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Residential Service Charge decision causes a stir

It’s not often that tenant consultation processes on residential service charges set pulses racing. However, the recent Supreme Court judgment in Daejan Investments v Benson & Others may at least provoke some heated debate. In a split Court, in which the majority was charged with “subverting Parliament’s intentions” by dissenting judges, a decision was reached which may surprise many practitioners.

The case provides guidance on when the Leasehold Valuation Tribunal (LVT) can dispense with the consultation requirements required by the Landlord and Tenant Act 1985. A brief outline of the history of the Daejan case illustrates the position prior to the judgment.

Initially, the LVT ruled that Daejan had not complied with certain aspects of the consultation process when embarking on works. Given the gravity of these failures, it was decided that the consultation obligation could not be curtailed and the tenants’ service charge was capped at the statutory maximum of £250 each.   Daejan could not recover approximately £280,000 of the cost of the works from the tenants.

Based on Daejan’s flagrant breach of the statutory requirements and the perceived importance of the consultation process, the appeal courts supported this decision. They agreed that neither the character of the landlord nor the final prejudice suffered by him were relevant factors.

This decision was reversed by the Supreme Court. In a radical departure from the approach of the lower courts, Lord Neuberger, in his leading judgment, took the view that the consultation process is a means to achieving an overarching principle: ensuring tenants are treated fairly. It is not an “end” in itself. It follows that if tenants are ultimately no worse off than they would’ve been had the landlord fully consulted, dispensation should be granted. Deajan provides a good example of this.  Here the landlord had offered a £50,000 discount on the service charge as a result of the initial hearing in the LVT. This was held to more than compensate for any loss the tenants may have suffered as a result of Daejan’s failure to consult. Dispensation was therefore granted.

The judgment raises three guiding principles:

  1. If no harm has been caused to the tenant by the landlord’s failure to follow the statutory consultation procedure, then dispensation from following that procedure should be granted (albeit on terms), regardless of the extent or severity of the landlord’s breach. 
  2. In the first instance, it is for the tenant to prove a “credible case for prejudice”, but the LVT should take a sympathetic attitude towards the tenants’ complaints.  After all, the landlord has breached his statutory duty and in so doing has caused the dispute to come before the LVT.
  3. The LVT has a wide discretion as to the terms on which dispensation will be granted. So, for example, a landlord could be required to compensate for any small loss caused by his failure to consult.

It is clear that the Court hope this will pave the way for predictable and equitable settlements of such disputes. However, the near unfettered discretion given to the LVT suggests that the terms on which the LVT is willing to dispense with consultation will vary enormously.