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You are here: BAILII >> Databases >> United Kingdom Supreme Court >> Daejan Investments Ltd v Benson & Ors (includes Costs Judgment) [2013] UKSC 14 (6 March 2013) URL: https://www.bailii.org/uk/cases/UKSC/2013/14.html Cite as: [2013] 2 All ER 375, [2013] 2 EGLR 45, [2013] UKSC 14, [2013] WLR(D) 94, [2013] 11 EG 80, [2013] HLR 21, [2013] RVR 164, [2013] UKSC 54, [2013] 1 WLR 854, [2013] L &TR 17, [2013] 2 P &CR 2 |
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Hilary Term
[2013] UKSC 14
See also Costs Judgment: [2013] UKSC 54
On appeal from: [2011] EWCA Civ 38
JUDGMENT
Daejan
before
Lord Neuberger, President
Lord Hope, Deputy President
Lord Clarke
Lord Wilson
Lord Sumption
JUDGMENT GIVEN ON
6 March 2013
Heard on 4 December 2012
| Appellant Nicholas Dowding QC Stephen Jourdan QC (Instructed by GSC Solicitors LLP) |
Respondent Philip Rainey QC Jonathan Upton (Instructed by Excello Law Limited) |
|
| Responden James Fieldsend (Instructed by Jaffe Porter Crossick LLP) |
LORD NEUBERGER (with whom Lord Clarke and Lord Sumption agree)
Valuation Tribunal ("LVT"), the landlord cannot recover more than a specified sum in respect of works for which the service charge would otherwise be greater. The issue on this appeal concerns the width and flexibility of the LVT's jurisdiction to dispense with the consultation requirements, and the principles upon which that jurisdiction should be exercised.
The statutory provisions
varies … according to the relevant costs". Section 18(2) defines "relevant costs" as "the costs … incurred … in connection with the matters for which the service charge is payable".
virtue of section 20(3), (4)(a) and (5) and section 20ZA(2), section 20 applies where the cost of qualifying works exceed "an appropriate amount set by regulations". Regulation 6 of the Service Charges (Consultation Requirements) (England) Regulations 2003, SI 2003/1987 ("the 2003 Regulations") sets that amount at a sum which results in the service charge contribution of any tenant to the cost of the relevant works being more than £250.
"… [T]he relevant contributions of the tenants are limited in accordance with subsection (6) … unless the consultation requirements have been either –
a) complied with in relation to the works …, or
b) dispensed with in relation to the works … by (or on appeal from) a [LVT]."
"Where an application is made to [an LVT] for a determination to dispense with all or any of the consultation requirements in relation to any qualifying works …, the tribunal may make the determination if satisfied that it is reasonable to dispense with the requirements."
Stage 1: Notice of intention to do the works
Notice must be given to each tenant and any tenants' association, describing the works, or saying where and when a description may be inspected, stating the reasons for the works, specifying where and when observations and nominations for possible contractors should be sent, allowing at least 30 days. The landlord must have regard to those observations.
Stage 2: Estimates
The landlord must seek estimates for the works, including from any nominee identified by any tenants or the association.
Stage 3: Notices about Estimates
The landlord must issue a statement to tenants and the association, with two or more estimates, a summary of the observations, and its responses. Any nominee's estimate must be included. The statement must say where and when estimates may be inspected, and where and by when observations can be sent, allowing at least 30 days. The landlord must have regard to such observations.
Stage 4: Notification of reasons
Unless the chosen contractor is a nominee or submitted the lowest estimate, the landlord must, within 21 days of contracting, give a statement to each tenant and the association of its reasons, or specifying where and when such a statement may be inspected.
The factual background
Daejan Investments Ltd ("Daejan"), the appellant in this appeal. The building consists of shops on the ground floor and seven flats on the upper floors. Five of the seven flats are held under long leases, and each of those leases is held by a respondent to this appeal (collectively "the respondents"). Each lease includes an obligation on the landlord to provide services, including the repair and decoration of the structure, exterior, and common parts of the building. Each lease also includes an obligation on the tenant to pay a specified fixed proportion of the cost of providing, inter alia, the services which the landlord is obliged to provide.
Daejan, is part of the Freshwater group of companies, and which carries on business under the name of Freshwater Property Management ("FPM").
Daejan intended to carry out such works. Three weeks later, FPM sent QMRA a specification in respect of the proposed works. Thereafter, pursuant to a request from Ms Marks, FPM appointed Robert Edward Associates ("REA"), who had been advising QMRA on the proposed works, as contract administrator.
Daejan (orally on 8 August and by letter two days later) that the contract for the proposed works had been awarded to Mitre, and, at least by implication, that the statutory consultation process had accordingly ended. It appears that this information was, in fact, inaccurate, but it was never corrected. Despite this, there were some further communications between Ms Marks and FPM about the proposed works.
Daejan contracted for the proposed works ("the Works") with Mitre, and this was formally communicated to the respondents and QMRA 16 days later. On 3 October 2006, Mitre started carrying out the Works, and completed them, albeit apparently late and not without criticisms from the respondents and QMRA.
The procedural history
Daejan in relation to (i) the provision of services over 14 years, and (ii) the Works. Inevitably, a number of issues and sub-issues were raised. Of those issues, only one is directly relevant to the present appeal. It is what the LVT called "Issue 10", which was whether Daejan had complied with the requirements of part 2 of Schedule 4 to the 2003 Regulations ("the Requirements") in relation to the Works.
Daejan had failed to comply with the stage 3 Requirements in two respects. First, neither of the purported stage 3 notices contained any "summary of observations". Secondly, "the estimates were not available for inspection as stated [in either notice], and were only inspected on 11 August". It is also worth mentioning that the LVT considered, under what it called "Issue 11", a number of criticisms of the Works, which were being carried out during the hearing, and dismissed almost all of them.
