UK: Daejan Investments Limited – v – Benson & Others

Last Updated: 12 April 2013
Article by Peter Levaggi and Emma Humphreys

On 6 March 2013, The Supreme Court handed down Judgment in the case of Daejan Investments Limited -v- Benson & Others [2013 UKSC 14] (on appeal from The Court of Appeal). The outcome of this appeal has been much anticipated by those working in the residential property management field.

Background

Pursuant to Section 20 of the Landlord and Tenant Act 1985 ("the Act") a landlord is required to consult with lessees prior to undertaking "qualifying works". The procedure is as prescribed by the Service Charges (Consultation Requirements) (England) Regulations 2003, with similar regulations applying in Wales. Should a landlord fail to comply with the consultation process, the relevant contributions of the lessees can be capped (currently at £250 per lessee).

Qualifying Works are defined as works which are "works on the building or any other premises" and include therefore works of repair, maintenance or improvement. By way of background, during 2005, the landlord (Daejan Investments Limited) ("Daejan") indicated to lessees of property at Queens Mansions that major works were required to the building. The lessees were all members of the Queens Mansions Residents Association ("QRMA").

Daejan obtained and sent to QRMA a specification of proposed works. Following a request by QRMA, Robert Edward Associates (who had previously been advising QRMA on the proposed works) were approached to provide a further specification for the proposed works.

A Notice of Intention was sent out to the lessees on 6 July 2005 following which the specification from Robert Edward Associates was received and utilised by QRMA to make observations on the proposed works.

The Stage 2 process of consultation was then commenced and Daejan obtained estimates for the proposed works. Robert Edward Associates reported to QRMA on the tenders.

The most competitive tender appeared to be that of a company called Rosewood Building Contractors followed by a tender from Mitre Construction Limited (Daejan's preferred contractor).

Notices were served on the lessees on 14 June 2006 purportedly in compliance with the ongoing consultation process, but these Notices did not include the Rosewood tender (albeit QRMA commented and provided observations on the Notices stating however that the points made were provisional until all priced tenders had been seen).

Daejan then served amended Notices including all estimates obtained. These Notices were served on 28 July 2006 and the lessees/QRMA had until 31 August 2006 to provide their comments and observations.

However, on 8 August 2006 QRMA were informed that the contract had been placed with Mitre. As such, the assumption was that there was no point in the lessees/QRMA providing further comments or observations as the contract had been placed and the consultation process had therefore been curtailed.

It subsequently transpired that the contract with Mitre was in fact not placed until 11 September 2006.

QRMA brought proceedings in the LVT on 14 July 2006 for a determination that the consultation process had not been complied with and that the cost of the works was not reasonable.

The LVT found that Daejan had not complied with Section 20, in that the Notices of Estimates did not contain a summary of observations received and further, the estimates were not available for inspection as set out on the Notices.

The LVT then considered an application by Daejan as to whether the consultation requirements should be dispensed with. The LVT determined in favour of the lessees and did not dispense with the consultation requirements. On the basis of this decision, Daejan were limited to recovering £250 per lessee for the major works, thus resulting in Dajean being unable to recover a substantial sum expended on the major works (some £278,750).

Daejan appealed to the Upper Tribunal (Lands Chamber), who rejected the appeal but did indicate that it considered the failure of Daejan (to include within its Notices of Estimates a summary of observations), to be a relatively minor breach which caused no prejudice to the lessees.

The Upper Tribunal did not agree with the LVT determination that the lessees had suffered consequential prejudice as a result of the consultation process effectively being curtailed albeit it did agree that the process had been prematurely curtailed.

Daejan were given permission to appeal to the Court of Appeal, who dismissed the appeal. The Court of Appeal Judgment concentrated on 3 points:-

  • The financial effect of dispensation on the landlord and tenant was irrelevant when deciding whether to grant dispensation;
  • The LVT had not erred in treating Dajean more harshly than if it had been a leaseholder owned landlord; and
  • Significant prejudice to the tenants is of primary importance when deciding whether to grant dispensation.

The Court of Appeal found that Daejan's failures on consultation had been serious and had caused the tenants serious prejudice.

However, Daejan was granted permission to appeal to The Supreme Court.

Supreme Court Judgment

Lord Neuberger determined that the Supreme Court had three questions to consider:-

(i) "The proper approach to be adopted on an application under Section 20ZA (1) to dispense with compliance with the requirements;

(ii) Whether the decision on such an application must be binary, or whether the LVT can grant a section 20 (1) (b) dispensation on terms;

(iii) The approach to be adopted when prejudice is alleged by tenants owing to the landlord's failure to comply with requirements."

On the first point, there is a link between Section 19 and Section 20ZA, in that they are intended to ensure that tenants of flats are not required to pay for unnecessary services which are provided to a defective standard or to pay more for services which are provided to an acceptable standard and are necessary.

On this basis, when the LVT determine whether to grant dispensation it should consider to what extent the tenants were prejudiced, if at all, by the landlord's failure to comply with consultation requirements.

The Judgment further indicated that neither the financial consequence to the landlord nor the identity of the landlord were relevant factors.

On the second point, the Judgment indicates that when deciding whether to grant dispensation it is not simply a case of dispensing or not dispending with the requirement to consult - the LVT has the power to grant dispensation on certain terms. Examples of conditions could be that dispensation could be granted if the landlord reduced the cost of the works to be put through the service charges or, the landlord paid the tenants' costs of the Section 20ZA application.

On the third point, the lessees would be required to identify prejudice that they have suffered as a result of the failure of the landlord to consult. Therefore, if a lessee indicated that had they been provided with an opportunity of nominating a contractor, they would have nominated Contractor A (who would have been cheaper than the contractor appointed), the LVT would be reasonable in making the assumption that the landlord would have appointed Contractor A and, as such, conclude that the tenant had suffered loss. The LVT could then either refuse to dispense with the consultation requirements or, alternatively, dispense with the requirement on condition that the sum recoverable from the landlord would be limited to the sum which would have been expended had Contractor A been nominated, In this way, the tenant does not achieve a windfall and only be liable for £250 towards what could be substantial works but that their position is restored to that which it is to be assumed it would have been had the landlord complied with consultation.

Having considered in depth the principal points, Lord Neuberger found that the tenants/QRMA had not suffered any relevant prejudice as a result of Daejan's failure to comply with the consultation requirements. They had been aware of the estimates, had had their own contractor produce a specification and had provided comments and observations which were unlikely to have been added to had the consultation process completed. Lord Clarke and Lord Sumption agreed but Lord Hope and Lord Wilson dissented.

The previous determinations/orders were set aside and dispensation granted to Daejan. As a result of The Supreme Court Judgment, it is likely that more landlords will be successful in obtaining dispensation from compliance with the consultation requirements albeit, in that event, with appropriate conditions attached. Landlords should however continue to consult as there will be many cases where dispensation will not be granted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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