Daejan Investments Limited v Benson & ors [2013] UKSC 14: the substantive judgments

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Hillfinch Properties Limited v Southbourne Court Limited [2013] UKUT 096 (LC)
8th March 2013
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Daejan Investments Limited v Benson & ors [2013] UKSC 14: from Muswell Hill to the Court of Appeal
14th March 2013
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Introduction

Please see here for the first post on this case.

Lord Neuberger gave the majority judgment: Lords Clarke and Sumption agreed with him. Lords Hope and Wilson dissented – quite energetically.

The issue before the Supreme Court was the width and flexibility of the LVT’s jurisdiction to dispense with the consultation requirements, and the principles upon which that jurisdiction should be exercised.

References

Unattributed sections are sections of the Landlord and Tenant Act 1985;

The “1985 Act”: the Landlord and Tenant Act 1985;

The “2002 Act”: the Commonhold and Leasehold Reform Act 2002.

Overview of the key points of Lord Neuberger’s judgment

  1. A short review of the statutory context;
  2. A description of the building in question and the dramatis personae;
  3. The background to the works;
  4. The procedural history;
  5. The LVT’s decision on dispensation;
  6. The Lands Chamber’s decision;
  7. The appeal to the Court of Appeal. These aspects of the judgment are described here.
  8. The three questions of principle that needed to be answered before deciding how to resolve the appeal:
    1. The proper approach to be adopted on an application under section 20ZA(1) to dispense with compliance with the Requirements;
    2. Whether the decision on such an application must be binary, or whether the LVT can grant a section 20(1)(b) dispensation on terms;
    3. The approach to be adopted when prejudice is alleged by tenants owing to the landlord’s failure to comply with the Requirements;
  9. Effect of the analysis on the parties;
  10. The application of the principles to the resolution of the appeal;
  11. Conclusion.

The proper approach to be adopted on an application under section 20ZA(1) to dispense with compliance with the Requirements

  1. S.20ZA provides little guidance on the exercise of the dispensing discretion.
  2. It is important to achieve consistency and reasonable predictability in dispensation decisions without fettering the LVT’s discretion.
  3. Sections 20 and 20ZA reinforce and give practical effect to the purpose of section 19.
  4. Therefore on an application for dispensation the LVT should focus on whether the failure to consult has caused “relevant prejudice”.
  5. Relevant prejudice is prejudice arising from a demand for
    1. Payment for inappropriate works, or
    2. Payment for more than would be appropriate.
  6. There should be no dispensation without relevant prejudice.
  7. There is therefore no need to identify the gravity of the breach.
  8. Irrelevant factors in the exercise of the discretion:
    1. The financial consequences to the landlord of a refusal to dispense;
    2. The nature of the landlord.
  9. Transparency and accountability are not ends in themselves. There is no free-standing right to be consulted.

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

  1. The LVT has power to grant dispensation on such terms as are appropriate in their nature and effect.
  2. This includes a power to impose a requirement that the landlord pay the lessees’ reasonable costs incurred in connection with the landlord’s application.

The approach to be adopted when prejudice is alleged by tenants owing to the landlord’s failure to comply with the Requirements. 

  1. Difficulty in establishing the existence and extent of prejudice should be no barrier to the LVT refusing to determine these issues.
  2. The legal burden of proof remains on the landlord throughout.
  3. The factual burden of proving prejudice lies on the lessees.
  4. The LVT should be sympathetic to lessees in this respect.
  5. It should not be too ready to deprive lessees of their costs of investigating the existence and extent of any relevant prejudice.
  6. But the lessees do not have carte blanche to expect far-fetched allegations of prejudice to be accepted uncritically.

Effect of the analysis on the parties

  1. The answers to the three questions produce a fair outcome for both parties.
  2. They do not grant a charter for the landlord to buy its way out of non-compliance.

The application of the principles to the resolution of the appeal

  1. The approach of the lower courts was wrong.
  2. The correct test is whether, if dispensation was granted unconditionally, the landlord’s failure to comply with the consultation requirements would cause the lessees:
    1. To suffer any relevant prejudice, and, if so,
    2. The extent of that prejudice.
  3. The offer to reduce the cost of the works by £50,000 was sufficient:
    1. There was no real evidence before the LVT of any relevant prejudice.
    2. There was no evidence that any relevant prejudice equalled or exceeded the £50,000 reduction offered by the landlord.

Conclusion 

The LVT ought to have decided that the landlord’s application for a dispensation under section 20(1)(b) should be granted on terms that:

  1. The lessees’ aggregate liability to pay for the Works be reduced (presumably on a pro rata basis) by £50,000, and
  2. The landlord pay the reasonable costs of the lessees in so far as they reasonably tested its claim for a dispensation and reasonably canvassed any relevant prejudice which they might suffer.

Overview of the key points of Lord Hope’s judgment

  1. The role of the LVT as an expert tribunal in identifying breaches;
  2. No need to evidence financially quantifiable prejudice;
  3. The adequacy of the reduction proposed by the landlord in this case;
  4. Conclusion.

The role of the LVT as an expert tribunal in identifying breaches

  1. The gravity of a breach and the consequences in terms of whether dispensation should be granted – conditionally or otherwise – are questions of fact and degree and should be left to the judgment of the LVT.
  2. The wording of s.20ZA is unqualified and leaves those matters to the LVT’s discretion.
  3. Judicial restraint should be exercised in prescribing limits on the way that an expert tribunal deals with issues of fact delegated to it by statute.

