Daejan Investments Limited v Benson & ors [2013] UKSC 14: from Muswell Hill to the Court of Appeal

Daejan Investments Limited v Benson & ors [2013] UKSC 14: the substantive judgments
14th March 2013
Daejan Investments Limited v Benson & ors [2013] UKSC 14: analysis
19th March 2013
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Here it is – the decision that we have been waiting for since the hearing on 04 December 2012.

I am sure that by now most of my readers will know the outcome of the case, but I will not spoil the suspense for anyone who does not yet know the result. Suffice it to say that the appeal was decided by a majority of three to two. Lords Neuberger, Clarke and Sumption formed the majority. Lords Clarke and Sumption agreed with Lord Neuberger’s judgment and said nothing more. Lords Hope and Wilson each wrote dissenting judgments.

After some deliberation – and much wrestling with a paper copy of the judgment on the Tube – I have decided to publish my report and analysis of the case over three posts.

This first post sets the scene, reflecting the opening pages of Lord Neuberger’s judgment. It takes the reader through the background facts and decisions in the LVT, the Upper Tribunal (Lands Chamber) and the Court of Appeal.

The second post is a summary of the issues canvassed in each judgment by their Lordships in the Supreme Court.

The third and final post will be a full post of the section I normally entitle “Observations” at the end of each case report. It will contain my analysis and views of the rights (and wrongs) of all three judgments, and the likely impact of the decision on the residential service charge world.

My aim, in dividing the case up this way, is to keep each post manageable in length, to keep the introductory background information separate from the substantive issues of principle, and, finally, to allow myself sufficient space to evaluate the competing judgments without metaphorically falling off the bottom of the page.

A short summary of the current service charge legislation

Sections 18-20ZA of the Landlord and Tenant Act 1985 are relevant to the recovery of residential service charges:

  • Section 18 defines service charge;
  • Section 19 provides for service charges to be recoverable provided that the sums demanded are reasonably incurred, reasonable in amount and that the service provided is of a reasonable standard, and
  • Sections 20 and 20ZA limit lessees’ contributions for qualifying works unless the landlord consults in accordance with the relevant statutory procedure.

The Service Charges (Consultation Requirements) Regulations 2003/1987 contain the statutory consultation procedures, and set the section 20 limit at £250 per lessee in respect of qualifying works if the landlord does not comply with the consultation requirements.

The relevant consultation procedure in this case was contained in Part II of Schedule 4 to the Regulations. The parties had agreed a summary of the procedure for the benefit of the Supreme Court. I reproduce it below:

  • Stage 1: Notice of intention to do the works: notice must be given to each tenant and any tenants’ association, describing the works, or saying where and when a description may be inspected, stating the reasons for the works, specifying where and when observations and nominations for possible contractors should be sent, allowing at least 30 days. The landlord must have regard to those observations.
  • Stage 2: Estimates: the landlord must seek estimates for the works, including from any nominee identified by any tenants or the association.
  • Stage 3: Notices about Estimates: the landlord must issue a statement to tenants and the association, with two or more estimates, a summary of the observations, and its responses. Any nominee’s estimate must be included. The statement must say where and when estimates may be inspected, and where and by when observations can be sent, allowing at least 30 days. The landlord must have regard to such observations.
  • Stage 4: Notification of reasons: unless the chosen contractor is a nominee or submitted the lowest estimate, the landlord must, within 21 days of contracting, give a statement to each tenant and the association of its reasons, or specifying where and when such a statement may be inspected.

The building and the dramatis personae

The building: Queen’s Mansions, Muswell Hill, London, containing shops on the ground floor and seven flats on the upper floors. Five of the seven flats were let on long leases;

The landlord: Daejan Investments Limited, part of the Freshwater group of companies;

The managing agent: Highdorn Co Ltd, part of the Freshwater group of companies, trading as Freshwater Property Management;

The residents’ association: Queen’s Mansions Residents’ Association (“QMRA”);

The QMRA chairperson: Ms Marks, partner of one of the long lessees;

The works contract administrator: Robert Edwards Associates (“REA”).

Background to the works

Early 2005: major works are needed to the building;

February 2005: the managing agent informs lessees of the landlord’s intention to carry out works;

Late February 2005: the managing agent sends a specification to the residents’ association;

Subsequently, at Ms Marks’s request, REA are appointed as contract administrator;

06 July 2005: a stage 1 notice of intention is sent to the residents’ association and the lessees;

30 August 2005: A fresh specification is sent to the residents’ association and the lessees;

Subsequently, tenders are sought and received from four contractors;

06 February 2006: the contract administrator sends a tender report to the lessees – most competitive tenders are from Rosewood and Mitre. Rosewood is more expensive, but the contract period is shorter. Only the specification from Mitre is sent to the lessees;

Throughout 2006: Ms Marks asks to see the other specifications. The landlord is indicating a preference for Mitre;

14 July 2006: Ms Marks makes detailed comments about the works, stating however that her comments are provisional until she has seen the priced tenders.

