultation was necessary. The consultation requirement applied to a “set of works”, and if a contractor engaged to carry out a set of works was unable to complete it, there was no requirement for a fresh consultation about the same set of works, even if the price was going to go up, and even if the tenant’s contribution was going to rise by more than £250. The additional work done to the roof in the present case did not amount to a fresh set of works. Accordingly, no fresh consultation was required: Phillips v Francis [2014] EWCA Civ 1395; [2015] EGLR 8 applied.
(5) If a dispensation were needed, the tribunal would grant one. The respondents had not shown any prejudice arising from a failure to consult. Where it was common ground that the extent, quality and cost of the works were not affected by the landlord’s failure to comply with the requirements, it was hard to see why the dispensation should not be granted: Daejan applied.
The appellant had taken a pragmatic approach which resulted in the work being done and the respondents had neither challenged its quality nor produced any evidence that the price was unreasonable. Accordingly, the challenge to the last three interim service charges failed.
The appellant appeared by his representative; the respondents appeared in person.
Eileen O’Grady, barrister
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