Daejan relied on the fact that, if it had been free to enforce the service charge provisions in all the leases held by the respondents, it would be entitled to recover just under £280,000 in total from the respondents by way of service charge payments in respect of the Works, whereas, if no dispensation was granted, it would be limited to recovering service charges of £250 per respondent in respect of the Works, ie a total of £1,250.
Daejan to comply with the … [Requirements] [had] caused substantial prejudice to the respondents", and "that it was a matter of great concern to Ms Marks … that Daejan had not provided copies of all the estimates". The LVT continued at para 90:
"the cutting short of the consultation period, by indicating … that the decision had been made to award the contract to Mitre … removed from the leaseholders the opportunity to make observations on the estimates to which landlord was obliged to have regard. This opportunity to make informed comment on these matters was central to the consultation process. It had been stressed in correspondence how important this was to the leaseholders."
"Although this was not a case where the landlord made no attempt to comply with the … Regulations, and some extra-statutory consultation was carried out … this did not make good the landlord's omission in failing to provide the estimates and an opportunity to make observations. … The Tribunal considers that the fact that they did not have this opportunity amounts to significant prejudice."
Daejan that "if, contrary to [its] submissions, the Tribunal considered that there has been prejudice to the [respondents], the Tribunal should consider the fair figure to compensate [them] for any prejudice, such sum to be deducted from the cost of the eventual charge when calculating the service charges for the [W]orks". During the course of the hearing, Daejan had proposed a deduction of £50,000, which it had described as "more than generous", but which had not been accepted by the respondents. The LVT rejected this proposal at para 101, saying that "there was no explanation of [how] the figure of £50,000 could be regarded as generous or as sufficient compensation for the prejudice suffered". It also said at para 103 that "the offer does not alter the existence of substantial prejudice to the leaseholders".
Daejan appealed to the Upper Tribunal (Lands Chamber) (Carnwath LJ and Mr NJ Rose FRICS), which rejected the appeal - [2009] UKUT 233 (LC), [2010] 2 P&CR 116. The Upper Tribunal agreed with the LVT that Daejan had failed to comply with the stage 3 Requirements in the two respects identified by the LVT.
Daejan had received about the proposed works – see paras 47-48.
Daejan's more important failure, according to the Upper Tribunal in para 52, was the fact that "the consultation process was for all practical purposes curtailed", a finding which had been open to the LVT. The Upper Tribunal was, however, troubled by the LVT's finding that the respondents had suffered any consequential prejudice. Only one specific item was seen to be of any weight, namely the respondents' preference for Rosewood over Mitre, but, as the Upper Tribunal pointed out, this was based on evidence two years after the event, and it was hard to see why it could not have been raised by the respondents during the period of consultation which Daejan had allowed.
Daejan to show that they had suffered no prejudice, as a result of Daejan's default, and that, in that connection, it was "enough that there was a realistic possibility that further representations might have influenced" Daejan's decision to engage Mitre rather than Rosewood. The Upper Tribunal said that it "had not found this an easy case", because "the evidence of actual prejudice is weak". Nonetheless, at para 62, it decided that, as the LVT was the primary decision-maker, its decision to reject Daejan's application to dispense with the Requirements in relation to the Works should be respected, as it was a view which the LVT had been "entitled" to arrive at.
Daejan was given permission to appeal to the Court of Appeal, on terms that it would not seek its costs if the appeal succeeded. The court (Sedley, Pitchford and Gross LJJ) dismissed the appeal, for reasons principally given by Gross LJ – [2011] EWCA Civ 38, [2011] 1 WLR 2330.
Daejan more harshly than if it had been a landlord controlled or owned by the lessees. Thirdly, in para 72, Gross LJ accepted Daejan's contention that "significant prejudice to the tenants is a consideration of first importance in exercising the dispensatory discretion under section 20ZA(1)".
Daejan's failure in this case "constituted a serious failing and did cause the respondents serious prejudice", and he echoed the LVT and Upper Tribunal in saying that this was not "a technical, minor or excusable oversight". He also said that the LVT was entitled not to speculate on what would have happened if there had been no breach, on the ground that the respondents' "loss of opportunity (to make further representations and have them considered) … itself amount[ed] to significant prejudice". In para 76, in agreement with the Upper Tribunal, Gross LJ doubted that the LVT would have been entitled to accede to Daejan's offer to reduce the chargeable amount by £50,000, and that, anyway, the LVT was entitled to reject that proposal.
Daejan was given permission to appeal to this court on terms similar to those which were imposed when permission was given to appeal to the Court of Appeal.
The issues on this appeal
(i) The proper approach to be adopted on an application under section 20ZA(1) to dispense with compliance with the Requirements;
(ii) Whether the decision on such an application must be binary, or whether the LVT can grant a section 20(1)(b) dispensation on terms;
(iii) The approach to be adopted when prejudice is alleged by tenants owing to the landlord's failure to comply with the Requirements.
The proper approach to dispensing under section 20ZA(1)
value in identifying the proper approach to the exercise of this jurisdiction, as it is important that decisions on this topic are reasonably consistent and reasonably predictable. Otherwise, there is a real risk that the law will be brought into disrepute, and that landlords and tenants will not be able to receive clear or reliable advice as to how this jurisdiction will be exercised.
very fact that section 20ZA(1) is expressed as it is means that it would be inappropriate to interpret it as imposing any fetter on the LVT's exercise of the jurisdiction beyond what can be gathered from the 1985 Act itself, and any other relevant admissible material. Further, the circumstances in which a section 20ZA(1) application is made could be almost infinitely various, so any principles that can be derived should not be regarded as representing rigid rules.
view is confirmed by the titles to those two sections, which echo the title of section 19.
very good reason): in such a case the tenants would be in precisely the position that the legislation intended them to be – ie as if the Requirements had been complied with.
