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.

Posted in News | Tagged , , , , , , , , , , | Leave a comment

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.

Posted in Leasehold Opinion, News | Tagged , , , , , , , , , | Leave a comment

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.

Posted in News | Tagged , , , , , , , , , , , | 1 Comment

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!

 

Posted in Leasehold Opinion, News | Tagged , , , , , , , , , | Leave a comment

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.

Posted in Leasehold Opinion, News | Tagged , , , , , , , , , , | 2 Comments

2012 – What did we learn?

It’s that time of the year when we all like to look back over the last twelve months and reflect. In the shifting sands of the legal world 2012 has provided some interesting residential leasehold property cases, some of which have even travelled as far as the Supreme Court.

So what did we learn this year? Here are what I think are the biggest decisions:

Magnohard Limited -v- Earl Cadogan and Cadogan Estates Limited – What is a “house” reasonably so called for the purposes of the Leasehold Reform Act 1967 (which allows tenants of houses to acquire their freehold)? Well the case determined that a purpose built block of flats is not!

Westbrook Dolphin Square Limited -v- Friends Life Limited – Discontinuing court proceedings concerning the validity or right to serve an enfranchisement notice under the Leasehold Reform Housing and Urban Development Act 1993 does not preclude the service of a further notice even where the same undetermined arguments will be raised.

Day and another -v- Hosebay Limited and Howard de Walden Estates Limited -v- Lexgorge Limited – Offices and a self catering hotel are not houses reasonably so called for the purposes of the Leasehold Reform Act 1967. The physical appearance of a building is not determinative.

2013 is already shaping up to be interesting with the Supreme Court judgment in Daejan Investments Limited -v- Benson and others on the horizon.

Posted in Leasehold Opinion | Tagged , , , , , , , , , , , , | Leave a comment

Daejan Investments Ltd v Benson and others: The submissions are in….

Yesterday saw the hearing in front of the Supreme Court of the long running Daejan Invetsments Ltd v Benson and others litigation.  The building work to Queens Mansions in Muswell Hill started in October 2006 and more than six years on the parties found themselves in front of the highest court in the land arguing about whether the landlord could recover the £270,000 that it spent on major works from the tenants through the service charge or whether the landlord would be limited to recovering just £1,250 of this expenditure.

I have written blog posts about the legal issues in the case before and judgment won’t be handed down until next year.  However, the interesting indications to emerge out of yesterday’s hearing were arguments over whether the Leasehold Valuation Tribunal should adopt a binary approach to applications by landlord’s for dispensation from the full section 20 consultation procedure under the Landlord and Tenant Act 1985 or whether the LVT actually has jurisdiction to grant dispensation on terms (ie are dispensation applications all or nothing or can the landlord achieve partial exemptions). 

My impression is that the Supreme Court Justices were leaning towards recognising that an LVT can make a partial dispensation order or an order for dispensation on certain terms.  This is attractive as it provides a potentially more just outcome in cases such as the one before it yesterday.  As matters stand in the Daejan case the tenants obtained the benefit of the works but are only liable for a tiny fraction of the costs.  If the LVT only has an either or jurisdiction, then the procedure works too harshly against landlords, especially if a mere failure to properly consult is viewed as amounting to serious prejudice on its own.

It is always difficult to predict how these cases will turn out but my view from watching most of the case yesterday is that we are likely to see some firmer guidance or a specific test formulated for how the LVT should exercise its discretion whether or not to give a landlord dispensation from the section 20 consultation requirements.  Whether on the facts Daejan Investments will be allowed to recover any more than £1,250 though is a different question.

Posted in Leasehold Opinion, News | Tagged , , , , , , , , , , | Leave a comment

Qualifying Long Term Agreements: is the agreement “intended” to last in excess of 12 months?

Residential long leaseholders, landlords and managing agents are generally well aware that under the section 20 of the Landord and Tenant Act 1985 there is a consultation procedure for items of major works where the cost to any single leaseholder exceeds £250 and for contracts in excess of 12 months where the cost to any single leaseholder exceeds £100.  This latter financial threshold can easily be exceeded but it is usually avoided by ensuring that the contracts are not for a term exceeding 12 months. 

Accepted practice amongst managing agents had been to ensure that most contracts (including their own) were expressed to be for a term of less than 12 months or expressed no term at all.  However, many such contracts often include provision for an ongoing periodic relationship thereafter in order to offer the managing agent a degree of security and to avoid the headache of entering into new agreements each year.  A recent Upper Tribunal (Lands Chamber) appeal decision provides a warning about such practices.

