OM Property Management Ltd v Burr: Liability has to crystallise before it becomes a cost

Regular readers of my blog will recall that I wrote an article last year on the Upper Tribunal case of OM Property Management Ltd v Burr which gave guidance upon what is known as the 18 month service charge rule under section 20B of the Landlord and Tenant 1985. Landlords are prevented from recovering service charge costs from tenants if they were incurred more than 18 months before they are demanded unless the correct form of prior notification is given.

The facts were peculiar in that they concerned the cost of heating a communal swimming pool, a facility that no doubt more long leaseholders would want as standard in their blocks.

OM Property Management Ltd (OMP) was given incorrect information about the gas supplier for the swimming pool heating system which eventually led to a bill for the period 2000 – 2007 in the sum of around £135,000. In the Leasehold Valuation Tribunal the LVT panel determined that the gas supply expense was incurred when the gas was supplied and not when the invoice was levied by the supplier.

OMP appealed to the Upper Tribunal who reversed the LVT’s decision on the basis that cost and liability are conceptually different, although there could be issues in cases where invoiced costs were diluted and not paid until outside the relevant period. In this case it was determined that the service charge cost was only incurred at the earliest, when the gas supplier rendered its invoice. That, you may have thought was the end of it. However, Mr Burr appealed to the Court of Appeal.

The Court of Appeal held firm and agreed with the Upper Tribunals view that a cost must crystallise for the 18 month clock to start ticking. The cost in this case only crystallised when there was a demand for payment by the supplier.

Mr Burr had argued that the purpose of section 20B was defeated by this approach in that it effectively removed the tenants statutory protection as there would be no end date for the payment of charges if invoices could be delayed for many years and tenants could not prepare for this (I don’t know if the impact of section 20 consultation was raised in the context of this proposition). However, the Court of Appeal disagreed with this and effectively said that the purpose of the statutory protection was not as wide as Mr Burr submitted.

Are advance payments of rent caught by the Tenancy Deposit Scheme rules?

The short answer is in most cases probably not and I was a little surprised to find that this had been argued all the way to the Court of Appeal in Johnson and others v Old.

The claim arose after the tenant in this case had fallen behind with the rent and the landlord sought possession under section 21 of the Housing Act 1988. The tenancy had become a statutory periodic tenancy following on from several fixed term tenancies which had provided for payment by the tenant of both a fixed deposit sum and an advance payments of rent well in excess of the usual monthly payments in most agreements.

The Tenancy Deposit Scheme provisions of the Housing Act 2004 provide that where a landlord receives payment by the tenant of a sum of money intended to be held as security for the performance of the tenants obligations or discharging any liability of the tenant under the tenancy. Regular readers will remember that if a deposit is not protected then the landlord cannot rely upon any s21 noticed served.

In this case the landlord had protected the deposit element but it had been argued that the landlord ought to have also have protected the advance rent payments as well. The tenant had success with this argument at first instance, despite in my view the fact that the advance rent payment was not security for the performance of the tenants obligations but the actual performance of those obligations.

On appeal the judge went on to overturn the original decision and upon further appeal to the Court of Appeal, the tenant was defeated again. Relief for landlords that advance rental payments shouldn’t attract the requirement to register them in a scheme but there USA warning that the obligations of the tenancy need to be look at as a whole so it isn’t a hard and fast rule.

Phillips and Goddard v Francis: The end of the road?

I wrote a blog earlier this year about the case involving Point Curlew holiday park in Cornwall where the tenants succeeded in a claim against their landlord concerning the proper interpretation of section 20 of the Landlord and Tenant Act 1985.

That decision has sent shock waves through the property management industry as the Chancellor of the High Court decided that the £250 qualifying works consultation threshold should be applied annually rather than on a project by project basis. This went against the received wisdom in the industry and the decision has been criticised by some commentators because of the practical problems that it created.

The basic rationale for the decision seems to have been that tenants require protection for expenditure on sporadic works as well as for complete sets of works and that can only be achieved by applying the statutory cap in this way. The judge appeared to be looking to find a way to plug the hole used by landlords to avoid the consultation requirements but some consider he went to far. It seems to me hat is needed is a clearer definition of “Qualifying Works” in the 1985 Act to dispel any uncertainty.

Well, I understand from the Point Curlew Tenants Association (www.curlew.org) that the landlord has asked for permission to appeal the decision out of time. Further, with the Daejan Investments Ltd v Benson appeal opening the door for a possible dispensation claim it seems that it may not be the last we’ve heard of section 20 consultation in the higher courts this year.