view that a dispensation should be refused in such a case solely because the landlord seriously breached, or departed from, the Requirements. That view could only be justified on the grounds that adherence to the Requirements was an end in itself, or that the dispensing jurisdiction was a punitive or exemplary exercise. The Requirements are a means to an end, not an end in themselves, and the end to which they are directed is the protection of tenants in relation to service charges, to the extent identified above. After all, the Requirements leave untouched the fact that it is the landlord who decides what works need to be done, when they are to be done, who they are to be done by, and what amount is to be paid for them.
view one took of the state of mind or degree of culpability of the landlord. Sometimes such questions are, of course, central to the enquiry a court has to carry out, but I think it unlikely that it was the sort of exercise which Parliament had in mind when enacting section 20ZA(1). The predecessor of section 20ZA(1), namely the original section 20(9), stated that the power (vested at that time in the County Court rather than the LVT) to dispense with the Requirements was to be exercised if it was "satisfied that the landlord acted reasonably". When Parliament replaced that provision with section 20ZA(1) in 2002, it presumably intended a different test to be applied.
Views as to the gravity of a landlord's failure to comply with the Requirements could vary from one LVT to another. And questions could arise as to the relevance of certain factors, such as the landlord's state of mind. The present case provides an example of the possible uncertainties. In para 99 of his judgment, Lord Wilson understandably expresses a very unfavourable view of Daejan's failure in this case. However, to some people it might seem that Daejan's failure in the present case was not a "serious failing", given that (i) the evidence of any resulting prejudice to the respondents is weak, (ii) Daejan adhered fully to stages 1 and 2, and to a significant extent to stage 3, (iii) Daejan did consult the respondents, through both REA and FPM, (iv) Daejan did some things which went beyond the Requirements (eg employing REA at Ms Marks's request), and (v) Daejan did give summary details of the tenders even though it did not accord the respondents sight of the tenders themselves. So, too, views may differ as to whether Daejan should be blamed for not taking up the time of the LVT with attempts to excuse its failures, and as to whether it was an innocent misunderstanding or flagrant incompetence which caused Daejan's representatives to tell the LVT that the contract had been placed with Mitre weeks before it had been. (None of those points undermines the basic fact that there was an undoubted failure by Daejan to comply with the Requirements).
very telling criticisms about the proposed works or costings. Or, on the other hand, where the landlord fails to get more than one estimate despite being reminded by the tenants, but there is only one contractor competent to carry out undoubtedly necessary works.
Daejan is wrong in its contention that the financial consequences to the landlord of not granting a dispensation is a relevant factor when the LVT is considering how to exercise its jurisdiction under sections 20(1)(b) and 20ZA(1). In that, I agree with the views of the courts below (although it can be said that such consequences are often inversely reflective of the relevant prejudice to the tenants, which is, as already mentioned, centrally important). It also seems to me that the nature of the landlord is not a relevant factor either, and I think that was the view of the Court of Appeal as well.
v West End Quay Ltd [2010] EWHC 833 (Ch), [2010] 1 WLR 2735, para 26. However, I consider that there are no grounds for treating the obligations in sections 20 and 20ZA as doing any more than providing practical support for the two purposes identified in section 19(1). The sections are not concerned with public law issues or public duties, so there is no justification for treating consultation or transparency as appropriate ends in themselves.
Is the LVT faced with a binary choice on a section 20ZA(1) application?
Daejan's section 20ZA(1) application on the terms offered by Daejan, namely to reduce the aggregate of the sum payable by the respondents in respect of the Works by £50,000.
view, the LVT is not so constrained when exercising its jurisdiction under section 20ZA(1): it has power to grant a dispensation on such terms as it thinks fit – provided, of course, that any such terms are appropriate in their nature and their effect.
various, and, given the purpose of sections 20 and 20ZA, it seems unlikely that the LVT's powers could have been intended to be as limited as the respondents suggest.
very urgently, or where it only became apparent that it was necessary to carry out some works while contractors were already on site carrying out other work. In such cases, it would be odd if, for instance, the LVT could not dispense with the Requirements on terms which required the landlord, for instance, (i) to convene a meeting of the tenants at short notice to explain and discuss the necessary works, or (ii) to comply with stage 1 and/or stage 3, but with (for example) 5 days instead of 30 days for the tenants to reply.
very limited. The effect of para 10 of Schedule 12 to the 2002 Act is that the LVT can only award costs (in a limited amount) (i) where an application is dismissed on the ground that it is frivolous, vexatious or an abuse of process, or (ii) where the applicant has "acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the proceedings".
view, that does not preclude the LVT from imposing, as a condition for dispensing with all or any of the Requirements under section 20(1)(b), a term that the landlord pays the costs incurred by the tenants in resisting the landlord's application for such dispensation. The condition would be a term on which the LVT granted the statutory indulgence of a dispensation to the landlord, not a free-standing order for costs, which is what para 10 of Schedule 12 to the 2002 Act is concerned with. To put it another way, the LVT would require the landlord to pay the tenants' costs on the ground that it would not consider it "reasonable" to dispense with the Requirements unless such a term was imposed.
v Jones [1939] 2 KB 702, 705-706, 709. However, if and in so far as the landlord opposes the tenant's application for relief unreasonably, it will not recover its costs, and may even find itself paying the tenant's costs, as in Howard v Fanshawe [1895] 2 Ch 581, 592.
Daejan, pointed out, in Factors (Sundries) Ltd v Miller [1952] 2 All ER 630, the tenant was legally aided and the court was precluded by statute from making an order for costs against him, but the Court of Appeal held that there was nonetheless jurisdiction to require him to pay the landlord's costs as a condition of being granted relief from forfeiture. As Somervell LJ explained it at 633D-F, the liability under such a condition was "not an order to pay costs in the ordinary sense", but "a payment of a sum equal to the costs as a condition of relief".