No need to evidence financially quantifiable prejudice

  1. There should not be any absolute requirement that lessees evidence relevant financially quantifiable prejudice.
  2. It may be that some breaches of the consultation requirements are so flagrant that it would not be reasonable to grant dispensation, irrespective of evidence of prejudice to the lessees.
  3. A more cautious, less prescriptive approach is consistent with:
    1. The proportionate exercise of the power to dispense;
    2. The purpose of the requirements;
    3. The open-ended language of s.20ZA.

The adequacy of the reduction proposed by the landlord in this case

  1. It is right that any reduction must be commensurate with any possible prejudice which the lessees would suffer is dispensation were unqualified.
  2. Judicial restraint should be exercised in examining the question of whether the LVT was entitled to dismiss the landlord’s offer of a £50,000 reduction.
  3. The LVT did not make an error of law that could be interfered with on appeal:
    1. It was for the LVT to decide – as a matter of fact – whether the reduction had been properly quantified;
    2. It did not know the proportion which the reduction bore to the overall cost of the works;
    3. It was therefore entitled to refuse to accept the proposed reduction.

Conclusion

“For these reasons, and for those given by Lord Wilson with which I am in full agreement, I would dismiss the appeal and affirm the order of the Court of Appeal”.

Overview of Lord Wilson’s judgment

  1. The majority judgment;
  2. The effect of the amendments to the 1985 Act by the 2002 Act;
  3. The issue on this appeal;
  4. Gravity of non-compliance is relevant to whether dispensation is reasonable irrespective of consequential financial prejudice;
  5. Relationship between breach and prejudice;
  6. Attachment of conditions to the grant of dispensation;
  7. Conclusion.

The majority judgment

  1. Subverts the intention of Parliament because it departs from the width of the criterion (ie reasonable) specified by Parliament in requiring evidence of financial prejudice.
  2. Reverses the burden of proof which Parliament identified in requiring the tenant to bear the factual burden of proof of evidencing prejudice.
  3. Fails to recognise the complications involved in the hypothetical exercise in which the parties will have to engage in order to identify relevant prejudice.

The effect of the amendments to the 1985 Act by the 2002 Act

  1. The amendments impacted severely on the landlord.
  2. The severity of the amendments shows the importance attached to by Parliament to compliance with the requirements.
  3. The effect of the amendments is that, even if the LVT is satisfied that it is reasonable to grant dispensation, it still has a discretion as to whether indeed to dispense.

The issue on the appeal 

  1. The question for the Supreme Court on the appeal before it was whether the LVT had correctly applied the law on an application from dispensation where there had been serious non-compliance with the consultation regulations.
  2. The LVT was entitled to consider that the opportunity to make observations on rival tenders was central to the consultation process.
  3. However the landlord curtailed this opportunity.
  4. That curtailment constituted serious non-compliance with the Regulations.
  5. The lessees never identified the observations that they would have made, had the consultation process not been aborted.
  6. The LVT expressly addressed the point in its decision, but concluded that it was speculative.
  7. This being an appeal from a discretionary jurisdiction, that is the landlord’s strongest point.

Gravity of non-compliance is relevant to whether dispensation is reasonable irrespective of consequential financial prejudice

  1. The legislative history runs counter to the majority view of the current statutory context.
  2. The Housing Act 1980 broke the connection between consultation and the s.19 jurisdiction:
    1. It imposed a free-standing sanction for failure to consult properly;
    2. It permitted dispensation if the landlord had acted reasonably.
  3. The 1985 Act and the amendments made by the 2002 Act maintain that distinction.
  4. Therefore non-compliance with consultation is not simply a factor to be weighed in the basic s.19 jurisdiction.
  5. There are accordingly two strands to the policy underlying the regulation of service charges:
    1. S.19 protection from having to pay excessive and unreasonable service charges or charges for work and services that are not carried out to a reasonable standard;
    2. S.20 assurance of a degree of transparency and accountability when a landlord decides to undertake qualifying works or enter a qualifying long term agreement.
  6. The new criterion of whether it is reasonable to dispense with the consultation requirements:
    1. Is wider and “no doubt” more favourable to the landlord;
    2. requires the LVT to appraise any financial prejudice suffered by the lessee;
    3. does not however banish consideration of whether the landlord has acted reasonably.
  7. The ODPM’s August 2002 consultation paper on a draft of the regulations supports the argument that substantial non-compliance with the Requirements is intended to entitle the LVT to refuse dispensation in order to preserve the integrity of the legislation.

Relationship between breach and prejudice

  1. A gross breach of the consultation requirements does not need to be described as amounting to prejudice to the lessee.
  2. It is reasonable to adopt a narrower definition of prejudice to be calculated in monetary terms and by reference to the likely outcome of a properly conducted consultation.
  3. The LVT should weigh both the gravity of the breach and the financial prejudice to the lessee in determining whether to dispense.
  4. The LVT did so in this case.
  5. The financial consequences to the landlord are irrelevant on an application for dispensation.
  6. It is open to the LVT to attach conditions to the grant of dispensation.

Attachment of conditions to the grant of dispensation

  1. There are likely to be difficulties in some cases in quantifying prejudice to lessees in monetary terms:
    1. Gravity of non-compliance independent of prejudice makes the assessment of a figure even more difficult;
    2. The LVT should be given considerable latitude in its determination of the conditions to be attached to a grant of dispensation.
  2. The LVT made no error of law because:
    1. it did not conclude that it had no jurisdiction to grant conditional dispensation;
    2. it gave reasons for its rejection of the offered reduction.

Conclusion

“I conclude that the LVT made no error of law in refusing the landlord’s application for dispensation with the Requirements; that the Upper Tribunal and the Court of Appeal were correct in determining not to set its refusal aside; and that this court should determine likewise”.