Resident controlled blocks of flats and Freeholders can relax

We're talking about the landmark decision in the Daejan case announced (March 6th) this week. Previously the Daejan decisions all the way to the Court of Appeal was that Section 20 was black or white - either you consulted or you paid the cost. Effectively meant that if a landlord of a block of flats (often now the flat owners collectively) messed up or agreed to try to waive the Statutory Consultation required by the 1985 Landlord and Tenant Act then they lost out badly. Arguably, not ruin if you are wealthy landlord like Daejan (one of Englands biggest residential landlords) but terrible if you are an unpaid volunteer Director of a block of flats and fellow leaseholders turn against you finding a legitimate way to opt out of paying service charges leaving you footing the bill.

Section 20 Consultation is required on 'works' not gardening or window cleaning but repairs and works to lifts and plant. The statutory threshold is £250 for any leaseholder (so no simple maths there) as penthouses with big percentages may reach the limit quickly. What the case held is that in the absence of proper procedures - if the landlord retrospectively applies to the planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal for a dispensation - then his loss from not having complied with procedures with be the difference between cost of the works and the cost of a reasonable alternative. So landlords no longer face a total loss situation of the whole cost of the works less £250 per service charge payer - perhaps say the difference between a £100,000 bill and a £120,000 bill.

This is why all the unpaid volunteers in small blocks of flats can now sleep a little more easily at night.
Mary-Anne Bowring is Group MD of Ringley Chartered Surveyors arguably northern London's biggest manager of leasehold property. Based right here in Camden Town.

OVERVIEW OF THE DAEJAN CASE
The Daejan case, concerned £280,000 of major works at Queens Mansions in Muswell Hill. The leaseholders claimed that Daejan failed to follow the statutory consultation requirements and their application for a dispensation should bot be allowed.
As high as the Court of Appeal the Courts sided with the leaseholders who thought they could get out of paying all service charge bar £250 towards the works.
Then on the 6th March 2013 the Supreme Court ruled in favour of Daejan. The dispensation was not all, but most of the cost of the disputed major works.

President Lord Neuberger and two of four judges, found that whilst Daejan had failed to properly follow the consultation requirements the lessees were little prejudiced.
Two areas of potential prejudice were considered:

1) Had tthe leaseholders paid for inappropriate works,

2), Had the leaseholders paid more than would be appropriate.

Lord Neuberger held that the only evidence of prejudice lay in the choice of contractor. The decision therefore reduced the potentially recoverable costs of the works by £50,000 to from £280,000 to £230,000. Daejan is a new precedent and Courts and planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunals will now in future consider the degree of prejudice suffered by the leaseholders not how greatly the consultation requirements were breached. Essentially, it moves on decision making from the black or white 'dispensation or no dispensation from consultation' and considers the actual outcome and impact upon the leaseholders concerned. The industry is lauding this as a victory for common sense and fairness for both landlord and lessee. Daejan is a new precedent and will leave leaseholders thinking twice before thinking they can simply not pay. Future challenges will need to focus on the degree of prejudice suffered by the leaseholders rather than the degree to which the consultation requirements were breached.

There will be no more black or white 'dispensation or no dispensation from consultation' cases instead cases that consider the actual outcome and impact upon the leaseholders concerned. Part 57 of Lord Neuberger's judgement reads: if a landlord were to carry out major works to the value of £1m but failed to comply with the consultation requirements to a small extent, e.g. in 'accidentally not having regard to an observation', it would be 'grossly disproportionate' to refuse the landlord dispensation. Instead, the degree of prejudice caused by the failure must be considered and the leaseholders' contributions reduced accordingly.

So, the ruling does follow a great common sense approach which is welcomed but also provides that only by demonstrating no or minimal adverse effect on leaseholders can a breach of the requirements be defended.
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