The correct approach to prejudice to the tenants
very difficult exercise (or "an invidious exercise in speculation" as Gross LJ put it at para 73(iv) in the Court of Appeal) and would frequently be unfair on the tenants. It may occasionally involve a difficult exercise, but the fact that an assessment is difficult has never been regarded as a valid reason for the court refusing to carry it out (although in some cases disproportionality may be a good reason for such a refusal). While each case must, inevitably, be decided on its particular facts, I do not think that many cases should give rise to great difficulties.
views the tenants' arguments sympathetically, for instance by resolving in their favour any doubts as to whether the works would have cost less (or, for instance, that some of the works would not have been carried out or would have been carried out in a different way), if the tenants had been given a proper opportunity to make their points. As Lord Sumption said during the argument, if the tenants show that, because of the landlord's non-compliance with the Requirements, they were unable to make a reasonable point which, if adopted, would have been likely to have reduced the costs of the works or to have resulted in some other advantage, the LVT would be likely to proceed on the assumption that the point would have been accepted by the landlord. Further, the more egregious the landlord's failure, the more readily an LVT would be likely to accept that the tenants had suffered prejudice.
Overview of the analysis so far
very end of its judgment, requiring the landlord to limit the recoverable service charge to the statutory minimum in a case such as this "may be thought to be disproportionately damaging to the landlord, and disproportionately advantageous to the lessees". That criticism could not, it seems to me, be fairly made of the conclusion I have reached.
The resolution of this appeal
Daejan's section 20ZA(1) application. That is because (i) they took into account the gravity (as they saw it) of the failure to comply with stage 3 of the Requirements, not only in the prejudice it may have caused to the tenants, but as a free-standing matter, (ii) they considered that the mere possibility of prejudice, apparently however speculative, and in the absence of any evidence to support its existence, would be enough to preclude the grant of a dispensation, and (iii) (in the case of the Upper Tribunal and the Court of Appeal) they did not consider (or doubted) that it was open to the LVT to grant a dispensation on terms, and (in the case of the LVT) they did not address the question whether the £50,000 offered by Daejan exceeded any relevant prejudice which the tenants could establish.
v Leaseholders of 37 Flats at 30-40 Grafton Way (LRX/185/2006), BAILII: [2008] EWLands LRX_185_2006. That case may have been rightly decided, but, if so, it was for the wrong reasons.
Daejan's failure, if the section 20(1)(b) dispensation was granted unconditionally. On the basis of the evidence before the LVT, it seems to me, substantially in agreement with the Upper Tribunal, that it is highly questionable whether any such prejudice at all would have been suffered. The only "specific prejudice" identified by the Upper Tribunal was in relation to what the LVT called in para 98 of its decision "a matter of speculation", namely that the respondents lost the opportunity of making out the case for using Rosewood to carry out the Works, rather than Mitre.
Daejan was entitled to recover a service charge based on the full cost of the Works. I have already dealt with these points in general terms. As to (i), the right to be consulted in accordance with sections 20 and 20ZA is not a free-standing right.
Daejan's and the respondents' respective experts had met and agreed a number of items, there were still many items of dispute which were contested by the respondents before the LVT on issue 11: the respondents were therefore well able to identify any complaints they had in relation to the Works.
Daejan was sufficient to compensate the tenants for any relevant prejudice they suffered in this case. Given that the LVT did not address this issue properly, there is, at least on the face of it, a strong case for saying that that is an issue which should be remitted, on the ground that we cannot fairly decide it. However, on closer examination of the facts, I am of the view that we can fairly decide the issue, and that we should therefore do so. This view is based on two reasons, which, when taken together, seem to me to establish that it would be pointless to remit the case.
Daejan's failure to comply with the Requirements. As mentioned, the Upper Tribunal described the evidence of any such prejudice as "weak". In this court, no contention as to the existence of possible relevant prejudice was advanced by Mr Rainey QC or Mr Fieldsend, save that they suggested that (i) Rosewood may have agreed to carry out the Works for some £11,000 less than the contract sum ultimately agreed with Mitre, and (ii) they relied on the fact that Mitre overran the six-month contract substantially. As to (i), I am not sure where the £11,000 comes from, but it is substantially less than the £50,000 offered by Daejan. As to (ii), I would have thought that the prejudice has to be measured as at the date of the breach of the Requirements, and anyway there was no attempt to show that Rosewood would have been any quicker or to quantify any prejudice.
very detailed response from Ms Marks in July 2006. I agree with Mr Dowding QC that it is hard to see what further submissions or suggestions the respondents could have presented if Daejan had complied fully with the Requirements. Again, no argument appears to have been advanced at any level of these proceedings on behalf of the tenants that any specific points, which had not been made, would or might have been made if Daejan had fully complied with the Requirements.
Daejan's failure to comply with the Requirements. If they were to justify resisting the LVT accepting Daejan's proposal, it was, in my judgment, incumbent on the tenants to advance some credible evidence and some rational argument which established that they had suffered, or at least may well have suffered such relevant prejudice.
Daejan to comply with stage 3 of the Requirements, the relevant prejudice to the respondents of granting the dispensation could not be higher than the £50,000 discount offered by Daejan. The fact that the £50,000 can fairly be said to have been plucked out of the air is irrelevant: the essential point is that it exceeds any possible relevant prejudice which, on the evidence and arguments put before it, the LVT could have concluded that the respondents would suffer if an unqualified dispensation were granted.
Daejan's application for a dispensation under section 20(1)(b) should be granted on terms that (i) the respondents' aggregate liability to pay for the Works be reduced (presumably on a pro rata basis) by £50,000, and (ii) Daejan pay the reasonable costs of the respondents in so far as they reasonably tested its claim for a dispensation and reasonably canvassed any relevant prejudice which they might suffer.
