COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
Lord Justice Carnwath and Mr N J Rose
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE PITCHFORD
LORD JUSTICE GROSS
| Daejan Investments Ltd
|- and -
|Benson & Ors
Philip Rainey QC (instructed by K&L Gates LLP) for the First to Fourth Respondents
James Fieldsend (instructed by Jaffe Porter Crossick LLP) for the Fifth Respondent
Hearing dates : 18/10/10
Crown Copyright ©
Lord Justice Gross:
i) By its March and August decisions, the LVT held that Daejan had failed to comply with the Service Charges (Consultation Requirements) (England) Regulations 2003, SI 2003 No. 1987 ("the Consultation Regulations"), in respect of works to be done at Queens Mansions, Muswell Hill ... "the works" and "Queens Mansions").
ii) By its August decision, the LVT declined to conclude that it was reasonable to dispense with the consultation requirements in the present case and so made no order for dispensation under s.20ZA(1) of the Landlord and Tenant Act 1985 as amended ("the Act"). The consequence is that Daejan failed in its claim to recover some £270,000 from the Respondents, five long leaseholders of flats in Queens Mansions, in respect of the works. Instead, pursuant to the statutory scheme (of which more below), Daejan's recovery from the Respondents was "capped" at £250 each. In reaching this conclusion, the LVT held that the financial effects of the grant or refusal of the application for dispensation on the landlord or tenant were irrelevant and were not to be taken into account. Further, the LVT held that Daejan's failure to comply with the Consultation Regulations had caused the Respondents "substantial" or "significant" prejudice.
iii) On appeal, the LT, whose constitution on this occasion included Carnwath LJ, Senior President, upheld the decision of the LVT. The LVT had been entitled both to conclude that Daejan had committed a "serious breach" and to refuse dispensation with the consultation requirements under s.20ZA(1) of the Act.
i) Are the financial consequences for the landlord or tenant relevant to the grant or refusal of dispensation under s.20ZA(1) of the Act? ("Issue (I): Financial consequences").
ii) Is the nature of the landlord relevant to the grant or refusal of dispensation under s.20ZA(1) of the Act? ("Issue (II): The nature of the landlord").
iii) What is the correct approach to prejudice allegedly suffered by a tenant in consequence of the landlord's failure to comply with the Consultation Regulations? ("Issue (III): Prejudice").
I return to these Issues below and will then deal with them in turn.
THE STATUTORY SCHEME
" One of the singular aspects of most long leases of flats is that the landlord covenants to repair and maintain the block but the tenants covenant to meet the cost through a service charge. Often, service charges extend beyond repair to cover improvements. How, when and by whom and at what cost the work is done is decided by the landlord, despite the fact that where leases are long, the tenants effectively own the block. (A 99 year term is usually thought to be worth c.99% of freehold value.) The landlord decides how to spend his tenant's money and at common law there is little control or basis for complaint by the tenants. Statutory consultation under ….[the Act]….fills this gap. Its importance must not be understated."
" 26. ….there 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 [of the Act] 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…..
27. One other general point needs to be made. The relevant provisions of ….[the Act]… do not prohibit a landlord from entering into whatever contract he pleases for the carrying out of works or the supply of services. They merely prevent him from passing on the cost of the works or services to the lessees unless he has satisfied the statutory requirements about price, quality and consultation….."
" (1)…..an amount payable by a tenant of a [dwelling] as part of or in addition to the rent –
(a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord's costs of management, and
(b) the whole or part of which varies or may vary according to the relevant costs."
" 19. Limitation of service charges: reasonableness
(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period –
(a) only to the extent that they are reasonably incurred, and
(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;
and the amount payable shall be limited accordingly. "
" 20. Limitation of service charges: consultation requirements
(1) Where this section applies to any qualifying works or qualifying long term agreement, the relevant contribution of tenants are limited in accordance with subsection (6) or (7) (or both) unless the consultation requirements have been either –
(a) complied with in relation to the works or agreement, or
(b) dispensed with in relation to the works or agreement by (or on appeal from) a leasehold valuation tribunal.
