Where do leaseholder now stand as a result of two landmark cases?

Jonathan Upton asks where leaseholders now stand as a result of two landmark cases that change the way Section 20 consultations must be carried out.

In the last six months the law on consulting tenants about major works has been turned on its head.  In December 2012, in his last case before retiring, the Chancellor (Sir Andrew Morritt) handed down his judgement in Phillips v Francis.  In March 2013, the Supreme Court gave judgment in Daejan v Benson

It used to be the case that tenants were only required to pay £250 towards each set of qualifying works unless the consultation requirements had been complied with or dispensed with.  The £250 statutory cap was understood to be a ‘triviality threshold’.  Dispensation would not be granted if the tenant suffered ‘significant prejudice’ and a serious failure to comply with the consultation requirements was often held by itself to amount to significant prejudice. 

In Phillips v Francis, the Chancellor held that all qualifying works should be brought into the account for computing the tenant’s contribution and then applying the statutory cap.  The tenant’s service charge contribution towards all qualifying works is capped at £250 unless the consultation requirements have been complied with.

As a result of this judgement, it appears landlords now have to consult on all qualifying works if a tenant’s contribution to the total cost of qualifying works in an accounting period exceeds £250.  If the landlord does not consult on all qualifying works however small the cost of a particular project, the lessee’s contribution to the total cost of qualifying works in the accounting period will be capped at £250.   

By example, a landlord decorates the internal common parts.  Such works are “qualifying works” (within the meaning of Section.20ZA(2)) but each tenant’s contribution is only £150.  Later in the same accounting period, the landlord fixes a leak in the roof.  Such works are again “qualifying works” and each tenant’s contribution is £200.  The tenant’s contribution to qualifying works in the accounting period is £350.  Unless the landlord consults on both the decorating works and the roof work, the tenant’s contribution is capped at £250. The landlord in Philips v Francis has applied for permission to appeal but at the time of writing, no decision has yet been made. 

 In Daejan v Benson, the Supreme Court held that the main (and normally the only) question for the First-Tier Tribunal (Property Chamber) (which replaced the LVT with effect from 1 July 2013) on applications for dispensation 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 are not a relevant factor.  Prejudice means ‘financial prejudice’ and the onus is now on tenants to show what they would have said had they been consulted.  The FTT can, however, grant dispensation on terms.  A landlord may have to reduce the service charge recoverable in order to compensate the tenants for any financial prejudice caused by the failure to consult.  A landlord is also very likely to have to pay its own costs of the application for dispensation (even if the lease allows it to recover such costs from the tenants) and the tenants’ costs of investigating prejudice and challenging the application. 

In summary, as a result of these judgements the requirement to consult on qualifying works is more onerous but the consequence of failing to consult is less severe.  The cost of making an application for dispensation may, however, be significant so it is better to get it right in the first place and comply with the consultation requirements.   

Jonathan Upton is is a barrister at Tanfield Chambers specialising in property disputes and the Editor of the Service Charges section for Property Law UK He is a member of the Chancery Bar Association, the Property Bar Association and the London Common Law and Commercial Bar Association.