LORD HOPE (dissenting)
valuation tribunal ("the LVT") amply qualifies for that description, both in respect of the expertise and experience of its members and in respect of its familiarity with the subject matter. Questions such as whether or not a landlord's breach or departure from the consultation requirements was "serious" or was "technical, minor or excusable" (see para 47, above) are questions of fact and degree. Questions of that kind are best left to its judgment. So too are questions as to whether a breach or departure is sufficiently serious to justify refusal of a dispensation or whether an offer to reduce the chargeable amount is acceptable. The wording of section 20ZA(1) adopts this approach. It is open-ended and unqualified. It leaves these matters to the tribunal's determination.
v Secretary of State for Social Security [2002] 3 All ER 279, paras 15-17 and R (Cart) v Upper Tribunal (Public Law Project Intervening) [2011] UKSC 28, [2012] 1 AC 663, para 49; Ravat v Halliburton Manufacturing and Services Ltd [2012] UKSC 1; [2012] ICR 389, para 35. The context for the exercise of that restraint is usually a challenge to the lawfulness of the decision on the ground, for example, that it was based on an error of law. In my opinion, however, judicial restraint is just as much in point where, as here, an appellate court is prescribing limits on the way the expert tribunal is to perform the tasks as to issues of fact that have been delegated to it by the statute.
view in the interests of preserving the integrity of the legislation, and to do so without conducting any such inquiry.
Daejan's offer to reduce the chargeable amount by £50,000. It rejected the proposal on the ground that there was no explanation of how that figure could be regarded as generous or as sufficient compensation for the prejudice suffered. Neither the Upper Tribunal nor the Court of Appeal thought it right to reverse the LVT on this point, holding that it was entitled to reject the proposal. I agree that the essential point is that the figure suggested should exceed, or at least be commensurate with, any possible prejudice which the respondents would suffer if an unqualified dispensation were to be granted: see para 84.
Daejan was one for the judgment of the expert tribunal. It was for it, after all, to decide whether or not to accept the proposal. It was for it to determine, as a matter of fact, whether it had been properly quantified. I am not persuaded that its decision to reject the proposal was based on an error of law that would entitle this court to interfere with it. As Lord Wilson says in para 117, it was entitled in its discretion to decline to accept a reduction without knowing the proportion which it bore to the overall cost of the works.
LORD WILSON (dissenting)
various provisions about a landlord's consultation with a tenant in relation to proposed works of a specified character for which, through the service charge, the tenant would later be required to pay. On the face of them, the provisions seem to impact severely upon the landlord; and the severity is in my view testament to the importance which Parliament attached to his compliance with the Requirements. Thus dispensation with them is available only if the LVT is satisfied (ie by the landlord) that it is reasonable to grant it (section 20ZA(1)); even if so satisfied, the LVT has a discretion in that, under that subsection, it then "may" grant the dispensation; and, in the absence of compliance or dispensation, the contribution of the tenant to the cost of such works is limited to £250 irrespective of the size of the cost (section 20(1)(3) and (5) and Regulation 6). Lord Neuberger's conclusion at para 47 that the gravity of the landlord's non-compliance with the Requirements is relevant to dispensation not of itself but only insofar as it causes financial prejudice to the tenant seems to me to subvert Parliament's intention. The concern which he expresses at paras 47 and 48 about the difficulties which would confront the LVT in making reasonably consistent assessments of the gravity of breaches is not one which I share. His conclusion at para 50 that real prejudice to the tenant should normally be the sole consideration for the LVT seems to me to depart from the width of the criterion ("reasonable") which Parliament has specified. His inevitable further conclusion at para 67 that the "factual" burden lies on the tenant to prove such prejudice seems to me, as a matter of reality, to reverse the burden of proof which Parliament has identified. And in my view the hypothetical exercise in which his conclusions require the parties to engage (and upon which they require the LVT to adjudicate) fails to recognise the complications which often attend a comparison of, for example, one estimate with another in terms not just of overall cost but of individual costings, of the proposed starting date for the works, of the period of the works to which the rival contractors will commit themselves and of their perceived capacity to perform the works satisfactorily. Whether the burden which Lord Neuberger casts upon the tenant is one which he can often discharge seems to me to be very doubtful.
(a) In August 2005, in response to
(b) In its report to
(i) analysed the four tenders which
(ii) noted that Rosewood had offered to reduce its quotation from £454,000 to £432,000, which therefore became only £11,000 higher than that of the contractor, namely Mitre, for which
(iii) observed that the contract period proposed by Rosewood was 24 weeks, whereas that proposed by Mitre was 32 weeks;
(iv) indicated that the choice was between Rosewood and Mitre;
(
(
(
(c) In February 2006
(d) But the respondents also wanted to see a copy of Rosewood's tender. Apart from reference to it in the schedule of individual costings, REA's report had made only "general observations" upon its tender over one page.
(e) On five separate occasions between January and July 2006 the respondents in
(f)
(g) So
(h) Meanwhile, on 17 July 2006, four of the respondents had applied to the LVT for a determination of their liability to pay service charges to
(i) At the LVT's pre-trial review, held on 8 August 2006, there was a remarkable development: for
(j)
(k) It transpires that
Daejan aborted the stage 3 consultation. Having correctly invited the respondents to make observations by 31 August 2006, it made clear on and after 8 August that the decision had been made. Even more extraordinarily, Daejan made it clear at a hearing before a tribunal which was beginning to investigate whether, among other things, it had consulted the respondents in compliance with the Requirements. In my view the LVT was clearly entitled to conclude that the opportunity for the respondents to make informed observations on the rival tenders prior to 31 August had been central to the consultation process. Notwithstanding positive aspects of the earlier stages of the consultation to which Lord Neuberger refers at para 48, the sudden termination of the process, which Daejan never sought to reverse nor even to explain, represented, as both of the tribunals and the Court of Appeal all concluded, serious non-compliance with the Requirements.