20ZA. Consultation requirements: supplementary
(1) Where an application is made to a leasehold valuation tribunal for a determination to dispense with all or any of the consultation requirements in relation to any qualifying works or qualifying long term agreement, the tribunal may make the determination if satisfied that it is reasonable to dispense with the requirements. "
" 20. Limitation of service charges: estimates and consultation
(1) Where relevant costs incurred on the carrying out of any qualifying works exceed the limit specified in subsection (3), the excess shall not be taken into account in determining the amount of a service charge unless the relevant requirements have been either –
(a) complied with, or
(b) dispensed with by the court in accordance with subsection (9);
and the amount payable shall be limited accordingly.
(9) In proceedings related to a service charge the court may, if satisfied that the landlord acted reasonably, dispense with all or any of the relevant requirements. "
It will be apparent that under these predecessor provisions, dispensation from the relevant requirements could only be granted if the landlord had acted reasonably: see too, Martin v Maryland Estates Ltd.  2 EGLR 53, at p.56, per Robert Walker LJ, as he then was. The current statutory provisions contain no such limitation; dispensation from the consultation requirements may be granted whether or not the landlord has acted reasonably.
" Stage 1
(1) Notice of intention Notice of intention to carry out qualifying works is given to each leaseholder and any recognised tenants' association ('RTA'). The notice must describe in general terms the proposed works, or specify a place and hours where the description may be inspected. The notice must state the reasons for the works, and invite written observations, specifying where they should be sent, over what period (30 days from the notice), and the end date. Further, the notice must contain an invitation for nominations of persons from whom the manager should obtain estimates. The landlord must have regard to written observations received during the consultation period.
(2) Estimates The landlord must seek estimates. (There are detailed rules as to seeking estimates from nominees of the tenants or RTA).
(3) The paragraph (b) statement The landlord then issues a statement (free of charge) setting out the estimated cost from at least two of the estimates and a summary of the observations received during the stage 1 consultation period, and his responses to them. The statement is issued with a notice (see below). If any estimates have been received from the leaseholders' nominees, they must be included in the statement. (The term 'paragraph (b) statement' is used by the regulations themselves, by reference to sub-paragraph (5)(b) in which this requirement is found).
(4) Notice accompanying paragraph (b) statement The statement must be sent out with a notice….., detailing where and when all of the estimates may be inspected and inviting each leaseholder and any RTA to make written observations on any of the estimates, specifying an address where they should be sent, the consultation period (30 days from the notice) and the end date.
(5) Regard to observations The landlord must have regard to written observations received within this second 30-day consultation period.
(6) Notification of reasons Unless the chosen contractor is a leaseholder's or RTA nominee or submitted the lowest estimate, the landlord must give notice within 21 days of entering into the contract to each leaseholder and any RTA, stating his reasons for the selection, or specifying a place and hours for inspection of such a statement…. "
" The issues in the present case turn on the requirements of Stage 2: steps (3), (4) and (5) in the above sequence. They relate principally to the following paragraphs in Schedule 4 Part 2 of the Regulations: step (3) paras 4(5)(b) and 4(9); step (4) para 4(10); step (5) para. 5. "
THE NATURE OF THE HEARING BEFORE THIS COURT
" (1) Subsection (2) applies if the relevant appellate court, in deciding an appeal under section 13, finds that the making of the decision concerned involved the making of an error on a point of law.
