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Daejan Investments Limited v Benson and others

Daejan Investments Limited v Benson and others [2013] UKSC 14, on appeal from [2011] EWCA Civ 38, was heard by the Supreme Court on 4 December 2012, and judgment handed down on 6 March 2013.

The facts of the case

Daejan sought dispensation from the consultation requirements in the Landlord and Tenant Act 1985 (“the 1985 Act”) and the Service Charges (Consultation Requirements) (England) Regulations 2003 (SI 2003/1987) ("the Requirements") from the LVT, so that it would be entitled to recover just under £280,000 in total from the respondent tenants, as opposed to a mere £1,250 in the absence of dispensation.

In the course of the proceedings, Daejan proposed a £50,000 deduction to the £280,000. The LVT regarded Daejan’s failure as a serious breach of the Requirements, which amounted to serious prejudice to the respondents.

Accordingly, the LVT refused dispensation. The Upper Tribunal and the Court of Appeal agreed with this refusal.

The appeal to the Supreme Court was allowed by a majority (Lords Neuberger, Clarke and Sumption) with Lords Hope and Wilson dissenting.  Dispensation was given to Daejan on terms that (i) the respondents’ aggregate liability to pay for the works be reduced by £50,000, and (ii) Daejan pay their reasonable costs in relation to the proceedings before the LVT.

Lord Neuberger, President, giving the lead judgment, considered the following three questions of principle:

  • The proper approach to be adopted on an application under section 20ZA (1) to dispense with compliance with the Requirements;
  • Whether the decision on such an application must be binary, or whether the LVT can grant a section 20(1)(b) dispensation on terms; and
  • The approach to be adopted when prejudice is alleged by tenants owing to the landlord’s failure to comply with the Requirements.

The proper approach to dispensing under section 20ZA(1)

The purpose of the Requirements is to ensure that tenants are protected from (i) paying for inappropriate works or (ii) paying more than would be appropriate, rather than for the purpose of “transparency and accountability” as identified by Lewison J in Paddington Basin Developments Ltd v West End Quay Ltd [2010] EWHC 833 (Ch), [2010] 1 WLR 2735, para 26.

Accordingly, the LVT should focus on the extent, if any, to which the tenants were prejudiced in either respect by the landlord’s failure to comply with the Requirements.

A dispensation should not be refused solely because the landlord seriously breached, or departed from, the Requirements: Adherence to the Requirements is not an end in itself, nor is the dispensing jurisdiction a punitive or exemplary exercise.

The most important consideration is the real prejudice to the tenants flowing from the landlord’s breach of the Requirements. In this context, it can be seen that where the landlord is guilty of “a serious failing”, it is more likely to result in real prejudice to the tenants than where the landlord has been guilty of “a technical, minor or excusable oversight”. This apart, it is neither convenient nor sensible to distinguish between such breaches.

The financial consequences to the landlord of not granting a dispensation is not a relevant factor,  although such consequences are often inversely reflective of the relevant prejudice to the tenants, which is centrally important.

The nature of the landlord is not a relevant factor either.

Is the LVT faced with a binary choice on a section 20ZA(1) application?

The LVT is not constrained either to dispense with the Requirements unconditionally or refuse to dispense with the Requirements: It has power to grant a dispensation on such terms as it thinks fit, provided that any such terms are appropriate in their nature and their effect.

Conditions might include requiring the landlord to reduce the cost of the works or to pay the tenants’ reasonable costs incurred in connection with the landlord’s application under section 20ZA(1).

The correct approach to prejudice to the tenants

Where the LVT is considering prejudice the legal burden of proof would, throughout, be on the landlord, but the factual burden of identifying some relevant prejudice that they would or might have suffered, or to identify what they would have said, if their complaint is that they have been deprived of the opportunity to say it, would be on the tenants. Once the tenants have shown a credible case for prejudice, however, it is for the landlord to rebut it.

Although the LVT should not accept any suggested prejudice, however far-fetched, or permit the tenants to recover unreasonable costs as part of any condition imposed for granting dispensation, it should be sympathetic to them when they are investigating relevant prejudice, or seeking to establish that they would suffer such prejudice and to the points that they raise.

Save where the expenditure is self-evidently unreasonable, it would be for the landlord to show that any costs incurred by the tenants were unreasonably incurred before it could avoid being required to repay such costs, including those of consulting a surveyor and/or a solicitor as a term of dispensing with the Requirements.

There can be little doubt that not only will Daejan be heaving a huge sigh of relief, but that many landlords will also find comfort in this practical judgment.

Although the risk of tenants making large windfalls in the face of relatively minor breaches of the Requirements is reduced, there are still significant financial implications to being in default.  Such a landlord will not only have to pay its own costs of making and pursuing an application to the LVT for a dispensation, it may, as a condition of getting it, also have to pay the tenants’ reasonable costs of investigating and challenging that application as well as discounting their service charge bills in order to compensate fully for any relevant prejudice, well-knowing that the LVT will adopt a sympathetic (albeit not unrealistically sympathetic) attitude to the tenants on that issue.

For further information, please refer to the judgment in Daejan Investments Limited v Benson and others [2013] UKSC 14.