view therefore this appeal requires the court to consider the LVT's proper treatment of serious non-compliance with the Requirements when invited to dispense with them. What financial prejudice did the respondents suffer from Daejan's termination of their opportunity to make submissions, in particular, of course, submissions in favour of Rosewood? Albeit without access to Rosewood's tender, they had already made extensive submissions. The LVT concluded that the REA report had raised numerous points which might have been clarified by the respondents' access to all the relevant tenders. It was an unsurprising conclusion. Nevertheless the Upper Tribunal was correct to observe that the LVT had not elaborated upon it. Moreover, at all four stages of these proceedings, Daejan has been at pains to make the point that, in their evidence before the LVT, the respondents never identified specific aspects of Rosewood's tender to which, had the consultation not been terminated, they would have referred in their intended observations. In that this is an appeal on a point of law from, originally, the exercise of a discretionary jurisdiction, it is worthwhile to note that, in its conclusions, the LVT expressly addressed the point before concluding that it was speculative. But it remains Daejan's strongest point. If, as Lord Neuberger considers, the respondents are now to be told that, when they opposed the dispensation, the initial burden had been on them to prove that the termination caused significant financial prejudice to them, the conclusion must indeed be that they failed to discharge it.
views of the tenant obtained during the requisite consultation should be admitted. There was no express provision about the effect of a landlord's failure to conduct the consultation; but it was clearly intended that a tenant could also deploy such a failure in a dispute with the landlord before a court which was exercising the basic jurisdiction to determine whether an amount or a standard was reasonable. In other words the section inserted in 1974 into the 1972 Act made the link which Lord Neuberger perceives in the current legislation.
v West End Quay Estate Management Ltd [2010] EWHC 833 (Ch), [2010] 1 WLR 2735, at para 26 as follows:
"[T] here are two separate strands to the policy underlying the regulation of service charges. Parliament gave two types of protection to tenants. First, they are protected by section 19 from having to pay excessive and unreasonable service charges or charges for work and services that are not carried out to a reasonable standard. Second, even if service charges are reasonable in amount, reasonably incurred and are for work and services that are provided to a reasonable standard, they will not be recoverable above the statutory maximum if they relate to qualifying works or a qualifying long term agreement and the consultation process has not been complied with or dispensed with. It follows that the consultation provisions are imposed for an additional reason; namely, to ensure a degree of transparency and accountability when a landlord decides to undertake qualifying works or enter into a qualifying long term agreement. As Robert Walker LJ observed in Martin & Seale
view the focus of the old criterion had been the gravity of the landlord's non-compliance. What, however, I find impossible to conclude is that the change in effect banished consideration of what had previously been the focus: the words of the new criterion are inapt to yield such a conclusion.
"3. The dispensation procedure is intended to cover situations where consultation was not practicable (eg for emergency works) and to avoid penalising landlords for minor breaches of procedure which do not adversely effect service charge payers' interests." [Emphasis supplied]
The paragraph tends to confirm my view that substantial non-compliance with the Requirements is, without more, intended to entitle the LVT, in the exercise of its discretion, to refuse to dispense with them in order, in Lord Hope's phrase at para 91, to preserve the integrity of the legislation. Lord Neuberger points out at para 46 that the Requirements leave untouched the fact that it is the landlord who decides what works should be done and what amount should be paid for them. What, however, the Requirements recognise is surely the more significant fact that most if not all of that amount is likely to be recoverable from the tenant.
v The Leaseholders of 37 Flats at 30-40 Grafton Way LRX/185/2006 30 June 2008, BAILII: [2008] EWLands LRX_185_2006, the Lands Tribunal (George Bartlett QC, President, and NJ Rose FRICS) dismissed Camden's appeal against the LVT's refusal to dispense with the stage 3 Requirements. Camden had prepared the requisite statement, including the offer to afford inspection of the tenders, but had failed to send it to the tenants and had proceeded to enter into the contract. The Lands Tribunal, at para 35, described Camden's error as gross. I agree; and I do not perceive much difference between a landlord's total failure to send the statement and its sending a statement which, after 11 days, it deprives of all further significance. The Lands Tribunal concluded:
"The extent to which, had [the tenants] been told of the estimates, [they] would have wished to examine them and make observations upon them can only be a matter of speculation. The fact is that they did not have the opportunity and this amounted to significant prejudice."
Daejan's contention that it was relevant for it to consider the size of the difference between the amounts recoverable from the respondents in the event of dispensation on the one hand and of its refusal on the other. Here too the LVT made no error. In this respect I agree with Lord Neuberger at para 51 that the size of the difference is irrelevant.
Daejan's offer to accept the attachment to a grant of dispensation of a condition that it should reduce the cost of the works to be charged to the respondents by £50,000.
valuable for the LVT that this court should so rule. In making provision for the consequences of non-compliance with the Requirements, Parliament will have had in mind the established ability of a court or tribunal to attach conditions to its exercise of a discretion: for example a condition that undertakings be given by an applicant before it grants a freezing order; or a condition which (so this court was told) the LVT itself already sometimes attaches to the grant of an adjournment, namely that the applicant for it, whom the tribunal has no power actually to order to pay the costs thrown away, should nevertheless do so. Lord Neuberger also explains at para 56 that urgent applications for dispensation in advance of carrying out the works may be particularly suited to be granted on conditions.
view, namely that the gravity of the non-compliance remains relevant independently of prejudice, makes the identification of an appropriate figure harder still. So it seems to me that, as Lord Hope suggests in paras 88 and 93, considerable latitude is to be afforded to the LVT, as the specialist decision-maker, in relation to its determination whether to accept a landlord's offer or to reject it outright or, in rejecting it, to identify some higher figure which, if offered, it would accept as a condition of a grant of dispensation. Appeals from these aspects of the exercise of the LVT's discretion should not lightly be permitted to proceed.