(2) The relevant appellate court –
(a) may (but need not) set aside the decision of the Upper Tribunal, and
(b) if it does, must either –
(i) remit the case to the Upper Tribunal or, where the decision of the Upper Tribunal was on an appeal ….from another tribunal…. , to the Upper Tribunal or that other tribunal…, or
(ii) re-make the decision. "
i) In the light of ss. 13 and 14 of the 2007 Act, this appeal cannot succeed unless this Court is satisfied that the decision of the LT involved the making of an error on a point of law.
ii) That said, the starting point on this appeal is the August decision of the LVT. It is the LVT – not the LT – which is entrusted by statute with determining whether there has been compliance with the Consultation Regulations and, if not, whether dispensation should be granted; the LT's function is appellate only. I am thus unable to accept that this is an appeal where this Court's consideration is effectively confined to a "review" of the decision of the LT – so that provided only the LT reached a decision it was entitled to reach, the appeal must be dismissed regardless of any flaws in the decision of the LVT. This Court must instead explore whether the LVT erred in law; but, in conducting that inquiry, it seems to me right that such weight as is appropriate should be given to the views of the LT as the designated and specialist appellate tribunal in this area. What weight is to be given to the LT's views must depend on the issue under consideration and all the circumstances of the individual case; this Court cannot be prescriptive in that regard.
i) If this Court is of the view that there was no error of law in the LVT's August decision, that would be an end of the matter, having regard to the dismissal of Daejan's appeal to the LT.
ii) If, conversely, this Court, having given such weight as it thought appropriate to the views of the LT, was nonetheless satisfied that the LVT had erred in law in its August decision, then it would seem to me very difficult to resist the conclusion that the LT had itself erred in law in deciding otherwise.
iii) Should the situation arise where this Court was of the view that a range of decisions was properly open to the LVT, then this Court would need to consider whether the decision to which the LVT had come was within the permissible ambit of that range. Once again, in considering that question, this Court would no doubt pause before rejecting the views of the LT on a "discretionary" decision of that nature.
THE FACTS AND THE KEY CONCLUSIONS OF THE LVT AND LT
" 56. ….by 11th August 2006, the leaseholders had already been informed that the contract had in effect been awarded to Mitre, and the statutory consultation process was for all practical purposes ended.
57. It was not disputed that at the pre-trial review hearing in early August 2006, it was stated by the legal representative of Daejan, that Mitre Construction had been awarded the contract. This was confirmed in a letter from Mr. Shevlin to Ms Marks dated 10th August 2006. In his oral evidence Mr. Shevlin said that this was a mistake, but it had never been corrected."
" Having considered the evidence as a whole, the Tribunal considers that Daejan:
1] failed to comply with the requirements of paragraph 4(5)(b)(ii).
A summary of the observations received and the landlord's responses thereto, were not properly included.
2] failed to comply with paragraph 4(5)(c), 4(9), 4(10) and 4(11)
All the estimates were not available for inspection at a place, during the hours and for the period specified in the notice. The relevant period of thirty days was cut short as it was indicated to the leaseholders that the contractor for the major works had been decided by the landlord. As a result they concluded that further representations were futile. The consultation process was for all practical purposes curtailed, and the invitation to inspect the estimates and make observations was rendered ineffective at that point.
3] failed to comply with paragraph 5.
The relevant period of thirty days was cut short before the leaseholders were provided with copies of all the estimates and had had an opportunity to make observations. The landlord did not have regard to the observations in respect of the estimates which the leaseholders may have made, had they had the opportunity to do so within the relevant period."
" The Tribunal considers that the cutting short of the consultation period, by indicating to the leaseholders that the decision had been made to award the contract to Mitre, both at the pre-trial review and in Mr. Shevlin's letter dated 10th August 2006, removed from the leaseholders the opportunity to make observations on the estimates to which [the] 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. "
" …..it is a matter of speculation what comments may or may not have been made by Ms Marks, Mr. Lapes and the other leaseholders and how this may have influenced the carrying out of the major works, had they had the opportunity to comment having seen all the estimates. The overall result of the landlord's failure to consult the leaseholders was that the Respondents lost the opportunity to make observations in respect of the estimates provided by contractors for the major works to Queens Mansions for which they would be contractually obliged to contribute substantial amounts of money…..The Tribunal considers that the fact that they did not have this opportunity amounts to significant prejudice. "
"104 …..the financial effects of the grant or refusal of the application for dispensation on the landlord or tenant are not to be taken into account."
