Landlord and tenant – Service charge – Major works – Landlord and Tenant Act 1985 – Services Charges (Consultation Requirements) (England) Regulations 2003 – Appellant management company consulting with leaseholders of flats about proposed major works to external common parts of development – Appellant failing to comply fully with statutory consultation requirements – Whether appropriate to grant dispensation from consultation requirements under section 20ZA of 1985 Act – Whether non-compliance causing any prejudice to leaseholders – Appeal allowed
The appellant was the management company responsible for managing a development of flats in Salford, Lancashire, on behalf of the freeholder. In 2006, the appellant issued consultation notices, under section 20 of the Landlord and Tenant Act 1985 and the Services Charges (Consultation Requirements) (England) Regulations 2003, informing the long leaseholders of the flats of its intention to carry out major works of refurbishment to the external communal structural parts of the development, to which the leaseholders would be required to contribute through the service charge provisions in their leases. A second notice served pursuant to para 11(5)(b) of Schedule 4 to the 2003 Regulations (the paragraph (b) statement) informed the leaseholders of various estimates for the works. The notice stated that a copy of the estimates could be obtained by written request and invited observations on them within the consultation period of 35 days from the date of the notice.
The appellant subsequently entered into a contract for the works. The £322,000 cost of the works was included in the service charge accounts for 2008 and 2009. On an application by the leaseholders, the leasehold valuation tribunal (LVT) determined that the appellant had failed to comply with the statutory consultation requirements in four respects, with the result that, unless it obtained dispensation from the requirements under section 20ZA of the 1985 Act, its recovery would be limited under section 20(1) of the 1985 Act to £250 from each leaseholder, or £42,500 in total. The LVT also found that if such dispensation were sought and granted, the reasonable sum recoverable for the works would be £200,591.85 plus VAT, exclusive of fees.
Permission to appeal was granted in respect of two of the instances of non-compliance and that appeal was allowed: see Peverel Properties Ltd v Hughes [2012] UKUT 258 (LC); [2012] PLSCS 198. The appellant applied to the LVT for dispensation from the consultation requirements in respect of the other two breaches, which consisted of: (i) omitting to provide the leaseholders with access to all four of the estimates that it had received for the works, rather than simply the two lowest estimates; and (ii) failing to summarise, in the paragraph (b) statement, the observations of the leaseholders who had written in reply to the initial notice of consultation and the appellant’s responses to them.
The application for dispensation was dismissed by the LVT but the appellant was given permission to appeal in light of the guidance given by the Supreme Court in Daejan Investments Ltd v Benson and others [2013] UKSC 14 on the proper approach to the grant of dispensation.
Held: The claim/appeal was allowed/dismissed.
(1) The guidance given by the Supreme Court in Daejan made at least four major changes to the approach formally taken by tribunals and courts when considering applications under section 20ZA: (i) it emphasised that the purpose of the consultation requirements was to ensure that tenants were protected from paying for inappropriate works, or from paying more than was appropriate, such that the focus on an application for dispensation should be the extent, if any, to which the tenants had been prejudiced in those respects by the landlord’s breach of the requirements; (ii) it disapproved of any difference of approach according to whether the breaches were substantial or serious or only technical, minor or excusable in nature, instead focusing on whether real prejudice to the tenants had flowed from the landlord’s breach; (iii) it therefore disavowed the previous practice of inferring the existence of prejudice in cases involving a serious failure to consult, instead placing the burden on the tenants in all cases to identify some relevant prejudice; and (iv) it rejected the idea that there was a “binary choice” between wither granting dispensation or refusing it entirely, instead holding that the LVT could grant dispensation on such terms as it thought fit.
(2) In the instant case, the LVT had found no evidence of actual prejudice to the leaseholders from the failure to provide access to the two highest estimates that it had received but had none the less regarded the departure from the consultation requirements in that regard to be sufficiently serious to enable prejudice to be inferred. Since the purpose of any tender process was to test the market, with a view to obtaining the best value for the paying party, the interests of the leaseholders had not been prejudiced by the failure to provide access to the highest tenders. In circumstances where there was a significant difference between the highest and lowest tenders, there was no realistic prospect of the highest tenderer being successful tenderer. It would have been obvious to the leaseholders from the summary provided to them that there was a substantial financial margin between the tenders and there was no evidence that the failure to provide full access to the two highest tenders had contributed to the leaseholders paying for inappropriate works, or paying more than was appropriate for the works that were undertaken. There was no evidence that the extent, quality and cost of the works were in any way affected by that defect in consultation.
(3) Likewise, there was no evidence of relevant prejudice flowing from the failure to provide notice to all leaseholders of the responses to the initial consultation notice. Although the LVT had made a positive finding of actual prejudice in relation to the failure to summarise observations and responses, holding that it had adversely affected the confidence that leaseholders might have invested in the consultation process, prejudice of that kind was not relevant for the purposes of the dispensation application. It was not a free-standing objective of the statutory consultation regime to promote confidence amongst tenants that their views were being listened to: Daejan applied. While a well-conducted consultation exercise might encourage confidence amongst leaseholders in the process and in the general management of their building, the nurturing of such confidence was not in itself a statutory objective and there was no provision in the 1985 Act for leaseholders to be relieved of their liability to pay service charges on the grounds of incompetent or inefficient administration that had not caused demonstrable prejudice. Further, so far as one leaseholder had requested that the residents’ association be involved in the tender process, that was not an observation in relation to the proposed works of a kind that the appellant was required to summarise in its paragraph (b) statement. It was not part of the statutory purpose to encourage the formation of recognised tenants’ associations or to stimulate communication between tenants. The only communications that a landlord was required to summarise in its paragraph (b) statement were observations in relation to the proposed works and its responses to them; no reference at all was required to tangential exchanges on other issues.
(4) Accordingly, it was reasonable to dispense with the consultation requirements on the condition that the leaseholders’ reasonable expenses incurred in connection with the section 20ZA application to the LVT should be reimbursed. The appellant was entitled to include in the service charge accounts for 2008 and 2009 the sums that the LVT had found to be reasonable.
Alexander Bastin (instructed by Peverel Property Management Group) appeared for the appellant; the leaseholders did not respond to the appeal.
Sally Dobson, barrister
