Daejan Investments Ltd v Benson [2013] UKSC 14; [2013] 1 W.L.R. 854

Summary

By a majority (3:2) the Supreme Court overruled the decisions of all lower Courts and tribunals and granted the landlord dispensation on terms.

Facts

The landlord was the freehold owner of a building comprised of shops and seven flats, five of which were held by the tenants under long leases which provided for the payment of service charges. The landlord gave the tenants notice of its intention to carry out major works to the building and appointed a firm of surveyors (REA), at the tenants’ request, to prepare a revised specification of works and act as contract administrator.  Four tenants nominated Rosewood Building Contractors as their preferred contractor.  The landlord obtained four priced tenders for the work and instructed REA to prepare a tender report.  The report stated that the choice was between Rosewood and Mitre (the landlord’s preferred contractor).  The landlord gave the tenants a copy of Mitre’s tender and the tender report and the tenants requested copies of the other tenders; they particularly wanted to see Rosewood’s tender.  The tenants then issued a s.27A application for a determination, inter alia, that the consultation process had not been complied with and that the cost of the major works was not reasonable.  The landlord served a stage 2 notice which stated that the end of the relevant period for making observations was 31 August 2006.  At a PTR in the FTT proceedings on 8 August 2006 (i.e. before the end of the relevant period), the landlord’s representative stated that the contract had already been awarded to Mitre.  The FTT found that it was futile for the tenants to make further observations and that the landlord had failed to comply with the Consultation Requirements.  The tenants’ contribution to the cost of the works (which was around £280,000 under the terms of their leases) was capped at £1,250 (£250 each).  The landlord applied for dispensation pursuant to s.20ZA(1).  It argued, inter alia: (i) that the failure to comply with the Consultation Requirements had not caused the tenants to suffer significant prejudice; (ii) that the financial consequences on the landlord of not granting dispensation was a relevant factor; and (iii) the offer to compensate the tenants for any prejudice by reducing the cost of the works by £50,000 was also relevant.  At the dispensation hearing, the tenants were unable to identify what comments they would have made had they seen the Rosewood tender

First Instance

The FTT held that “the cutting short of the consultation period by indicating that Mitre had been awarded the contract … removed from the leaseholders the opportunity to make observations on the estimates … the fact that they did not have this opportunity amounts to significant prejudice”.  It rejected the landlord’s offer to reduce the cost of the works by £50,000.  

The Upper Tribunal followed Grafton Way and held that the financial consequences of refusing dispensation was not a relevant consideration.  It was not an easy case because “the evidence of actual prejudice is weak”.  Nonetheless, the FTT was “entitled to regard this as a [case involving a] serious breach, rather than a technical or excusable oversight”, as the tenants’ “right to make further representations [at stage 3] was nullified”.  It was not for the tenants to show prejudice, but for the landlord to show that they had suffered no prejudice, as a result of the landlord 's default, and it was “enough that there was a realistic possibility that further representations might have influenced” the landlord’s decision to engage Mitre rather than Rosewood.  The FTT was not entitled to accept a landlord’s offer to reduce the amount of the charge to reflect its view of any prejudice suffered.

The Court of Appeal upheld the FTT’s decision on essentially the same grounds as the UT.  Gross LJ held that significant prejudice to the tenants is a consideration of first importance in exercising the dispensatory discretion under section 20ZA(1) and the landlord’s failure in this case constituted a serious failing and did cause the tenants serious prejudice.  This was not a technical, minor or excusable oversight.  The FTT was entitled not to speculate on what would have happened if there had been no breach, on the ground that the tenants’ loss of opportunity to make further representations and have them considered itself amounted to significant prejudice.

Gross LJ doubted that the FTT would have been entitled to accede to the landlord’s offer to reduce the chargeable amount by £50,000, and that, anyway, the FTT was entitled to reject that proposal

Issues

In the Supreme Court, Lord Neuberger identified 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 FTT can grant a section 20(1)(b) dispensation on terms;

The approach to be adopted when prejudice is alleged by tenants owing to the landlord's failure to comply with the Requirements.

Decision on Appeal

By a majority (3:2) the Supreme Court overruled the decisions of all lower courts and tribunals and granted the landlord dispensation on terms.  Lord Neuberger (with whom Lord Clarke and Lord Sumption agreed) gave the leading judgment.  Lord Hope and Lord Wilson delivered powerful dissenting judgments. 