In Poynders Court Limited v GLS Property Management Limited the Upper Tribunal (Lands Chamber) upheld the decision of the Leasehold Valuation Tribunal that this agreement which contained terms for per annum charges, periodic termination provisions and a charge review mechanism after 2 years was in substance intended to be for a term in excess of one year and accordingly was a Qualifying Long Term Agreement (“QLTA”) for the purposes of section 20 consultation.  This capped the leaseholder’s liability at £100 per unit and means that the landlord was unable to recover the remaining £75 per unit charge.

This decision serves as a warning for managing agents who want to avoid the requirement to consult on their own appointment each year.  If the agreement contains reference to what may or may not happen outside an initial fixed term of 12 months or contains no fixed term provision then it is at risk of being considered a QLTA that requires consultation.  The safest approach to mitigate against the consultation requirements would be to put a new fixed term agreement in place each year.

Posted in Leasehold Opinion | Tagged , , , , , , , , , | Leave a comment

Daejan Invetsments Ltd v Benson and others hearing moves closer

It is now only 3 weeks until the Supreme Court hears the final appeal in the long running Daejan v Benson litigation which should provide some more certainty over the circumstances in which a landlord will be given dispensation to dispense with the consultation requirements of section 20 of the Landlord and Tenanct Act 1985.

The Supreme Court summary of the case is repeated below (from http://www.supremecourt.gov.uk/current-cases/CCCaseDetails/case_2011_0057.html):

Issue

Whether the Court of Appeal was wrong in law to hold that, when considering, under s.20ZA(1) of the Landlord and Tenant Act 1985, whether it is reasonable to dispense with the consultation requirements under s.20:
a) The amount of money involved is irrelevant;
b) The failure to comply strictly with the requirements will itself be treated as constituting serious prejudice, without the need to consider whether the lessees would have been better off if there had been strict compliance;
c) An offer by the landlord to reduce the cost of the works taken into account in calculating the service charges, is irrelevant.

Facts

Five flats in Queens Mansions, Muswell Hill are held under long leases which provide for the payment of service charges. Daejan is the landlord and the Respondents are the lessees. By December 2005, four priced tenders had been received in relation to works to be carried out at Queens Mansions. The priced specifications were not available for inspection by the Respondents until 11 August 2006. However, by that date, the leaseholders had already been informed that the contract had in effect been awarded to a particular contractor and that the statutory consultation process had for all practical purposes ended. The Leasehold Valuation Tribunal found that Daejan had failed to comply with the Consultation Regulations. The LVT declined to make an order for dispensation. The Upper Tribunal (Lands Chamber) and the Court of Appeal dismissed Daejan’s appeal.

The hearing can be watched live on 4 December 2012 by clicking on the following link: http://news.sky.com/info/supreme-court but judgment is unlikely to be handed down until next year.

Posted in News | Tagged , , , , , , , , , , , | Leave a comment

What happens when an insured risk strikes with devastating consequences?

The residents of Spencer Court in Newburn will have been watching the demolition crews move in to tear down the development only 7 years or so after it was completed.  Heavy rain is believed to have led to a culvert on private land collapsing.  The resultant flooding carried away the ground upon which the building was constructed, leaving the piles for the foundations exposed.

Damage to a block of flats caused by flooding is almost always covered by the buildings insurance for the block.  Most leases for blocks of flats oblige the freeholder to place that insurance for the benefit of the tenants.  Cover is usually limited to the rebuild cost  of the block, which is usually less than the open market value of the leasehold and freehold interests combined.  The important thing about this is that in the event that it becomes impossible to rebuild the block most leases provide that the proceeds of the claim be dispersed proportionately amongst the policy beneficiaries.  It is this rebuild sum insured that is paid out to the leaseholders and not the open market valuation of their interests.

It is important to note this as the Spencer Court case could be an example where it may be impossible to rebuild the properties because of the scale of the flooding and the effect on the surrounding land.  This could leave leaseholders in a difficult position if the rebuild cost is substantially less than their mortgages, it may leave them with no property but still with at least part of the mortgage to pay. 

Fortunately, such circumstances as these are rare but when the worst does happen it can have difficult financial consequences even where all parties have fulfilled their legal obligations.

Posted in Introductory, News | Tagged , , , , , , , , , | Leave a comment