Service Charges: When will conditions be imposed upon the grant of dispensation from consultation requirements?
Aster, a social landlord, sought to carry out major works to numerous residential blocks of flats, requiring each lessee to pay by way of service charge a proportion of costs relating to their block.
In accordance with the consultation requirements prescribed by S.20ZA(4) of the Landlord and Tenant Act 1985 (“the Act”), Aster served a notice of intention on all the lessees in respect of various items of work proposed, mistakenly having omitted any mention of the replacement of balcony asphalt.
Thereafter, Aster furnished each lessee with a statement of three estimates, a summary of the observations made by tenants, and its own responses to those observations. Within the statement, Aster listed the proposed works but again failed to mention the replacement of balcony asphalt, while the information in the enclosed estimates did mention the replacement of balcony asphalt.
Aster applied to the FTT under S.27A of the Act for a determination as to the reasonableness of such on-account service charges as were being demanded of the lessees.
The FTT found not only that the full replacement of balcony asphalt was unnecessary, but that such works were not part of the S.20 consultation. The FTT held that even if at some future stage Aster could justify the necessity of such asphalt work, the only way they could hope to recover the costs of such work would be to seek dispensation from the consultation requirements, lest they suffer the restriction imposed by S.20(1) of the Act (limiting recovery to just £250 per lessee).
Aster made an application for dispensation and it was granted, subject to two conditions: (1) Aster pays the reasonable costs of an expert to consider and advise the tenants on the necessity of replacing all the balcony asphalt and, (2) Aster pays the respondents' reasonable costs of the dispensation application.
Aster unsuccessfully appealed to the UT, but was given permission for a second appeal to the Court of Appeal.
At the Court of Appeal, the contention raised by Aster was that, following the reasoning of Lord Neuberger in Daejan Investments v Benson  UKSC 14, the question of dispensation should be viewed as a question of whether there had been any relevant prejudice suffered by the lessees, as a result of a failure to comply with the consultation requirements. If no prejudice was suffered, the lessees would be in exactly the same position had the requirements been complied with, thereby warranting the award of dispensation.
Aster argued that the FTT, in finding no justification for the carrying out of the asphalt works due to the absence of any evidence in support, deemed the relevant prejudice suffered by the lessees to extend to no more than unreasonably charging for such works. Accordingly, compensating the lessees for the cost of an expert’s report did not go to the heart of the prejudice identified by the FTT, and was an attempt to compensate the lessees for something that was not identified as an expense occasioned by the relevant prejudice.
The Court of Appeal dismissed Aster’s Concerns, relying on the reasoning in Daejan to comment that lessees are “likely to have their costs of consulting a surveyor and/or solicitor paid by the landlord", and holding that generally tenants should be entitled to the costs of investigating the issue of relevant prejudice.
In addition, and importantly, the Court of Appeal endorsed the FTT’s approach of “proceeding on the basis that the potential prejudice to the tenants remained to be addressed, with any future section 27A application providing a forum for the investigation into prejudice which might otherwise have been undertaken at Aster's expense in the context of the dispensation application”.
It is now clear that “potential prejudice” is enough to warrant the imposition of conditions on an award of dispensation.
The Court emphasized the wide scope of the FTT’s discretion, stating that its discretion extended to an ability to impose “terms as it thinks fit” (albeit caveating against a potential abuse of such power by stating “provided of course, that any such terms are appropriate in their nature and their effect").
That is a very wide discretion indeed, and as a result of this ruling we may expect to see more FTT dispensation decisions include conditions of the kind imposed on Aster.
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Michael Grant is a member of the Property and Housing teams at 42BR Barristers and specialises in all aspects of residential and commercial property litigation.
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