Consultation Process: Decisions In Cases B, D, O and R
Summary: The consultation requirements in respect of qualifying long term agreements (“QLTAs”) do not apply to agreements entered into in relation to buildings which have not yet been constructed or which are not let at the time of the agreement.
The first claimant (BDW) constructed an estate which included four residential blocks of flats. Three of the blocks were held on a long lease to BDW, and two of those blocks were held on an underlease granted to the defendant. BDW held the freehold interest in the fourth block. BDW entered into an agreement with a third party, Utilicom Ltd, under which Utilicom would provide hot water (for space heating and domestic water services) and electricity to each of the residential flats on the development and BDW would pay a monthly charge. Those costs were ultimately invoiced to the lessees. At the time the agreement was entered into there were no lessees in any of the flats.
If the consultation requirements did apply, then since consultation was impossible in the absence of any tenant, BDW would have to seek a dispensation under s.20(1) of the 1985 Act, failing which it could not recover more than the statutory cap (£100) from any later tenant. BDW submitted that the section could not apply because the definition of a QLTA in s.20ZA referred to “the landlord”, denoting an existing tenancy. The tenants argued that “the landlord” had to include future or prospective landlords, since otherwise there would be a major gap in the legislation; that there was provision for a tribunal to dispense with consultation if it was impossible; and that the 2003 Regulations assumed that the 1985 Act did apply to buildings not yet in existence or not yet let and the 1985 Act was to be construed consistently with the Regulations.
(N Strauss QC): The consultation requirements had no application to the instant case. Since “landlord”, “tenant”, “lease” and “tenancy” were defined in s.30 and s.36 of the 1985 Act in conventional terms, it seemed inconceivable, if it was intended that the legislation apply to agreements entered into when the property was not built or let, that the draftsman would not have so provided in clear terms. The section does not say that “the landlord” is someone who may in future become a landlord and there was no proper basis for stretching its meaning. Further, although landlords could easily avoid the requirement to consult by entering into long-term agreements before letting flats, tenants would still have the protection of s.19 if costs were unreasonable. Also, if an agreement was in place, tenants could enquire about the level of charges before they entered into a lease.
The Regulations and the consultation paper issued by the Office of the Deputy Prime Minister on the proposed regulations in August 2002 (which contains the same provision that became Regulation 3(1)(d) except that there was no exemption for agreements for less than 5 years) were admissible as an aid to interpretation on the ground that they were sufficiently contemporaneous with the 1985 Act. It was undeniable that reg.3(1)(d) assumed that the 1985 Act did apply to agreements entered into where there were no tenants. Where, however, as in the instant case, there was little doubt as to the meaning of the Act and considerable stretching of the language was required to produce an ambiguity, any admissible documents were likely to be of very little weight. Neither the Regulations nor the consultation document had any persuasive power as an aid to the interpretation of the Act, and did not come remotely near dislodging what was otherwise the clear meaning of s.20ZA.
This decision accords with plain common sense. Notwithstanding the failure of the Regulations to exempt such circumstances from the requirements, it would be absurd to interpret the consultation provisions as imposing an obligation to consult with non-existent consultees. It may be prudent for developers to enter into long term agreements before granting leases to tenants so as to avoid the consultation requirements.
BIRMINGHAM COUNCIL v KEDDIE  UKUT 323 (LC) Crosspite Ltd v Sachdev  UKUT 321 (LC): Consultation Process Not Curtailed
Summary: (1) A stage 2 consultation notice which notified the tenants of the landlord’s intention to instruct its preferred contractor was merely notice of a provisional intention so that the lessees were not put off from making observations. In the circumstances, the consultation process had not been curtailed. (2) It is not essential to specify the date on which the relevant consultation period ends, it is sufficient if the date is made clear (in this case by specifying the number of days from the notice by which the lessees had to respond).
