SERVICE CHARGES - Consult thy tenant!

09 May 2013

The world of residential service charges has recently come under the spotlight in relation to two leading cases dealing with the operation of the service charge provisions of the Landlord and Tenant Act 1985 (the "1985 Act"). Some welcome clarification which assists residential landlords resulted from the Supreme Court's judgment in Daejan Investments Limited v Benson earlier this year, although landlords had less to cheer about after the Chancellor of the High Court's decision last year in Phillips and Goddard v Francis.

The Daejan case concerned Section 20 of the 1985 Act, which requires a landlord who is planning to undertake qualifying works, where any single tenant would be required to contribute over £250, to consult the tenants in a specified form. That consultation procedure entails a sequence of notices to be served on the tenants and tenders to be obtained by the landlord and referred to the tenants for their observations. There is a fall-back route enabling landlords to obtain a dispensation if they do not comply with the correct procedure by applying to the Leasehold Valuation Tribunal (LVT) under section 20ZA of the 1985 Act.

Daejan, as landlord, had made errors in the consultation process when undertaking works to its building, which had cost almost £280,000. The tenants of several flats and shops in the building applied to the LVT for a determination of the level of service charge payable, given their landlord's errors. Daejan sought a dispensation under the 1985 Act, but was unsuccessful in the LVT, the Upper Tribunal and the Court of Appeal, all of whom dismissed its appeals and upheld the LVT's decision that it could recover only £250 per tenant as a result of its failure to consult. As a consequence this landlord was nursing a severe financial headache.

The Supreme Court, however, led by the judgment of Lord Neuberger reversed the decision and considered that dispensation should be given as the failure to consult had not affected the extent, quality or cost of the works undertaken by the landlord. Lord Neuberger considered that the purpose of the consultation procedure was to protect tenants from paying too much for works or footing the bill for inappropriate works that might not be required. It was not meant as a punitive exercise against non-compliant landlords.

The LVT was given guidance by the Supreme Court in dealing with such cases in the future. Its focus now must be on whether tenants were 'prejudiced' by the landlord's failure to comply. The burden of proof is on the tenants to identify the relevant prejudice and show the steps they would have taken if the consultation had taken place correctly and demonstrate the loss they have suffered as a result. The LVT is required to undertake a somewhat hypothetical exercise to consider what the situation would have been if the consultation had been correctly followed and can then impose appropriate conditions on the grant of a dispensation. It now remains to be seen if landlords will optimistically assume a dispensation will be granted on satisfactory terms if they do not adhere to the consultation requirements.

Section 20 of the 1985 Act was also the focal point of the Phillips and Goddard v Francis case. This case considered when the requirement to consult is to apply. The freehold owners planned a series of works to upgrade facilities at a holiday park and sought to recover the cost through the service charge. Taken individually, each element of the works undertaken would not have triggered the consultation requirements as they did not exceed £250 per tenant, whereas the total cost of the works to be borne by each tenant, once added together, did meet the threshold.

The Chancellor of the High Court decided that the owners should be bound by the consultation requirements where, in aggregate, any tenant would have to contribute more than £250 towards the cost of those works, taken as a whole, in any one year. Clearly if residential landlords fail to consult, they can face being left with significant financial burdens, as their ability to recover will be limited to a maximum contribution of £250 per tenant for the relevant accounting year. The Phillips judgment puts additional compliance burdens on landlords and managing agents, who will no doubt seek to pass those costs on to the tenants through their service charge. In some respects the decision may come to be seen as a pyrrhic victory for tenants as it could also mean their landlord (which includes residents' management companies and right to manage companies) taking a more cautious approach by invoking the consultation process on even relatively minor repairs.

It has been well publicised that the Association of Residential Managing Agents is very concerned by the implications of this decision and is involved in discussions with the Department for Communities and Local Government. At this stage, however, the decision stands and landlords will need to pay close attention to the level of costs that are being incurred and consult accordingly, if they are to seek full recovery from their tenants via service charge.

For further infomation, please contact:

Paul Henson, Senior Associate

Additional information