No déjà vu for Daejan as Supreme Court overturns Court of Appeal decision

In a decision that many practitioners will deem “common sense”, the Supreme Court in Daejan Investments Limited v Benson & Ors [2013] UKSC 14 took a pragmatic view of the statutory requirements and restrictions that impinge a landlord’s ability to recover service charges from tenants.

The current law provides, effectively, that if a landlord fails to comply with certain statutory consultation requirements, then he has to get a dispensation from the Leasehold Valuation Tribunal (LVT) if he is to recover more than the statutory minimum in service charges. While the LVT has the jurisdiction to dispense with the consultation requirements, it has historically been very rigid in its application of the law.  It was the scope and flexibility of this jurisdiction that was the subject of the appeal before the Court.

The landlord, Daejan, owned a block of flats of which the tenant, Benson, held five on long leases.  The leases obliged Daejan to provide certain services, and obliged Benson to pay a proportion of the cost of providing them.  The law states that Daejan must comply with certain consultation requirements, and if it fails to do so (subject to the LVT finding that they may be dispensed with), Daejan can only recover up to a certain amount in relation to Benson’s contribution to the service charge.

Daejan complied with most of the consultation requirements by notifying Benson that it intended to carry out works to the building and sending them a specification.  However, while Daejan had received four priced tenders for the work, it only sent one of them to Benson before awarding the contract.  Daejan had therefore failed to comply with the third stage of the consultation requirements.

Daejan subsequently asked the LVT to exercise its discretion to dispense with the need to comply with the requirements so it could recover a contribution of £280,000 (later reduced to £50,000).  The tribunal refused, finding that Daejan had seriously breached the legal requirements by failing to comply with them all and this breach resulted in significant prejudice to Benson.  Daejan appealed, eventually ending up in the Supreme Court.

The Supreme Court, while not unanimous in their decision, eventually found in favour of Daejan.  It held, essentially, that compliance with the requirements was not an end in itself and the LVT should not refuse to dispense with a requirement simply by reason of a serious breach.  Rather, the main consideration for the LVT should be the prejudice to the tenant that flows from the breach.  The financial consequences to the landlord in not granting a dispensation were irrelevant.

In overturning the LVT’s decision to grant Daejan dispensation to the consultation requirements, the Court held that it had taken too much account of its own view of the seriousness of Daejan’s breach, rather than focussing on the prejudice that Benson actually suffered.  The Court, in fact, found that it was highly questionable whether there was any relevant prejudice suffered by Benson, let alone prejudice that could be valued as being in excess of the £50,000 discount offered by Daejan.  The Court therefore effectively granted Daejan the dispensation on terms that they reduce the sum sought from Benson to £50,000 and pay Benson’s reasonable costs.

No doubt landlords will be happy to see the LVT’s wings clipped a little, and practitioners will wait to see how this decision influences future findings of the LVT in its exercising its discretion to grant dispensations to the statutory requirements.

If you would like any further information about this issue, please contact me by emailing ian.gilmour@edwincoe.com..

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