Daejan Investments Limited v Benson & ors [2013] UKSC 14: analysis

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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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London Borough of Southwark v Mr C Bevan, Miss C Champenois [2013] UKUT 0114 (LC)
25th March 2013
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My summary of the background to this case and the judgments given by their Lordships in the Supreme Court can be found here and here. This post contains my analysis and observations on the judgment.

It is divided into three parts: the first examines the key issues and reasoning in the judgments. The second considers its practical effects. In the third part, I modestly elevate myself to Supreme Court judge and set out how I would have resolved the appeal.

Contents

The judgments and their Lordships’ reasoning:

  • The statutory history and context
  • Breach without prejudice
  • No freestanding right to consultation
  • Conditional dispensation

The effects of the judgment:

  • Mitigation of the effects of Phillips v Francis [2012] EWHC 3650 (Ch)
  • The problem with the one size fits all remedy
  • Relevant financial prejudice
  • Extracting the consultation teeth by tying prejudice in to section 19

Conclusion

The judgments and their Lordships’ reasoning

First the Chancellor: now Lord Neuberger. I’m having some difficulty getting along with these senior judges on their service charge judgments.

As I read Dajean, the issue which truly divided the Supreme Court was the relationship between breach and prejudice.

The question was whether actual financial prejudice had to be shown for a lessee to get home on the £250 limit, or whether a more general, intangible prejudice was sufficient. Lords Neuberger, Clarke and Sumption said yes. Lords Hope and Wilson said no. I hope that they will forgive me for saying that they gave Lord Neuberger quite a handbagging in their dissention: “Lord Neuberger’s conclusion that the gravity of the landlord’s noncompliance with the [consultation] requirements is relevant to dispensation not of itself but only insofar as it causes financial prejudice to the tenant seems to me to subvert Parliament’s intention”, smouldered Lord Wilson.

If the majority judgment in Daejan was a narrative proposal for new legislation, I would welcome it with open arms. It seems to me to be an eminently sensible solution to what can become a fractious hot point between landlords and lessees. The majority judgment is however not such a proposal: it is an interpretation of the law. As an interpretation of the law, it seems to me to be rather broad brush.

Let me explain why.

The statutory history and context

Lord Wilson’s analysis of how the law separated section 19 from consultation makes sense and gives independent meaning to section 20. It is a handy, pocket-sized history of service charge consultation.

Further, and in the light of Lord Wilson’s analysis, it does not follow that when Parliament amended the Landlord and Tenant Act 1985 in 2002, and then went to the trouble of adding the consultation regulations in 2003, its aim was simply to support the section 19 criteria. If that were the case:

  • I would have expected reference to section 19 to appear in the amendments, and
  • It would be arguable that the changes safeguarded the landlord’s recovery of major expenditure by ensuring that the lessee put his cards on the table early doors.

My understanding is that Parliament has been at pains to protect the tenant. This is evidenced by the comparatively low threshold of £250 beyond which the landlord cannot (or could not, before this judgment) recover costs in the event of breach of the consultation requirements, and by my own experience of reading the Hansard records of questions, answers and debates leading to the enactment of the Commonhold and Leasehold Reform Act 2002.

Breach without prejudice

I do not see eye to eye with their dissenting Lordships, Lords Hope and Wilson, on the main question.

The civil law is rarely punitive: its normal aim is to compensate rather than to enrich. There are exceptions – for instance, exemplary damages and damages under the Distress for Rent Act 1689, but they are so memorable because they are the exceptions.

As a matter of general civil law principle therefore, unless Parliament intended non-compliance with the relevant consultation requirements to be another such exception, it does not follow that, by a landlord breaching one of the consultation requirements, a lessee may enjoy a windfall worth, in some cases, thousands of pounds, without suffering any loss.

No free standing right to consultation

Lord Neuberger is clear on this issue. At paragraph 52, he says: “there is no justification for treating consultation or transparency as appropriate ends in themselves”.

When I discussed this case with a colleague more practised in public than private law, she observed that the consultation procedure for service charges bore similarities to the provisions often found in public law for the expression of observations by the population likely to be affected by the exercise of a given power. I wonder therefore whether the obligation to consult – and particularly the detailed consultation requirements – were fashioned on a public law model.

