A recent case saw the Court of Appeal consider the circumstances in which the First-tier Tribunal (FTT) may grant a landlord dispensation for carrying out works when they have done so without first notifying leaseholders of their intentions.
In Aster Communities v Kerry Chapman and Others [2021] EWCA Civ 660, the principles determined in Daejan Investments v Benson and Others [2013] UKSC 14 were followed, and the test for whether a landlord should be granted dispensation from the section 20 consultation process – established by Lord Neuberger in the earlier case – appears to have been applied in favour of leaseholders.
The Landlord and Tenant Act 1985 governs residential service charges, including the expenses that leaseholders must pay their landlord for repair and maintenance of their property. Landlords are required by section 20 of the act to consult with leaseholders when planning major works if the cost is likely to exceed the 'appropriate amount', which is currently set at £250 for one each tenant.
The consultation process is provided for in Schedule 4, Part 4 of the Service Charges (Consultation Requirements) (England) Regulations 2003, and involves serving the leaseholders with a notice of intention, notices regarding estimates, and a notification of reasons for appointing the contractor. Provided that this consultation process is followed, the landlord is entitled to demand a full contribution from the tenants.
On occasion, it is not possible to comply fully with the regulations; for example, where works might be urgent, there may be no time to provide the tenants with various notices. When this happens, the landlord must seek dispensation from the FTT to recover the costs through the service charge. Likewise, if leaseholders think that the process has not been properly followed, then they are entitled to challenge the liability of service charges in the FTT.
'On occasion, it is not possible to comply fully with the regulations [...] When this happens, the landlord must seek dispensation from the FTT to recover the costs through the service charge'
The principles that govern whether dispensation will be granted by the FTT were established in the Supreme Court decision Daejan.
Lord Neuberger, who gave the leading judgment, made it clear that in determining an application for dispensation, the first step for the FTT is to establish what prejudice, if any, the lessees have suffered as a result of the landlord's failure to comply with the consultation requirements.
In this case, the freeholders had undertaken major works on a block of flats in Muswell Hill that cost £28,000. There were, however, a number of failures in the consultation process that would have resulted in Daejan only being able to recover a total of £1,250 from the tenants. The FTT granted Daejan dispensation subject to certain conditions, but its decision was appealed and eventually reached the Supreme Court.
A corollary of this test is that leaseholders who wish to oppose an application for dispensation must provide evidence and a credible case showing that they have suffered prejudice. They must show what steps they would have taken had the consultation process been carried out properly, and consequently state what prejudice they have faced owing to the landlord's failures. It is then up to the court to decide whether the leaseholders have in fact faced such prejudice and, if so, determine what needs to take place in order for that prejudice to be rectified.
The principle behind this test, as explained by Lord Neuberger, is that the section 20 consultation process should not be understood in black and white terms, such that if a landlord has failed to comply then they cannot retrieve the relevant costs. Instead, the consultation process, and consequently the dispensation test, should ensure that leaseholders are not forced to pay for unnecessary services, or pay more than they would have had the consultation process been properly followed.
In line with this reasoning, the Supreme Court also held that the FTT could require a landlord to comply with certain terms provided 'any such terms are appropriate in their nature and effect'. In Daejan, the Supreme Court overturned earlier judgments provided by the FTT, Upper Tribunal and Court of Appeal, and granted dispensation on condition that Daejan reduce the leaseholder's overall liability by £50,000 and pay the leaseholder's reasonable costs in relation to the application process.
In the recent case of Aster, the Court of Appeal again considered the circumstances in which the FTT may grant a landlord dispensation, and it is interesting to see how it applied the principles established by Daejan in the leaseholders' favour.
In Aster, the landlord of several blocks of flats carried out a section 20 consultation process in relation to a package of works. The original notice of intention was sent to the leaseholders in 2016. Aster then provided estimates for the works to the tune of £4.8m. In order to establish the reasonableness of on-account service charge demands for these costs, the company then applied under section 27A of the 1985 Act for a determination in the FTT.
