service charge dispute articles 04.13

Repair wars: a new hope
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A recent case offers good news for landlords in service charge disputes, says Justin Bates, barrister at Arden Chambers
Long leaseholders and service charges are clearly a perennial problem for local authorities and housing associations. Inside Housing has reported previously that in 2012 Westminster Council alone lost £2 million of service charges owing to a failure to consult leaseholders properly. A recent case may, therefore, provide some solace for landlords.
The Landlord and Tenant Act 1985 requires landlords to consult leaseholders if the landlord plans to carry out works costing any leaseholder more than £250. If the consultation process is not complied with, the landlord cannot recover more than £250 per leaseholder unless the Leasehold Valuation Tribunal grants dispensation. The consultation procedure is potentially complex and small errors can have very serious consequences.
Hope for landlords
In Daejan Investments Ltd v Benson, the Supreme Court has, however, brought cheer to landlords across the country by making it clear that dispensation can and should be granted relatively easily.
Daejan was the freehold owner of a building containing seven flats. The respondents were leaseholders of five of the seven flats. In 2005, major works were required of which £280,000 was recoverable from the leaseholders as a service charge.
Consultation requirements
Daejan erred in the application of the consultation requirements, by telling leaseholders a major works contract had been awarded before the end of the statutory consultation period. The firm applied for dispensation, offering to reduce the recoverable sum by £50,000. The LVT, Upper Tribunal (Lands Chamber) and Court of Appeal all refused this application.
But in a judgement on 6 March 2013, the Supreme Court allowed Daejan’s appeal.
The court described the process of consultation as a means to an end, rather than an end in itself. The purpose is to ensure that leaseholders do not have to pay inappropriate works or pay more than would be appropriate, it clarified.
Dispensation applications should focus on how any breach of the consultation regulations had impacted on those matters. If the extent, quality or cost of the works were not affected by the failure to consult, dispensation should normally be granted. It is for a leaseholder to show that they had suffered this sort of prejudice, the judgement concludes.
The LVT could also grant dispensation on terms which could include a requirement that the landlord agrees to reduce the recoverable costs and/or to pay the leaseholders’ reasonable costs of the dispensation application.
This is excellent news for landlords. As long as the works are necessary and represent value for money, dispensation should be granted. It may be that the landlord has to agree to absorb some costs itself, but compared with recovering just £250 per leaseholder, this is a much better result. Leaseholders are likely to find it difficult to get the evidence needed to show they have been prejudiced.
The cost of it all


There are still pitfalls to be aware of when billing leaseholders, warn Susan Hall and Allan Hudson
Another case related to section 20 of the Landlord and Tenant Act will worry landlords, as it means leaseholders must be consulted if the cost of ‘qualifying work’ will exceed £250 a year – not for an individual maintenance bill, as was thought previously.
In Phillips v Francis, decided on 21 December 2012, the Chancellor of the High Court considered Martin v Maryland Estates, a decision about the 1985 act before amendments in 2002. He pointed out that the current limit of £250 per tenant was calculated by reference to the cost of ‘works on a building or any other premises’; however the amendments refer to the tenant’s contribution to the cost of qualifying works.
The chancellor said the current legislation does not require the identification of one or more sets of qualifying works, so all qualifying works, undertaken during the relevant year, however trivial, must be aggregated to see if the £250 ceiling is exceeded.
The case is binding until primary legislation is introduced or the decision is overturned by the Court of Appeal. So for now a section 20 consultation will be required wherever an individual tenant’s annual service charge contribution exceeds £250.
Landlords should be aware of the risk that leaseholders may apply to the Leasehold Valuation Tribunal for the disallowance of costs exceeding £250 for current and previous service charge years, for which there may be no statutory limitation period. There may be little at stake in the case of new blocks, but for older, expensive to maintain blocks, or refurbishments, figures may make grim reading.
Susan Hall is a partner and Allan Hudson is a consultant at Howard Kennedy Fsi




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