If they were so fashioned, I am not sure that I would set sail with Lord Neuberger on this point. I would have reservations about the accuracy of his compass.

Conditional dispensation

All five of their Lordships approved the concept of conditional dispensation. Having castigated Lord Neuberger for subverting the intention of Parliament at the outset of his judgment, Lord Wilson went on to say: “I agree with Lord Neuberger that it is open to the LVT to attach a condition of that character; and I regard it as valuable for the LVT that this court should so rule”.

No authority was cited in any of the tribunals or in the Court of Appeal in support of the power to dispense on terms. Its origin is a mystery:

  • The LVT has no inherent jurisdiction like the High Court. It is a creature of statute, and therefore has no powers which are not expressly given to it;
  • There is nothing in the Leasehold Valuation Tribunals (Procedure) Rules 2003/2099 which gives it the express power to dispense on terms, nor have I so far found any provision which does so implicitly;
  • Conversely, in cases of relief from forfeiture, which Lord Neuberger refers to at paragraph 62, the relevant statutes (the Law of Property Act 1925 and the County Courts Act 1984) expressly permit conditions to be attached to the grant of relief, and
  • Finally, the Civil Procedure Rules (the “CPR”) expressly endow the court with the power to make an order subject to conditions at CPR r.3.3. The LVT is not governed by the CPR.

For my part, I welcome the practicality of the principle of conditional dispensation, but I remain baffled as to its source.

And what about the conditions themselves? Are they limited to shortening time or reducing the amount payable by lessees? Or will the LVT in future be able to impose wider conditions? If the landlord makes an application for dispensation whilst major works are underway, will the LVT be entitled to impose conditions such as prohibiting works at specific times, or temporarily re-accommodating lessees prejudiced by a particularly messy contractor?

The effects of the judgment: what next?

Mitigation of the effects of Phillips v Francis [2012] EWHC 3650 (Ch)?

Does this judgment mitigate the effects of Phillips v Francis? Daejan was heard on 04 December 2012. The then Chancellor handed down his judgment in Phillips on 21 December 2012. On 04 March 2013 the Supreme Court handed down its judgment in Daejan.

Whilst Daejan is on a different point to Phillips, it seems to me that it does swing the pendulum back towards the centre ground. Take the example of a landlord who breaches the requirement to consult left right and centre in a year where he simply does not anticipate expenditure in respect of which Phillips would expect him to consult. The positive effect of Daejan is twofold. First, in all but the most urgent works, the landlord can make a pre-emptive application for dispensation from the requirement to give a full thirty day period for observations, a point made by Lord Neuberger at paragraph 56:

“… It is clear that a landlord may ask for a dispensation in advance. The most obvious cases would be where it was necessary to carry out some works very urgently, or where it only became apparent that it was necessary to carry out some works while contractors were already on site carrying out other work. In such cases, it would be odd if, for instance, the LVT could not dispense with the Requirements on terms which required the landlord, for instance, (i) to convene a meeting of the tenants at short notice to explain and discuss the necessary works, or (ii) to comply with stage 1 and/or stage 3, but with (for example) 5 days instead of 30 days for the tenants to reply”.

Second, for truly minor works, or inadvertently incurred costs exceeding the consultation threshold, it seems to me arguable that a landlord now has a better prospect of recovering unconsulted-for expenditure. This is likely to be the result of the newly-hewn requirement that there be evidence of financially relevant prejudice.

Effectively this means that the landlord can go and undertake minor works such as lock replacement without consultation. Provided that those works satisfy the section 19 criteria, it seems to me that there will be little risk of a refusal of dispensation.

Take note however, that the LVT now has the power to make it a condition of dispensation that the landlord pay lessees’ reasonably incurred costs of the dispensation application. Where the landlord-lessee relationship is fraught therefore, it may be a courageous decision (in the “Yes Minister” sense) to go ahead with works without consultation.

The problem with the one size fits all remedy

The principle of consultation has always struck me as an inherently positive one.

The main problem with consultation in the service charge context however has been the draconian outcome of an application for dispensation, especially in cases where works are high cost. Such applications have often resulted in a clear winner and a bruised loser, an unfortunate outcome in circumstances where the parties have to continue to live with each other after the event.