The FTT found that Aster had failed in two respects. First, it found that one of the works – the replacement of the balcony asphalt – was unnecessary. It also determined that it was not part of the section 20 consultation. As such the FTT concluded that, for the balcony works only, Aster would need to apply for dispensation; failing which, it would be limited to recovering £250 per tenant. In relation to the other works, the FTT determined that Aster had 'carried out a good faith consultation'.
In 2019, Aster made an application for dispensation, stating that it was satisfied that it could justify the necessity of replacing the balcony asphalt. The application elicited four objections from leaseholders.
Two of them did not say anything about what they might have done differently had Aster followed correct procedures, and so given the nature of the test laid out by Lord Neuberger were unlikely to be able to provide evidence of relevant prejudice. One other response came from a counsel representing 41 tenants, who argued that they had been 'deprived of the opportunity to become involved in determining the scope of the asphalt works'. Finally, a Miss Motovilova – who in 2016 had inspected the estimates in the Aster office – argued convincingly that she would have obtained expert advice to ascertain whether the balcony works were necessary.
The FTT was therefore entitled to assume that, had the full scope of the works been disclosed, the leaseholders would have referred the matter to their expert. The landlord's default had therefore resulted in a credible case of prejudice. The judge did, however, grant permission to appeal.
The court of appeal considered three issues that were raised by Aster.
The first concerned whether the FTT was wrong to conclude that Motovilova would actually have acted differently if Aster's notice had included reference to the replacement of the balcony asphalt. The thrust of Aster's argument was that the FTT had ignored a relevant consideration, namely that none of the tenants had complained in the section 27A proceedings that the notice of intention was defective because it failed to mention the balcony works.
The Court of Appeal dismissed this, stating that the FTT was right to conclude that Motovilova would have acted differently – particularly given that she had made clear she would have done so in a statement of case, verified by a statement of truth.
Second, Aster submitted that the issue of relevant prejudice should be assessed separately for each lessee and that the FTT should not have relied on the evidence of a single tenant in granting dispensation to the others. Its counsel argued that 'tenants cannot ride on each other's coat tails'.
The Court of Appeal rejected this argument and agreed with the leaseholder's counsel, who claimed that if one tenant in a block of 20 was a retired surveyor who challenged an item in a programme of works then it was not just that tenant alone that suffered: all 20 would have suffered the same relevant prejudice, and all would be entitled to the benefit of the same conditions.
The court also referred to the 2003 Regulations as a group process, where a landlord seeks dispensation against tenants generally. In light of this, it concluded that the fact that prejudice might be attributable to the way Motovilova alone would have reacted did not mean that the FTT was confined to considering the prejudice done to her.
Finally, Aster questioned whether the FTT was entitled to impose the initial conditions for dispensation. The FTT had granted dispensation on two conditions: the first was that Aster would pay the reasonable costs of an expert to consider and advise the tenants on the necessity of replacing the balcony asphalt at the main blocks, and the second that it should also pay the respondents' reasonable costs for the dispensation application.
The Court of Appeal decided that the FTT was well within its rights to impose the first condition given the specific circumstances of the case. It considered that the second condition was in keeping with the conditions imposed in Daejan and consequently acceptable. The Court of Appeal thus upheld the FTT's decision and the conditions it had imposed on Aster in relation to dispensation.
This decision highlights the importance of getting the statutory consultation process right. It also appears to have extended the test established by Daejan in favour of leaseholders.
Where there has been a failure by a landlord to adequately set out the scope or necessity of certain works during the consultation process, then leaseholders will not necessarily be expected to provide expert evidence to prove relevant prejudice.
Although it is not enough to rely on procedural errors, the fact that leaseholders – or even a single leaseholder – would have obtained expert advice had the process been properly followed is likely to be sufficient. If relevant prejudice is established, the freeholder will probably be ordered to pay the leaseholders' expert investigation costs to secure dispensation.
Related competencies include: Conflict avoidance, management and dispute resolution procedures, Communication and negotiation, Landlord and tenant, Legal/regulatory compliance, Property management
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