In these cases HHJ Gerald makes it clear that LVTs do not have jurisdiction to determine issues not identified by the parties (in their statements of case). In exceptional cases, it may be appropriate for the LVT to raise issues not raised by the parties but which fall within the broad scope of the application, not something which arises outside it. In those cases, the LVT must give the parties a fair opportunity to deal with the issue.
DAEJAN INVESTMENTS LTD v BENSON  UKSC 14;  1 W.L.R. 854: Addendum Judgement By The Supreme Court
Summary: The Supreme Court has handed down an addendum judgment on the form of order; the liability to pay the (tenants’ and the landlord’s) costs of the hearing regarding compliance with the consultation requirements; the interaction between conditions relating to costs and an order pursuant to s.20C; and the date dispensation takes effect.
Facts: The Supreme Court handed down judgment ( UKSC 14) on 6 March 2013, granting the landlord dispensation on conditions. It then invited the parties to file submissions on the form of order and costs.
Decision: Both parties agreed that the Supreme Court’s judgment ( UKSC 14) required the landlord to pay the tenants’ costs of the dispensation hearing. The parties disputed the wording of the condition to be included in the court’s order. The landlord argued that the tenants were only entitled to their costs in the LVT “insofar as those costs were incurred in reasonably testing the landlord’s claim for dispensation or in reasonably canvassing any prejudice which the tenants might suffer”, whereas the tenants submitted that their costs should be recoverable from the landlord insofar as they were incurred “in reasonably investigating and establishing non-compliance with the Regulations, investigating or seeking to establish prejudice, and investigating and challenging the landlord’s application for dispensation.”
The Supreme Court preferred the tenants’ (wider) formulation and clarified that the landlord was required to pay the tenants’ costs in reasonably investigating and establishing non-compliance with the consultation requirements as a condition of dispensation, even though these costs were incurred in earlier separate proceedings.
The Supreme Court also clarified that the landlord should be prevented from recovering its costs in resisting a determination that it failed to comply with the consultation requirements as a condition of dispensation. Notwithstanding these conditions, it was also appropriate to make an order pursuant to s.20C.
As regards the effective date of dispensation, the Supreme Court held that dispensation will take effect once all conditions subject to which the dispensation is granted have been determined (and, where appropriate, satisfied). This may be important, as in the instant case, for the purpose of determining when interest on the late payment of service charges becomes payable.
Comment: The Court’s Order is likely to be used by parties and tribunals as a precedent as to how to give effect to decisions granting dispensation on conditions.
DAEJAN INVESTMENTS LTD v BENSON  UKSC 14;  1 W.L.R. 854: Landlord Granted Dispensation On Terms
Summary: By a majority (3:2) the Supreme Court overruled the decisions of all lower Courts and tribunals and granted the landlord dispensation on terms.
Facts: The landlord was the freehold owner of a building comprised of shops and seven flats, five of which were held by the tenants under long leases which provided for the payment of service charges. The landlord gave the tenants notice of its intention to carry out major works to the building and appointed a firm of surveyors (REA), at the tenants’ request, to prepare a revised specification of works and act as contract administrator. Four tenants nominated Rosewood Building Contractors as their preferred contractor. The landlord obtained four priced tenders for the work and instructed REA to prepare a tender report. The report stated that the choice was between Rosewood and Mitre (the landlord’s preferred contractor). The landlord gave the tenants a copy of Mitre’s tender and the tender report and the tenants requested copies of the other tenders; they particularly wanted to see Rosewood’s tender. The tenants then issued a s.27A application for a determination, inter alia, that the consultation process had not been complied with and that the cost of the major works was not reasonable. The landlord served a stage 2 notice which stated that the end of the relevant period for making observations was 31 August 2006. At a PTR in the LVT proceedings on 8 August 2006 (i.e. before the end of the relevant period), the landlord’s representative stated that the contract had already been awarded to Mitre. The LVT found that it was futile for the tenants to make further observations and that the landlord had failed to comply with the Consultation Requirements. The tenants’ contribution to the cost of the works (which was around £280,000 under the terms of their leases) was capped at £1,250 (£250 each). The landlord applied for dispensation pursuant to s.20ZA(1). It argued, inter alia: (i) that the failure to comply with the Consultation Requirements had not caused the tenants to suffer significant prejudice; (ii) that the financial consequences on the landlord of not granting dispensation was a relevant factor; and (iii) the offer to compensate the tenants for any prejudice by reducing the cost of the works by £50,000 was also relevant. At the dispensation hearing, the tenants were unable to identify what comments they would have made had they seen the Rosewood tender
First Instance: The LVT held that “the cutting short of the consultation period by indicating that Mitre had been awarded the contract … removed from the leaseholders the opportunity to make observations on the estimates … the fact that they did not have this opportunity amounts to significant prejudice”. It rejected the landlord’s offer to reduce the cost of the works by £50,000.
