Ian Mitchell, Partner and Head of Leasehold Services
Residential Property - July 2011
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Never too careful
The recent case of Daejan v Benson highlighted the importance of the consultation process when a landlord needs to recoup the costs of building works through the leaseholders’ service charge. Ian Mitchell explains..
Freeholders and their managing agents face a difficult challenge in meeting all leaseholders’ expectations in the management of a leasehold building. When leaseholders are notified that major works are required, there is usually some resistance to all or part of the works, or just to paying for the works.
In terms of Section 20 of the Landlord and Tenant Act 1985, consultation is required when a landlord proposes to undertake works that would incur costs of more than £250 per leaseholder. When consultation has been inadequate and building works have been carried out, the costs may be challenged by leaseholders, who have the right under the regulations to have their contributions limited to £250 each. One such case was Daejan Investments Ltd v Benson & Ors [2011], which was decided in the Appeal Court in January, although elements of the decision are currently being appealed to the Supreme Court. More about that later.
The consultation process
The major works consultation process is contained in the Service Charges (Consultation Requirements) (England) Regulations 2003, SI 2003 No. 1987. For those who are not familiar with it, it works like this:
Stage 1. The landlord serves a notice of intention, giving details of the proposed works and the reasons for doing them and inviting the leaseholders to nominate a contractor from whom an estimate should be obtained. A consultation period of 30 days should be allowed, during which leaseholders can submit written observations.
Stage 2. The landlord obtains at least two estimates, at least one from an unconnected source. A statement should be issued setting out (i) the estimated costs based on at least two estimates and (ii) a summary of the observations received during stage 1, with responses. If an estimate has been obtained from a contractor nominated by the leaseholders, it must be included.
With this statement, there should be a notice detailing where and when all the estimates may be inspected and inviting leaseholders to make written observations on any of the estimates within 30 days.
Stage 3. As good practice, landlords should notify the leaseholders of the successful contractor/s and give reasons for the choice. However, unless the contractor was nominated by the leaseholders or RTA, or submitted the lowest estimate, the landlord is required to notify each leaseholder and any RTA of the reasons for the decision (or the time and place where they can view a statement on the reasons) at least 21 days before signing the contract.
If the consultation process is abbreviated in any way, the landlord opens the way for refusals to pay and possible litigation. So, if there is any doubt about whether a consultation is compliant, it is better to redo it than risk incurring the costs of a challenge.
If the works must be carried out as a matter of urgency, the landlord can apply to the LVT for dispensation. The tribunal has power to dispense with some or all of the consultation requirements when it considers it reasonable to do so. It is likely to grant dispensation in the following situations:
- for emergency works
- where there is only one possible contractor able to carry out the proposed works
- where there has been a minor breach of the process causing no prejudice.
It is all too easy for leaseholders to argue later that they did not receive notices, so landlords should keep up-to-date records of leaseholders’ contact details. They may wish to send the notices to the registered addresses on the title documents held by the Land Registry and, where there is more than one address for a leaseholder, it may be wise to use both. Addresses for consultation notices should be consistent with those to which service charge demands are sent.
There is little guidance on how a landlord should handle leaseholders’ observations received during consultation periods, so the safest strategy is never to disregard an observation and to respond in writing to them all.
Case in point
In the case of Daejan v Benson, the landlord, Daejan, failed to comply fully with the consultation process in respect of works to be done at Queens Mansions, Muswell Hill. The LVT, Lands Tribunal and Court of Appeal refused Daejan's application for dispensation, believing the leaseholders had been significantly prejudiced by the way the consultation had been carried out. Daejan was therefore unable to recover £270,000 from five flat owners. Daejan failed to:
- provide a summary of observations, and to properly include the landlord's responses
- make all the estimates available for inspection at a place and for a period specified in a notice
- provide copies of the estimates and a 30-day period in which the leaseholders/RTA could submit observations.
The LVT will not have regard to the financial consequence for the freeholder, however significant, when considering whether to grant dispensation. The landlord's intention and the standard to which the works were carried out are irrelevant. In any application for dispensation, the emphasis is on whether the leaseholders have been prejudiced, and in most cases, the loss of the opportunity to be heard is considered prejudicial.
In light of this, you might think a significant failing in following the consultation regulations would automatically result in a finding of significant prejudice, but not so; there have been a number of tribunal cases in which dispensation has been granted despite procedural failings. So with dispensation unpredictable, it is best not to leave anything to chance. Although there is a consensus among property professionals that the potential financial impact of the consultation regulations is unfair, there is no plan to change the protection they afford leaseholders.
Ian Mitchell is Head of Leasehold Services at Anthony Gold Solicitors. For further information email Ian or call 020 7940 4000.