The proper approach to dispensation

Sections 20 and 20ZA are intended to reinforce and to give practical effect to the purpose of section 19(1), namely:

   (i)        ensuring that tenants of flats are not required to pay more than they should for works/services which are necessary and are provided to an acceptable standard (19(1)(a)); and

  (ii)        ensuring that tenants of flats are not required to pay for unnecessary works/services or works/services which are provided to a defective standard (s.19(1)(b)).

There is no justification for treating consultation or transparency as appropriate ends in themselves (Lewison J  was wrong to hold so in Paddington Basin Developments Ltd v West End Quay Ltd [2010] EWHC 833 (Ch), [2010] 1 WLR 2735).

The main, indeed normally, the sole question for the FTT when considering how to exercise its jurisdiction in accordance with section 20ZA(1) is the real prejudice to the tenants flowing from the landlord’s breach of the Consultation Requirements.

The financial consequences to the landlord of not granting a dispensation is not a relevant factor.  The nature of the landlord is not a relevant factor.

It is not appropriate to distinguish between “a serious failing” and “a technical, minor or excusable oversight”, save in relation to the prejudice it causes.

Dispensation should not be refused solely because the landlord seriously breached, or departed from, the Consultation Requirements.  Grafton Way may have been rightly decided but, if so, it was for the wrong reasons.

Conditional Dispensation

The FTT 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

Thus, the FTT can require a landlord to reduce the recoverable cost of the works by an amount equivalent to the additional cost of the works caused by the failure to comply with Consultation Requirements.

The FTT has power to impose a condition that the landlord pays the tenants’ reasonable costs (including surveyor and/or legal fees) incurred in connection with the landlord’s application under section 20ZA(1). 

The approach to prejudice

The legal burden of proof remains throughout on the landlord.  The factual burden of identifying some ‘relevant’ prejudice that they would or might have suffered is on the tenants.  ‘Relevant’ prejudice is given a narrow definition; it means whether non-compliance with the Requirements has led the landlord to incur costs in an unreasonable amount or to incur them in the provision of services, or in the carrying out of works, which fell below a reasonable standard, in other words whether the non-compliance has in that sense caused prejudice to the tenant.

Lord Neuberger anticipates that FTTs will view the tenants' arguments sympathetically, for instance by resolving in their favour any doubts as to whether the works would have cost less (or, for instance, that some of the works would not have been carried out or would have been carried out in a different way), if the tenants had been given a proper opportunity to make their points.  The more egregious the landlord's failure, the more readily an FTT would be likely to accept that the tenants had suffered prejudice.

Where the tenants were not given the requisite opportunity to make representations about proposed works to the landlord, the tenants have an obligation to identify what they would have said, given that their complaint is that they have been deprived of the opportunity to say it.

Once the tenants have shown a credible case for prejudice, the FTT should look to the landlord to rebut it.

The Dissenting View

In strong dissenting judgments, Lord Hope and Lord Wilson held that Lord Neuberger’s conclusion that the gravity of the landlord’s non-compliance with the Consultation Requirements is relevant to dispensation not of itself but only insofar as it causes financial prejudice to the tenant “subverts Parliament’s intention”.  Lord Neuberger’s conclusion that real prejudice to the tenant should normally be the sole consideration for the FTT departs from the width of the criterion (“reasonable”) which Parliament has specified.  Lord Neuberger’s inevitable further conclusion that the “factual” burden lies on the tenant to prove such prejudice, as a matter of reality, reverses the burden of proof which Parliament has identified.  The hypothetical exercise in which Lord Neuberger’s conclusions require the parties to engage and the FTT to adjudicate upon fails to recognise the complications in comparing estimates.  It is very doubtful whether a tenant can often discharge the burden which Lord Neuberger has cast upon him.   A serious failure of the landlord does not need to be described as amounting to “prejudice” to the tenant but the FTT should weigh the gravity of the non-compliance with a consultation requirement in determining whether to dispense with it along with any prejudice in the narrower financial sense (which will often be a matter of prime importance).

Comment

Many landlords will welcome this decision.  Dispensation is likely to be granted in far more cases, albeit on terms.  Landlords are likely to have to pay their own costs of the application for dispensation and the tenants’ reasonable costs in so far as they reasonably tested its claim for a dispensation and reasonably canvassed any relevant prejudice which they might suffer but it is difficult to envisage many situations whereby a tenant’s contribution to the cost of major works will be capped at £250. 

Tenants will be able to identify what they would have said with the benefit of hindsight and assisted by a surveyor.  If and to the extent that tenants establish relevant (financial) prejudice, dispensation will be granted on condition that the recoverable costs are reduced to compensate such prejudice.