Daejan's offer into a condition attached to a grant of dispensation, it would have made an error of law which would have required re-exercise of its discretion at an appellate level. But it did not so conclude. It was the Upper Tribunal which, at para 40, wrongly concluded that the LVT had no such jurisdiction; and it was the Court of Appeal which, at para 76(i), overcautiously doubted whether the jurisdiction existed. Before the LVT, by contrast, the parties agreed that it existed and the LVT proceeded on that basis. It is important to note that, having embarked on the works in October 2007, Mitre was still engaged upon them at the time of the LVT's hearing of Daejan's application for dispensation in March 2008 and probably at the time of its decision in August 2008. The evidence does not permit a conclusion to be drawn about the reasons for the overrun. At all events the LVT's expressed reason for rejecting Daejan's offer of a reduction of £50,000 was that it was impossible to assess it in the light of the cost of the works already undertaken and of the estimated cost of the works still to be undertaken, as to neither of which had Daejan adduced evidence. The gravity of Daejan's non-compliance with the Requirements made the LVT's appraisal of any offer extremely difficult. But it was in any event entitled, in its discretion, to decline to accept the offered reduction without knowing the proportion which it bore to the overall cost of the works.
Daejan's application for dispensation with the Requirements; that the Upper Tribunal and the Court of Appeal were correct in determining not to set its refusal aside; and that this court should determine likewise.
Hilary Term
[2013] UKSC 54
On appeal from: [2011] EWCA Civ 38
COSTS JUDGMENT
Benson and others (Respondents)
before
Lord Neuberger, President
Lord Hope, Deputy President
Lord Clarke
Lord Wilson
Lord Sumption
JUDGMENT GIVEN ON
24 July 2013
Heard on 4 December 2012
| Appellant Nicholas Dowding QC Stephen Jourdan QC (Instructed by GSC Solicitors LLP) |
Respondent Philip Rainey QC Jonathan Upton (Instructed by Excello Law Limited) |
|
| Responden James Fieldsend (Instructed by Jaffe Porter Crossick LLP) |
After receiving the parties' submissions as to the form of order and costs, Lord Neuberger gave the following judgment with which Lord Hope, Lord Clarke, Lord Wilson and Lord Sumption agreed.
LORD NEUBERGER (with whom Lord Hope, Lord Clarke, Lord Wilson and Lord Sumption agree)
Daejan Investments Ltd ("Daejan") against the decision of the Court of Appeal, which had unanimously upheld a decision of the Upper Tribunal (Lands Chamber) ("the UT"), which had in turn upheld a decision of the Leasehold Valuation Tribunal ("the LVT"). The effect of the decisions below was that Daejan was not entitled to a dispensation under section 20ZA(1) of the Landlord and Tenant Act 1985 ("the 1985 Act"), as amended, which it had sought from the LVT, to enable it to recover any payment by way of service charges from the respondent tenants, in respect of the cost of certain works of repair ("the works") which it had carried out to a block of flats.
Daejan was entitled to such a dispensation (a "dispensation"), albeit on terms. The effect of our decision is that, notwithstanding its failure to comply with some of the procedural steps set out in Part 2 of Schedule 4 to the Service Charges (Consultation Requirements) (England) Regulations 2003 (SI 2003/1987) ("the Regulations"), Daejan is entitled to recover service charges in respect of the cost of the works from the respondents, subject to (i) a deduction of £50,000 and (ii) terms as to costs.
i. A statement that
ii. A statement that the decisions of the LVT, the UT and the Court of Appeal are set aside;
iii. A direction that, as a condition of the dispensation,
(a) already incurred in the proceedings in the LVT, albeit that the scope of this direction is in dispute;
(b) which may be incurred in their being determined by the LVT "if and to the extent that the [LVT] determines that the costs of that application were reasonably incurred";
iv. A direction (subject to the wording) that, as a condition of the dispensation,
£50,000 deduction;
Daejan must comply with in order to obtain the dispensation (i.e. under paras 4(iii), (iv) and (vi) above) are "terms" or "conditions". Nothing hangs on this, although it is probably preferable to call them conditions, which is the description which I shall adopt. The important point is that, unless and until Daejan has complied with the conditions in so far as they require compliance, it is not entitled to give effect to the dispensation and to recover the service charges the subject of these proceedings.
(i)
(ii) The respondents also contend that the Order should provide that these costs are not limited to those incurred after the issue of
(iii) The respondents further contend that the Order should state that these costs can include costs incurred in connection with the hearing which resulted in the earlier determination referred to in para 24 of the main judgment.
Daejan's wording follows para 85 of the main judgment, but the meaning of the respondents' wording is quite consistent with what is said in that paragraph. So far as (ii) is concerned, the only objection to the respondents' proposal is that it amounts to surplusage: an order for costs in relation to proceedings is not limited to costs incurred after the proceedings start. However, as Daejan opposes the respondents' proposal, it should be adopted to ensure there can be no dispute. As to (iii), at first sight it may appear surprising that the respondents can claim as costs in relation to the issue decided in a later determination (viz. that mentioned in para 26 of the main judgment) expenditure incurred on issues decided in an earlier determination. However, as Daejan appears to accept, although there were two determinations, at least some of the evidence and the arguments in relation to the first were important and relevant in relation to the second determination.
v) above. Daejan says that there should be no order for costs in the UT, in the Court of Appeal and in this Court, whereas the respondents contend that they should be able to recover their costs from Daejan in all three tribunals insofar as they fall within the scope of the form of order they have proposed as quoted in point (i) in para 7 above (and which is accepted in relation to the LVT costs – see para 8 above).
Daejan to seek any costs in the Court of Appeal or in this Court, as it was granted permission to appeal to each court on terms that it did not seek its costs (see paras 33 and 37 of the main judgment). That was for the very good reason that Daejan, as a large landlord, had a significant interest in the issue in this case being conclusively determined, whereas the respondents had no such interest. When one adds to that point the fact that it was Daejan's default which ultimately caused these appeals to be necessary, and the fact that the decision of this Court can be said to have represented a change in what the law was perceived to be, it seems right that Daejan should not claim its costs in the UT any more than in the Court of Appeal or in this Court.