The LVT thus concluded that it did not consider it reasonable to dispense with the consultation requirements in this case and declined to make an order for dispensation under s.20ZA of the Act.
" 32. Any process of consultation consists of giving information, inviting observations and taking those observations into account, and this is what paragraphs 1 to 6 make provision for. Information has to be given to tenants at three stages – when there is an intention to carry out works, when estimates have been obtained and when a contract has been entered into. Observations from tenants are to be invited at the first two stages. Those observations must be taken into account and the landlord's response to them must be given. This is the scheme of the provisions, which are designed to protect the interests of tenants; and whether it is reasonable to dispense with any particular requirements in an individual case must be considered in relation to the scheme of the provisions and their purpose.
33. The principal consideration for the purpose of any decision on retrospective dispensation must….be whether any significant prejudice has been suffered by a tenant as a consequence of the landlord's failure to comply with the requirement or requirements in question. An omission may not prejudice a tenant if it is small, or if, through material made available in another context and the opportunity to comment upon it, it is rendered insignificant. Whether an omission does cause significant prejudice needs to be considered in all the circumstances. If significant prejudice has been caused we cannot see that it could ever be appropriate to grant dispensation.
34. It was urged on us by Miss Holland that the consequences, for LBC and their tenants, was a material consideration, and indeed an important one. Also material, she suggested, was the unjustified benefit that the leaseholders here would receive in the event that dispensation was not granted. We can accept that the general nature of the provisions, with the £250 limit imposed as the consequence of section 20(1) and section 20ZA, forms part of the background to the consideration of reasonableness. We cannot accept, however, that the particular effects on the landlord or the tenant in the case in question are properly to be taken into account. It is in the very nature of the provisions that the landlord will suffer financially and the tenant will gain financially in the event that dispensation is not given. If it were material to take into account the degree to which the landlord might suffer or the tenant might gain, this would mean that a failure might achieve dispensation if the contract was a very large one but might not do so if the contract was small. We do not think that this could be the effect of the provisions. There would in any event be real practical difficulties for an LVT in dealing with a contention relating to the consequences for the landlord or other persons affected since the evidence relevant to these could be very far-reaching, time-consuming and costly to pursue and potentially inconclusive.
35. The requirements relating to estimates are clearly fundamental in the scheme of requirements. The landlord must obtain estimates (in the plural), must include in the paragraph (b) statement the overall estimate of at least two of them and must make all of the estimates available for inspection. The purpose is to provide the tenants with the opportunity to see both the overall amount specified in two or more estimates and all the estimates themselves and to make on them observations, which the landlord is then required to take into account. In the present case stage 2 was completely omitted. It was a gross error, which manifestly prejudiced the leaseholders in a fundamental way. "
"40. …..The power given to the LVT is to dispense with the consultation requirements, not with the statutory consequences of non-compliance. The principal focus, therefore, must be on the scheme and purpose of the regulations themselves. If Parliament had intended to give a power to remove or mitigate the financial consequences, it could easily have done so……The potential effects – draconian on one side and windfall on the other – are an intrinsic part of the legislative scheme. It is not open to the tribunal to rewrite it…… "
For the same reasons, the LT was not attracted to Daejan's alternative submission – or offer – of allowing a deduction from the charge rather than refusing dispensation in its entirety.
" ….the tribunal should keep in mind that their purpose is to encourage practical co-operation between the parties on matters of substance, not to create an obstacle race. If the non-compliance has not detracted significantly from the purpose of the regulations and has caused no significant prejudice, there will normally be no reason to refuse dispensation….."
Tribunals should use their own common sense to examine submissions as to the significance of non-compliance, given the parties' financial interests in playing such significance up or down as the case may be.
