Courts find in favour of landlords over residential service charges

2013 was an eventful year for cases relating to residential service charges and, in particular, consultation requirements pursuant to section 20 of the Landlord and Tenant Act 1985 (‘the Act’).

In the summer, the High Court handed down a decision that will please landlords. The case of BDW Trading Ltd & Comet Square Phase 2 Block Management Co Ltd v South Anglia Housing Ltd [2013] EWHC 2169 (Ch) held that the consultation requirements do not apply to long-term qualifying agreements for buildings that have either not yet been constructed or have not yet been let at the time the agreement was entered into.

Qualifying works

Under the Act, landlords are required to consult tenants prior to carrying out any ‘qualifying
works’, or prior to entering into a ‘qualifying long-term agreement’.

‘Qualifying works’ are defined under section 20Z of the Act as works to premises or buildings, ‘qualifying long-term agreements’ are agreements entered into by or on behalf of a landlord or superior landlord for more than 12 months. Failure to consult or comply properly with the consultation requirements will result in a landlord only being able to recover a maximum of £250 per tenant in relation to qualifying works and £100 per tenant for agreements entered into for more than 12 months.

Previously, the courts have come down hard against landlords who failed to get it right. The 2010 decision in the case of Paddington Basin v West End Quay Estate Management [2010] EWHC 833 (Ch) is a stark reminder for landlords of the penalties they face if they get it wrong.

In this case, the landlord, Paddington Basin, failed to consult tenants before entering into a management agreement that could only be terminated after 25 years. The result was that the tenants only had to contribute £100 each per year towards the cost of the management agreement, which amounted to £46,700. The first year’s charge under the agreement actually cost £270,000.

The decision in Phillips v Francis [2012] EWHC 3650 (Ch) was not any better for landlords. In that case, the judge held that all works which are ‘qualifying works’ will need to be considered as a whole when calculating a tenant’s contribution for that accounting period. In many cases, this will mean that a tenant’s contribution to the cost of qualifying works in any one period will exceed £250, even if no major works projects are planned, simply because the definition will cover basic and unexpected maintenance.

Special dispensation

However, things now appear to be changing slowly with decisions that will please landlords. Last year, the Supreme Court handed down its decision in the case of Daejan Investments Ltd v Benson & Others [2013] UKSC 14, granting the landlord, Daejan Investments Ltd, dispensation from the consultation requirements. The decision enables the First Tier Tribunal to look at the extent to which, if any, the tenants’ protection from paying for the costs of unreasonable works or paying more
than necessary, is prejudiced by a landlord’s failure to consult.

If no prejudice is suffered (and it is for the tenants to prove this is the case), dispensation should be granted. Dispensation can be granted to the landlord subject to conditions that the First Tier Tribunal thinks fit.

In Daejan, dispensation was conditional upon it paying the tenants’ reasonable costs of the proceedings and reducing the costs of the works it was entitled to recover from the tenants by £50,000. This judgment is good news for landlords, as it has made it much harder for tenants to avoid paying service charges based on technical or procedural irregularities. However, the fact that the tribunal can impose conditions still means that landlords could face significant penalties if they fail to consult properly.

In BDW Trading Ltd, BDW entered into a 25-year agreement with Utilicon Ltd to provide hot water and electricity to each of the residential flats. The agreement was entered into during the construction of the development and prior to any of the flats being let.

The defendant, South Anglia Housing Ltd (‘South Anglia’), which came to own two long underleases of two of the four residential blocks in the development, challenged the sums claimed for these costs on the basis that BDW had not complied with consultation requirements under the Act. Although there were no tenants at the time the agreement was entered into, South Anglia argued that BDW should have applied in any event to the First Tier Tribunal for dispensation from the consultation procedure.

Clear relationship

The court dismissed this argument on the basis that the Act clearly denoted the existence of a landlord and tenant relationship and there lacked any express wording in the Act providing for qualifying long-term agreements to apply to property not yet built or let.

Furthermore, were it the intention of the Act to make potential landlords apply to the First Tier Tribunal for dispensation in these circumstances, provision would have been made; whilst at the same time also setting out regulations for the First Tier Tribunal to be able to deal with such one-sided applications. In the absence of these provisions, the court had no difficulty in finding for the landlord.

The court reached this decision despite evidence in the form of the Service Charges (Consultation Requirements) (England) Regulations 2003 and a consultation paper issued by the Office of the Deputy Prime Minister on the proposed regulations in 2002 which both denoted that the Act did apply to qualifying long-term agreements, even where there are no tenants to consult. However, the court dismissed this evidence as inadmissible given that the meaning of the Act was clear.

While this decision will no doubt further please landlords, and for the ‘savvy’ developer act as a potential backdoor route to enter into agreements prior to letting a building to avoid the consultation procedure, it should be adopted with caution.

Future tenants can still challenge the reasonableness of any service charge costs under section 19 of the Act in the First Tier Tribunal, which could mean that landlords end up funding the costs of long-term agreements if the First Tier Tribunal find such costs to be unreasonable.

In the case of BDW, the court identified circumstances where landlords are not under an obligation to consult. In Daejan, the court went further and the First Tier Tribunal can now adopt a more flexible and commercial approach when interpreting the consultation requirements.

However, the financial penalties of failing to consult properly can be significant and in a lot of cases it may well be more cost effective to consult properly in the first place. SJ