Daejan can fairly say that the normal order for costs in a case where the ultimate appeal court decides in favour of one party ("the successful party") is that that party recovers all its costs from the opposing party. In this case, there are undoubtedly two special factors, namely (i) the successful party only succeeded on the basis that it should have succeeded at first instance on terms that it paid some of the opposing party's costs (see paras 59-64, 73(ii) and 85(ii) of the main judgment, and paras 7 and 8 above), and (ii) the successful party is precluded from seeking its costs in this Court and the Court of Appeal (see paras 33 and 37 of the main judgment).
Daejan of its costs of the hearing before the UT (in addition to the Court of Appeal and this Court) could be said to be generous to the respondents, although, for the reasons briefly given in para 10, it is appropriate in this case. However, it would not be right to make an order for costs in the UT or higher courts which was more favourable to the respondents than no order for costs.
Daejan's successive appeals. That is true, but Daejan also acted reasonably in pursuing the appeals, and, unlike the respondents, Daejan was ultimately successful.
Daejan has to pay a large proportion of the respondents' costs before the LVT, even though it obtained the dispensation it was seeking, but that is because it was asking for an indulgence from the LVT (as explained in paras 58-64 of the main judgment). However, the appeals concerned a point of law, namely the correct approach to a dispensation application by a landlord who had failed to comply with the Regulations, and it was a point on which, ultimately, Daejan won and the respondents lost. Prima facie, therefore, Daejan should have its costs of the appeals, but, as explained in para 10, the correct order in respect of the appeal costs is that there be no order.
Daejan raised the argument at all levels of appeal that the financial consequences to it of refusing a dispensation represented a relevant factor when deciding whether to grant it a dispensation, the fact that this argument failed should be reflected in any order for costs on the appeals. In arguments about costs, it is normally inappropriate to single out a particular strand of argument (in this instance, prejudice to the landlord) in connection with what is in reality a single point (the principles applicable to granting a dispensation), particularly on an appeal, where no question of the cost of particular evidence arises. This case is no exception. Furthermore, while prejudice to the landlord was rejected as a relevant factor, it does represent the windfall to the tenants which is relevant (see para 51 and 71 of the main judgment).
Daejan is entitled to recover any costs which it has paid to the respondents in respect of the UT or Court of Appeal hearings. However, the respondents should be entitled, despite Daejan's objection to the contrary, to a direction for a stay on any order that they repay these costs, while the parties await the decision of the LVT as to the sums which Daejan should be required to pay to them pursuant to the order referred to in para 4(iii) above, with a view to setting off any such costs liabilities against each other. However, if the respondents unreasonably delay matters being determined by the LVT, Daejan has the right to apply to the LVT to lift this stay.
Daejan suggests that it "is not to include in the service charge costs its costs of applying for dispensation in the [LVT] or its costs of appealing from a refusal of that dispensation". The respondents' proposal is that it should be the costs which Daejan incurred in "resisting a determination that it had failed to comply with the Regulations or in respect of its application for dispensation". Daejan's formulation is arguably too narrow, and the respondents' formulation could apply to any application in the future. The appropriate form of words is that Daejan must not "include in the service charge costs its costs of (i) resisting the respondents' application for a determination that it had failed to comply with the Regulations, (ii) supporting its application for dispensation (including any costs it has to pay to the respondents), or (iii) appealing from a refusal of that dispensation".
Daejan in relation to its application for a dispensation. Section 20C permits a tenant to apply "for an order that all or any of the costs incurred … by the landlord in connection with proceedings before a court, … [LVT], or [UT], … are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge …". At first sight, there seems little point in including such a direction, given the agreement to the provision set out in para 4(iv), and discussed in para 17 above. However, as the respondents point out, the agreed provision in para 4(iv) is, strictly speaking at least, no more than a condition imposed on Daejan as a term of granting it the dispensation it seeks. In theory, Daejan might not take up the dispensation. Accordingly, as it would be wrong for Daejan to seek to include the costs involved in a future service charge demand, the order sought by the respondents under section 20C should be granted.
Daejan complies with the conditions set out in para 4(iii). At first sight, the question of when the dispensation takes effect may well not matter, and, if it does, it should be determined as and when the reason for which it matters is identified. This point appears to be linked to another issue.
Daejan provides for interest on late payments of money due under the lease at the rate of 14% per annum. The respondents seek to be released from liability for this interest in relation to the service charges which Daejan anticipates recovering in the light of the main judgment.
Daejan for the grant of the dispensation are complied with.
Daejan in accordance with para 4(iii) above have been determined and, if appropriate, paid (within fourteen days of the determination). It may well be that the costs will be less than the costs already paid to the respondents in relation to the orders for costs made on the appeals in the courts below (see para 16 above), and therefore no payment will be due from Daejan to the respondents. However, that would not undermine the point made in para 21 above: until the conditions on which the dispensation is granted are known and quantified, there is no operative dispensation, and time does not begin to run for interest.
Daejan the service charges assessed in accordance with the Order (beyond fourteen days, to allow time to organise payment) once the dispensation becomes operative, there would (at least in the absence of special facts which have not so far arisen) be no basis for depriving Daejan of its contractual right to claim interest at 14% per annum.
vii) above. The respondents wish the remission to be to the same panel as heard the proceedings and gave the decisions referred to in paras 23- 28 of the main judgment ("the original panel"), whereas Daejan argues for a different panel. There is possible advantagevery full decisions of the original panel. There is nothing in Daejan's argument that the original panel would be, or would appear to be, inappropriate because its decision has been reversed. The reversal was based on an issue of law, and does not cast doubt on the panel's ability to determine the issues which are now to be determined, if they cannot be agreed.
value in the original panel hearing the matter, but it is unlikely to be very advantageous, and that there may be difficulties in getting the original panel to reconvene.