" 43. Finally, we emphasise the need to consider these issues having regard to the particular facts of each case, including the nature of the parties and their relationship. For example, the tribunal may reasonably take a more rigorous approach to non-compliance by a local authority or commercial landlord, than to a case where the landlord is simply a group of lessees in another form….."
"44. ……We have no doubt that the LVT was correct to find failures of compliance at Stage 2, but it is equally clear to us that for the most part these failures were minor and did not cause any significant prejudice to the lessees…."
" 50. …..provided that, once they received the estimates, they had an appropriate opportunity to consider them and to raise any significant points that might emerge from them, and that they were taken into account before a final decision was made."
" 57. …..in particular whether the estimates did in fact disclose any new material, and whether the lessees would have had anything new to say."
The LT remarked on the LVT dismissing this inquiry as speculative, echoing the language used in Grafton. The LT, however, underlined that the circumstances in Grafton were different: there were many more lessees, not all represented by the main group and it could not be said that all the same information had been made available in another form.
" 61. We have not found this an easy case. Although the LVT was entitled to find a material breach of the regulations, the evidence of actual prejudice is weak. However, we remind ourselves that we are reviewing their decision, not substituting our own judgment. It is common ground that we can only interfere if the LVT has gone wrong in principle, or left material factors out of account, or its balancing of the material factors led it to a result which was clearly wrong. The LVT was in our view entitled to regard this as a serious breach, rather than a technical or excusable oversight. It involved a failure by a corporate landlord to ensure that those responsible in their office for the stage 2 consultation properly understood its requirements and its significance. The result was that the lessees' statutory right at stage 2, to make further representations following examination of the estimates, was nullified.
62. As to prejudice, the tribunal was entitled to start from the position that, given the seriousness of the breach, it was not for the lessees to prove specific lack of prejudice. It was enough that there was a realistic possibility that further representations might have influenced the decision. We bear in mind that, as is clear from the tender report, Mr. Harris' decision to recommend Mitre in preference to Rosewood was a very close one. Although the issue was raised in Ms Marks' letter of 14 July, she made clear that it was an interim comment, pending access to full information. The lessees were entitled to proceed on the basis that they would have a further opportunity to present their case in its strongest terms and in the light of the full information; and that, given the marginal difference between the two tenders, they might be able to persuade the landlord to change its mind. In these circumstances, we are unable to say that [the] LVT has erred in principle, or that its decision was clearly wrong. The financial consequence may be thought disproportionately damaging to the landlord, and disproportionately advantageous to the lessees, but, as we have said, that is the effect of the legislation. "
ISSUE (I): FINANCIAL CONSEQUENCES
" There is clearly a difference between a case where there is a modest degree of prejudice to the tenants and a huge financial loss to the landlord, and one where there is a modest degree of prejudice to the tenants and a modest financial loss. "
i) The need to undertake emergency works;
ii) The availability, realistically, of only a single specialist contractor;
iii) A minor breach of procedure, causing no prejudice to the tenants.
It may be noted that none of these examples undermines the integrity or importance of the consultation process.
ISSUE (II): THE NATURE OF THE LANDLORD
i) For my part, I do not think that the LT was saying more than (as Sedley LJ observed in argument) "context is everything"; that is certainly the impression created by the opening sentence of . If so, the observations are unexceptionable and this Issue simply falls away.
ii) If it is necessary to go further, then cases can be envisaged where a less rigorous approach may be justified in respect of lessee owned/controlled landlords. So, where the lessees are their own landlord, the consultation requirements have to be considered against the background that they are spending their own money; it may no longer be the case of X spending Y's money. Furthermore, in such a situation, there may be a greater likelihood of canvassing the relevant information by way of informal or extra-statutory consultation.
iii) Even, however, if the LT was in error in contemplating a less rigorous approach in (some) cases where the tenants are their own landlord, the point does not go anywhere. It does not follow that the LT erred in holding that the consultation requirements were to be applied according to their terms in the case of a corporate (or local authority) landlord. There is certainly no suggestion in its decision that the LT applied a more rigorous standard than that provided for in the statute.
iv) Finally, if error there was in this regard, it was an error on the part of the LT – there is no hint of any such "error" in the August decision of the LVT. For this reason too, as it seems to me, the point goes nowhere as a self standing ground of appeal.