Are there any comparables for such a standardised remedy? The tenancy deposit scheme springs to mind. In analogous and trenchant fashion, the Housing Act 2004, as originally enacted, provided for a flat treble-the-deposit sanction for non-compliance with its provisions. The sanction became flexible by the amendments inserted by the Equality Act 2010: the courts are now empowered to award up to three times the deposit by way of reprimand to the landlord.

The Daejan solution reflects this flexibility in the service charge setting.

Relevant financial prejudice

Lord Neuberger’s description of relevant financial damage may fairly be likened to special damage because any reduction of the cost of works must be directly quantifiable by reference to the section 19 criteria. In other words, it can be calculated by reference to direct costs.

By contrast, the minority standpoint describes a reduction more akin to general damages, ie damages for an intangible loss such as the loss of an opportunity to make observations, or the loss of transparency in the landlord’s dealings with the lessee.

To my mind this is relevant for the reasons discussed under the next heading.

The blunting of the consultation teeth by tying prejudice in to section 19

The tying in of prejudice to losses which arise from the section 19 criteria arguably sterilises the whole consultation process. I have struggled to come up with situations where relevant prejudice might be sustained under section 20 which would not also fall under section 19 – almost by definition it could be said that the two are one and the same.

I have however managed to come up with an example. Say the landlord wishes to carry out works and obtains tenders, including a tender from a contractor which a lessee – for publicly disclosable reasons – knows is about to go into liquidation. The landlord does not know this and has not made any enquiries on the question. The curtailment of the consultation process prevents the lessee from communicating this potentially highly relevant information to the landlord. The landlord appoints the soon-to-be-liquidated contractor, which then goes into liquidation in the middle of the works. The landlord then incurs further costs in tendering for and engaging a further contractor, costs which he would not have incurred if he had allowed the consultation procedure to run its course.

Whilst I am happy to have identified an example of curtailed consultation which would not necessarily produce the same result under section 19, it seems to me that such examples are likely to be few and far between. I cannot help but reach the conclusion that the post-Neuberger section 20 is a considerably feebler – even if fairer – animal.

Conclusion

Could you have done better? I hear you ask.

In determining the application for dispensation, the LVT exercised a discretionary jurisdiction. When reviewing the exercise of that discretion, Carnwath LJ (in the Upper Tribunal hearing of the case) reminded himself that “we are reviewing [the LVT’s] decision, not substituting our own judgment. It is common ground that we can only interfere if the LVT has gone wrong in principle, or left material factors out of account, or its balancing of the material factors led it to a result which was clearly wrong.”

It seems to me that the LVT did go wrong in principle. On the proposed reduction by the landlord, at paragraph 103 of its decision, it held that: “The Tribunal has taken into account the proposed deduction from the cost of the works. It is not possible to assess this against the final costs which are not currently known. The Tribunal considers that the offer does not alter the existence of substantial prejudice suffered by the leaseholders” (my emphasis).

This paragraph implies that the lessees’ substantial prejudice could not be compensated in money:

  • The LVT considered that the reduction would “not have altered the existence” of the lessees’ substantial prejudice;
  • It did not say that it would reduce or minimise it, and
  • If it was assessing the adequacy of the reduction, it is unclear whether this was by reference to a special damages-type figure or an intangible, general damages-style one.

Since all five of their Lordships agreed that money can compensate for the prejudice suffered by non-compliance with the consultation requirements, it seems to me that the LVT’s decision could not stand.

My solution would have been a hybrid of the majority and minority judgments. Experience tells me that transparency and accountability are important in the landlord and tenant relationship. I would therefore have retained Lord Neuberger’s analysis, but I would have bolted on to it an entitlement for a lessee to rely on prejudice of an intangible, general damages type.

I would still have required evidence of prejudice however, before considering reducing the figure sought by the landlord. Loss of opportunity to make observations? What would have been said? Incorrect date specified in the section 20 notice? What would have been done if the correct date had been given?

The tricky question is as to the quantification of that intangible prejudice, but then again, the courts manage to quantify pain, suffering and loss of amenity in personal injury cases, and distress and anxiety caused by harassment and disrepair. As Lord Neuberger said at paragraph 66: “the fact that an assessment is difficult has never been regarded as a valid reason for the court refusing to carry it out (although in some cases disproportionality may be a good reason for such a refusal)”.

© Amanda Gourlay, March 2013. Not to be reproduced without the author’s written permission.