Daejan Investments Ltd v Benson : The last word on dispensation

The recent Supreme Court judgment in the case of Daejan Investments Ltd v Benson has been extensively reported in the last month. Some say it is a welcome breath of common sense but others believe that the Supreme Court has ridden roughshod over the statutory consultation regime. In true lawyer fashion, my own view is somewhere in the middle. There are always criticisms that can be made of any decision and in this case I believe that in some cases the procedural failings can be so severe that a landlord should be punished for disregarding or failing to consult with the tenants. However, in the majority of cases the fact that the tenants have to show that they have been prejudiced is a difficult proposition to argue against.

What was the Supreme Court deciding? The facts of the case often get lost in the reporting. The case concerned Queens Mansion in Muswell Hill. A short summary of the relevant ponts are that the landlord commenced a section 20 consultation for some major works to the building. In error, part of the way through the consultation process the landlord indicated that the building contract had already been awarded (it had not but the tenants weren’t to know). The landlord went on to undertake circa £280,000 of works, the cost of which was to be split between the 5 leaseholders. The leaseholders raised objections to their liability for the service charges demanded because of the serious defect in the consultation procedure. They maintained that the £250 per leaseholder cap on recoverability for major works should apply and in response the landlord recognised its failing and sought dispensation from consultation from the Leasehold Valuation Tribunal. The landlord lost its case all the way to the Supreme Court, where it was largely successful.

In resolving the landlord’s appeal the Supreme Court took it upon itself to espouse some general principles as to how the LVT should exercise its discretion to grant or refuse dispensation from consultation. It added meat to the statutory bones of “reasonableness” which is the basis for the LVT exercise of discretion.

Firstly, as I hinted at above, procedural errors or omissions alone are no longer enough on their own to prevent a landlord from obtaining dispensation, no matter how serious they are. The tenants will have to show that they have suffered serious prejudice if they are to succeed in opposing a landlord’s application for dispensation. The Supreme Court directed the LVT to adopt a sympathetic approach to tenants who can show a credible case of prejudice arising from the landlord’s non-compliance. So e have said this is a landlords charter to ignore dispensation altogether as the tenants will always have an uphill struggle in showing sufficient financial prejudice to merit making a claim and may need expert evidence to prove that case.

Secondly, the LVT has an extraordinarily wide discretion as to the terms of the dispensation it can offer, if it chooses to exercise that discretion. This means that the received wisdom that the LVT had to adopt a binary, yes or no approach to a landlord’s application for dispensation was incorrect. The LVT can grant dispensation on terms and its discretion in this respect is almost unfettered. Despite its usually limited costs jurisdiction, the terms under which dispensation can be given by the LVT now extend to the costs of the application itself (one either side). no longer is the LVT bound to apply the £250 statutory cap for qualifying works. Indeed, in this case the Supreme Court imposed the terms under which dispensation should be given to the landlord which broadly accorded with an offer that the landlord had made at the outset of the proceedings. This development is possibly the most significant in its impact on the number of dispensation cases that will come before the tribunal as the days of tenant windfalls seem numbered except in exceptional cases.

Thirdly, the extent of the prejudice suffered by a landlord if dispensation is refused is not a relevant consideration when the LVT is asked to consider if it is reasonable to grant or refuse dispensation from consultation. This was because such a rule would operate inversely to the intention of the legislation in that the bigger the consequences of the landlords error the more likely that dispensation would be given.

My next blog on this case will look at the views of the dissenting judges.

Daejan Investments Ltd -v- Benson: The landlord prevails…..

The Supreme Court has handed down judgment in the long awaited Daejan Investments Ltd v Benson and others section 20 dispensation appeal and found in favour of the landlord by a majority of 3 to 2. 

 The case was typical of many that come before the Leasehold Valuation Tribunal in that the landlord had incurred significant major works expenses but had failed to fully comply with the consultation process.  The tenants sought to limit the landlord’s recovery to £250 per leaseholder, leaving the landlord exposed to circa £280,000 of costs.  The landlord sought dispensation from the LVT in order to escape the consequences of the costs cap.  The Supreme Court overturned the original LVT decision and the subsequent appeals to the Upper Tribunal and Court of Appeal.

The message from the Supreme Court is that the purpose of the section 20 consultation is to prevent tenants being exposed to:

a)      liability for inappropriate works; or

b)      paying more than appropriate for works

The statutory scheme was not designed to allow tenants to benefit from a windfall and the essential points for the LVT to consider when granting or refusing dispensation is what is the prejudice to the tenant.  The factual burden of proving prejudice rests with the tenants and once a credible case has been established then it is up to the landlord to rebut that case.    

The full judgment will be available shortly and should contain more detailed guidance on the exercise of the LVT’s jurisdiction to grant or refuse dispensation.

Swindells v Ayannuga: Is substantial compliance with the tenancy deposit requirements enough?

When the Localism Act 2011 brought in changes to the tenancy deposit framework many people thought that may be the end of the TDS litigation that had been coming before the courts for the last few years since they were introduced in 2007.  The changes in the Localism Act addressed some of the judicial criticisms levelled at the original statutory scheme and in particular gave the judiciary some flexibility in deciding how much of the statutory fine to award.

However, at the end of November 2012 the Court of Appeal heard another case in this long running litigation sage, Swindells v Ayannuga. 

A dispute arose between the landlord and the tenant in respect of an assured shorthold tenancy deposit.  The deposit had been into a custodial scheme by the landlord and the tenant alleged breaches of the tenancy deposit scheme under s 213 of the Housing Act 2004. These allegations were a failure by the landlord to provide the prescribed information. During the hearing, the landlord provided to the tenant a handwritten document that gave additional information regarding the deposit.  The Judge then found that, between the tenancy agreement and the additional handwritten document, the requirements of s 213 of the 2004 Act had been substantially complied with. The tenant appealed.

In the appeal the landlord accepted that it had not quite got the information correct but submitted that there had been no real prejudice suffered by the tenant. The landlord said that the judge was correct to consider substantial compliance with the statutory requirements and that the deposit had always been protected and the tenant knew where it was there was no prejudice.  However, the Court of Appeal disagreed that a substantial compliance test was appropriate.

Complete compliance was necessary as all areas of the statutory scheme were of importance to a tenant.  It was not a defence for a landlord to claim that the missing information could have been obtained by the tenant making its own investigations, as was said in the case.

The landlord was ordered to repay the deposit to the tenant and to pay three times the amount of the deposit as well.  So substantial compliance was not enough.

My understanding was that this case was decided under the unamended Housing Act 2004 provisions and so now a judge has a discretion whether to award the whole three times the deposit fine.  A landlord who has substantially complied in similar circumstances to this may now be able to argue for a small fine but I’m not sure whether just arguing that the tenant could have found the information out would get you very far!

 

Section 20: Project by Project or Year by Year?

While most of us were preparing for Christmas dinner, the Chancellor of the High Court was handing down judgment in the case of Phillips and Goddard v Francis and Francis, a decision that has caused quite a stir in the property management world.

The case may have concerned a holiday park in Padstow, Cornwall but the impact of the decision could be felt much further afield.  It concerned the application of the section 20 consultation requirements under the Landlord and Tenant Act 1985 to qualifying works. 

Section 20 has always been a thorn in the side of landlords or managing agents because the sanction for non-compliance was a cap of the amount of expenditure that the landlord can recover from the tenant.  In the case of qualifying works that cap was £250 per leaseholder and the requirement to consult was triggered where the individual tenants  contribution to works exceeded this level.

Qualifying works are simply defined as works on a building or any other premises and received wisdom before this case was that the consultation requirements were triggered on a project by project basis as and when works were planned.  This no doubt was abused by some landlords who would split works projects into smaller managable chunks to evade the consultation requirements this way.  However, the Phillips and Goddard v Francis decision has muddied those waters to prevent those abuses.

The Chancellor of the High Court held that as the contributions to the cost of the works were payable on an annual basis then the limit should be applied to the proportion of the qualifying works carried out in that year. Under the legislation the judge decided there was no ‘triviality threshold’ in relation to qualifying works; all the qualifying works must be entered into the calculation unless the landlord is prepared to carry any excess cost himself.  The judge distinguished his decision from the case of Martin v Maryland Estates on the basis that the legislation had been amended since then and the legislative scheme was now different.  The judge then found that the trial judge had used the wrong test and overturned that decision. 

So are we now dealing with a requirement to consult on the service charge budget each year? Well, perhaps.  I would venture that this case could be limited to its own particular facts.  This is because, the exercise that the trial judge sought to undertake was, on the facts of this case, artificial and that is why the appeal was allowed.  The evidence seems to indicate that there was no real overall works plan until well into the period in question.  Many have interpreted this as meaning that s20 consultations will be almost mandatory each year to ratify many service charge budgets or the £250 cap will apply.  However, the judge agreed with the application of common sense from Martin v Maryland Estates and it seems that there is an opportunity to argue that properly planned separate projects may still be consulted upon separately which could reduce the incentive or need to consult on any remaining works required to a buikding in any given year.