ISSUE (III): PREJUDICE
i) As already emphasised, a proper consultation process is of the essence of this statutory scheme, devised as it is to protect the interests of tenants such as the Respondents.
ii) In my judgment, the LT and the LVT were entirely right to treat the curtailment of the consultation process as a serious failing. It is striking that the observation of the Daejan legal representative at the LVT hearing in early August 2006, that Mitre had already been awarded the contract for the works, was never corrected; to the contrary, it was confirmed in Mr. Shevlin's letter of the 10th August, 2006. Even assuming this failing to be the result of a lack of understanding or ineptitude rather than a flouting of the consultation requirements, it is impossible to view it as a technical, minor or excusable oversight.
iii) Against this background, I can detect no error of law or misdirection in the LVT's refusal to speculate (at  of its August decision) as to what might have been the outcome had the consultation been allowed to run its proper course. Indeed, given the seriousness of non-compliance in this case, I would endorse the LVT's approach of treating the Respondents' loss of opportunity (to make further representations and have them considered) as itself amounting to significant prejudice. On any view, as it seems to me, that was a conclusion to which the LVT was entitled to come.
iv) This view is reinforced by reflection on the rival contention advanced by Daejan. In many cases, a landlord could readily assert that further consultation would have made no difference. Disproving such assertions would inevitably give rise to an invidious exercise in speculation, quite apart from difficulties of proof (if and insofar as a burden rests on the tenants in this regard – see below). While there will no doubt be some instances where a landlord may demonstrate that a failure to comply with the consultation requirements was, on the facts, such as to make no difference and to give rise to no prejudice to the tenants, arguments of this nature need careful scrutiny; there would otherwise be a risk of undermining the purpose of the statutory scheme or, as Pitchford LJ remarked in argument, a "premium on recalcitrance". Suffice to say that on the facts of this case, involving a serious failing on Daejan's part, I am not at all attracted to the argument.
v) With respect to Mr. Dowding's argument, I do not see a tension between the LVT's conclusion (that the curtailment of the consultation itself amounted to significant prejudice) and the observations of the LT, already referred to, as to the importance of prejudice to the tenants, in Eltham, Grafton and in this case. The conclusion of the LVT involves a finding that there has been significant prejudice. Moreover, given that the LVT found as a fact that the extra-statutory consultation had not made good Daejan's failure to comply with the Consultation Regulations, nothing turns on the difference between the number of tenants in this case as compared with the much larger number in Grafton.
vi) Accordingly, the LVT was amply justified in refusing dispensation in this case. Its conclusion betrays neither any error of law nor perversity.
i) First, in agreement with both the LT (at ) and the LVT (at ), I do not think that Daejan's offer of a £50,000 "discount" off the price of the works, provides a ground for the grant of dispensation. I incline to the view that, as the LT reasoned, the statutory scheme does not provide for such an alternative; however, even if it was open to Daejan to avert the refusal of dispensation by making a suitable offer of this nature, I agree with the LVT that the only offer on the table did not suffice.
ii) Secondly, there was some debate as to the burden of proof with regard to prejudice suffered by the Respondents. As will be apparent, it did not seem to me that the outcome in this appeal turned on the incidence of the burden of proof. Insofar as it rested on the Respondents and as already discussed, they have satisfied the burden. I am accordingly reluctant to express a concluded view on a point, not without complexity, which does not require resolution in this case.
iii) Thirdly, in the light of the decision to which I have come on the curtailment of consultation, it is unnecessary to say anything of the additional points canvassed in the Respondent's Notice.
Lord Justice Pitchford:
Lord Justice Sedley: