A landlord who failed to consult properly with its tenants before incurring service charge costs has been reprieved

The UK's highest court overturned the Court of Appeal's earlier ruling that a failure to comply strictly with the consultation requirements would itself be treated as "constituting serious prejudice" by a three to two majority. In his leading judgment (34-page / 137KB PDF), Lord Neuberger said that the tenants' right to be consulted was "not a freestanding right", and was instead a "means to an end" to protect tenants from being forced to pay for "inappropriate" works.

The landlord, Daejan Investments, was asked to reduce the amount to be paid by the tenants by £50,000 and to pay their "reasonable costs" in relation to the Leasehold Valuation Tribunal (LVT). The LVT and Court of Appeal had previously ruled that the liability of the five tenants should be capped at the statutory maximum of £250 each, rather than allowing Daejan to recover the full £280,000 cost of the works.

"[T]he correct question that the LVT should have asked itself was, whether the [tenants] would suffer any relevant prejudice, and, if so, what relevant prejudice, as a result of Daejan's failure, if [dispensation from the statutory consultation requirements] was granted unconditionally," Lord Neuberger said. "On the basis of the evidence before the LVT, it seems to me ... that it is highly questionable whether any such prejudice at all would have been suffered."

Daejan owned a block of flats, Queens Mansions. Five of these flats were held by long-term tenants under long leases. Each of the leases required the tenant to pay a fixed proportion of the cost incurred by the landlord of providing certain services it was required to provide, including repairs to the exterior and common parts of the building. The dispute related to work carried out on the building in 2006.

The Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations restrict the ability of a landlord to recover service charges from tenants. The Act states that the landlord's ability to recover service charges for work will be restricted to £250 from each tenant, unless the landlord complies with a four-stage consultation process or the LVT grants it a dispensation. The LVT can dispense with the consultation requirements if it is "satisfied that it is reasonable to do so", according to the Act.

In 2005, a company appointed by the building's property managers wrote to the Queens Mansions Residents Association (QMRA) setting out its intention to carry out work on the building and estimates for how much that work would cost. This met the requirements of the first two stages of the four-part consultation process. The contractors informed the tenants that two of the four tenders it had received were the most competitive, but it then contracted with one of these without supplying the tenants with details about both bids.

When it applied to the LVT for a dispensation from the requirements, Daejan offered the tenants a discount of £50,000 from the total cost of the repairs to make up for the fact that they had not had a chance to consider the other bid for the work. However, the LVT said that this failure to consult was so serious a breach of the requirements that it could not grant the dispensation. Its decision was upheld on appeal to the Upper Tribunal and the Court of Appeal.

Lord Neuberger said that the LVT was wrong not to consider the relevant sections of the Act in their "statutory context" when considering whether the tenants had been prejudiced by the failure to consult. He said that it was clear from the wording of the Act that the provisions were "directed towards ensuring that tenants of flats are not required ... to pay for unnecessary services or services which are provided to a defective standard, and ... to pay more than they should for services which are necessary and are provided to an acceptable standard".

"Thus, in a case where it was common ground that the extent, quality and cost of the works were in no way affected by the landlord's failure to comply with the Requirements, I find it hard to see why the dispensation should not be granted ... in such a case the tenants would be in precisely the position that the legislation intended them to be - ie as if the Requirements had been complied with," he said.

"I do not accept the view that a dispensation should be refused in such a case solely because the landlord seriously breached, or departed from, the Requirements. That view could only be justified on the grounds that adherence to the Requirements was an end in itself, or that the [LVT's] dispensing jurisdiction was a punitive or exemplary exercise," he said.

"The decision provides some welcome clarity and common sense to the operation of section 20 of the 1985 Act," said property law expert Siobhan Cross of Pinsent Masons, the law firm behind Out-Law.com. "Landlords will no longer be left bearing costs that properly fall under service charge provisions simply because of a procedural error. Instead it is likely tenants will remain liable to pay what they would have paid had the consultation requirements been complied with."

"However the decision does not provide a charter for ignoring the requirements of section 20. Any landlord who does so risks being unable to recover the true costs of its works and of having to pay its own and its tenants costs of any application it is forced to make to dispense with the requirements of section 20," said Cross.

"The huge disparity between the amount that the landlord stood to lose and the tenants stood to gain underlined the potentially draconian effects of the requirements," said property law expert Allyson Colby of Pinsent Masons. "Previous decisions have tended to favour tenants and many thought that the Supreme Court would dismiss the appeal. Consequently, landlords will welcome this decision, which ensures that the scales of justice will be more evenly balanced."