14 June 2006: Stage 3 notices served on the residents’ association and the lessees;

28 July 2006: Stage 3 notices served on the residents’ association and the lessees. Both this and the 14 June notice state when the priced estimates can be inspected. Neither notice contains the required summary of observations received in response to the landlord’s stage 1 notice, and the estimates were not available for inspection until –

31 July 2006: the priced estimates are made available for inspection by the landlord;

08 & 10 August 2006: the residents’ association and the lessees are informed that the contract has been awarded to Mitre. The information is wrong but is never corrected, and at this stage, the lessees have not inspected the estimates. The Regulations provide that lessees should have thirty days to inspect the priced estimates and to make observations about them to the landlord. Effectively therefore the thirty day period is truncated: the landlord has failed to comply with the consultation procedure;

Subsequently, Ms Marks communicates further with the landlord about the proposed works;

11 September 2006: the landlord in fact awards the contract for the proposed works to Mitre.

27 September 2006: the fact of the contract award to Mitre is communicated to the lessees and the residents’ association;

03 October 2006: Mitre start carrying out the works.

The procedural history

14 July 2006: four of the lessees apply to the LVT for a determination of the service charges payable under their leases. The issue of compliance with the consultation requirements arises;

February – November 2007: eight days of hearings before the LVT;

11 March 2008: the LVT gives its decision: the landlord has failed to comply with the consultation requirements. The lessees’ contribution to works costing in the region of £280,000 is limited to £250.00;

Subsequently, there is a one day hearing of the landlord’s application for dispensation from the requirement to consult;

08 August 2008: the LVT gives its decision: no dispensation;

27 November 2009: the Lands Chamber gives its decision: no dispensation;

28 January 2011: the Court of Appeal hands down judgment: no dispensation;

The LVT’s decision

Key elements of the LVT’s decision were:

  • The comments Ms Marks may have made about the Rosewood estimate, and what effect that would have had on the works were a “matter of speculation”;
  • The landlord’s failure to comply with the Regulations had caused substantial prejudice to the lessees;
  • The opportunity to comment on all of the tenders was central to the consultation process and important to the lessees;
  • The landlord’s extra-statutory consultation did not make good its failure to provide copies of the estimates and thereby to give the lessees the chance to make comments on them, and
  • That failure amounted to significant prejudice.

Daejan’s offer of £50,000 to compensate the lessees for any prejudice was rejected because:

  • There was no explanation as to how that figure had been arrived at, and
  • The offer did not alter the existence of substantial prejudice to the lessees.

The Lands Chamber’s decision

The Lands Chamber determined that the failure to give the lessees opportunity to comment meaningfully on the estimates had for all practical purposes curtailed the consultation process.

Key elements of this decision were:

  • That evidence of actual prejudice was weak;
  • The burden of proving an absence of prejudice lay on Daejan. It was not for the lessees to show that they had suffered prejudice, and
  • The LVT was the primary decision maker. On the evidence, it had been entitled to reach the conclusion it did.

The Court of Appeal’s judgment

Gross LJ expressed the view of the court on the three main issues before the Court of Appeal:

  • The financial effect of the grant or refusal of dispensation on the individual landlord and tenants is irrelevant in an application for dispensation;
  • The LVT had not erred in treating Daejan more harshly than if it had been a landlord controlled or owned by the lessees, and
  • Significant prejudice to the tenants is a consideration of first importance in exercising the dispensatory discretion.

He continued that:

  • On the facts of this case, Daejan’s failure “constituted a serious failing and did cause the respondents serious prejudice”;
  • This was not “a technical, minor or excusable oversight”;
  • The LVT was entitled not to speculate on what would have happened if there had been no breach, on the ground that the respondents’ “loss of opportunity (to make further representations and have them considered) … itself amount[ed] to significant prejudice”;
  • He doubted that the LVT would have been entitled to accede to Daejan’s offer to reduce the chargeable amount by £50,000, and that, anyway,
  • The LVT was entitled to reject that proposal.

The issues before the Supreme Court

Lord Neuberger identified three questions of principle that needed to be answered, before deciding how to resolve the appeal:

  • The proper approach to be adopted on an application under section 20ZA(1) to dispense with compliance with the Requirements;
  • Whether the decision on such an application must be binary, or whether the LVT can grant a section 20(1)(b) dispensation on terms;
  • The approach to be adopted when prejudice is alleged by tenants owing to the landlord’s failure to comply with the Requirements.

Click here to read his answers to those questions. Cliffhanger anyone?