The importance of landlords complying with service charge consultation requirements

Landlords should take note of Daejan Investments Limited v Benson and others [2011] EWCA Civ 38 (“Daejan”). It serves as a stark reminder that not complying with the relevant legislation can have severe financial consequences for landlords. If a landlord of a property, wholly or partially let on residential long leases, wants to carry out works above a certain value or enter into a long-term agreement for the provision of services, it must comply with the Landlord and Tenant Act 1985 (“LTA 1985”).

The LTA 1985 (as amended by the Commonhold and Leasehold Reform Act 2002) requires a landlord to:

Stage One:

  • Give notice of its intention to the leaseholders and any recognised tenants’ association (“RTA”), explaining why the proposed works are necessary. The notice must also invite written observations from the leaseholders and RTA and the landlord must take any written observations received into account.

Stage Two:

  • Seek estimates from contractors. The leaseholders and RTA have a right to nominate alternative contractors. If any are nominated, the landlord must ask for estimates from nominated contractors.
  • Issue a statement setting out the estimated cost from at least two of the contractors, and a summary of observations received in Stage One, along with the landlord’s responses to them.
  • Give notice of when and where all the estimates may be inspected. The notice should also invite written observations on the estimates within 30 days of the date of the notice. The landlord must have regard to any written observations received within the given time frame.

Stage Three:

  • Give reasons to the leaseholders and RTA for choosing the successful contractor.

The LTA 1985 only allows the Land Valuation Tribunal (“LVT”) to dispense with the above requirements “if satisfied that it is reasonable” to do so. Importantly, if a landlord fails to comply with the consultation requirements and the LVT chooses not to dispense with such requirements, the contribution of each tenant to the landlord’s works is limited to £250.

In Daejan, the landlord wanted to carry out works on its property totalling £270,000. Whilst the landlord carried out some of the consultation requirements, it failed to comply with all such requirements.  The LVT refused to grant dispensation from compliance as, in failing to comply, the landlord had caused substantial prejudice to the tenants.  The contributions of the five tenants were therefore limited to £250 each.

Consequently, the landlord was responsible for the remainder of the £270,000.  Whilst this may seem disproportionately harsh on the landlord, the LVT (and later the Court of Appeal) held that it could not take this into account in judging whether it was reasonable to grant dispensation from compliance. The Court of Appeal noted that it would be strange if the higher the service charge, the more readily dispensation was granted. The Court of Appeal commented that dispensation may be granted in cases where the integrity or importance of the consultation procedure was not affected, for example emergency works, cases where only one specialist contractor could do the works or where there was a minor procedural breach which did not prejudice the tenants’ rights.

In order to assist landlords in complying with the requirements of the LTA 1985, The Leasehold Advisory Service (LEASE) has produced model notices, which can be found at http://www.lease-advice.org/publications/

 

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Jury O'Shea