The Upper Tribunal followed Grafton Way and held that the financial consequences of refusing dispensation was not a relevant consideration. It was not an easy case because “the evidence of actual prejudice is weak”. Nonetheless, the LVT was “entitled to regard this as a [case involving a] serious breach, rather than a technical or excusable oversight”, as the tenants’ “right to make further representations [at stage 3] was nullified”. It was not for the tenants to show prejudice, but for the landlord to show that they had suffered no prejudice, as a result of the landlord ‘s default, and it was “enough that there was a realistic possibility that further representations might have influenced” the landlord’s decision to engage Mitre rather than Rosewood. The LVT was not entitled to accept a landlord’s offer to reduce the amount of the charge to reflect its view of any prejudice suffered.
The Court of Appeal upheld the LVT’s decision on essentially the same grounds as the UT. Gross LJ held that significant prejudice to the tenants is a consideration of first importance in exercising the dispensatory discretion under s20ZA(1) and the landlord’s failure in this case constituted a serious failing and did cause the tenants serious prejudice. This was not a technical, minor or excusable oversight. The LVT was entitled not to speculate on what would have happened if there had been no breach, on the ground that the tenants’ loss of opportunity to make further representations and have them considered itself amounted to significant prejudice.
Gross LJ doubted that the LVT would have been entitled to accede to the landlord’s offer to reduce the chargeable amount by £50,000, and that, anyway, the LVT was entitled to reject that proposal
Issues: In the Supreme Court, Lord Neuberger identified three questions of principle:
(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.
Decision on Appeal: By a majority (3:2) the Supreme Court overruled the decisions of all lower courts and tribunals and granted the landlord dispensation on terms. Lord Neuberger (with whom Lord Clarke and Lord Sumption agreed) gave the leading judgment. Lord Hope and Lord Wilson delivered powerful dissenting judgments.
The Proper Approach To Dispensation: Sections 20 and 20ZA are intended to reinforce and to give practical effect to the purpose of section 19(1), namely:
(i) ensuring that tenants of flats are not required to pay more than they should for works/services which are necessary and are provided to an acceptable standard (19(1)(a)); and
(ii) ensuring that tenants of flats are not required to pay for unnecessary works/services or works/services which are provided to a defective standard (s.19(1)(b)).
There is no justification for treating consultation or transparency as appropriate ends in themselves (Lewison J was wrong to hold so in Paddington Basin Developments Ltd v West End Quay Ltd  EWHC 833 (Ch),  1 WLR 2735).
The main, indeed normally, the sole question for the LVT when considering how to exercise its jurisdiction in accordance with section 20ZA(1) is the real prejudice to the tenants flowing from the landlord’s breach of the Consultation Requirements.
The financial consequences to the landlord of not granting a dispensation is not a relevant factor. The nature of the landlord is not a relevant factor.
It is not appropriate to distinguish between “a serious failing” and “a technical, minor or excusable oversight”, save in relation to the prejudice it causes.
Dispensation should not be refused solely because the landlord seriously breached, or departed from, the Consultation Requirements. Grafton Way may have been rightly decided but, if so, it was for the wrong reasons.
Conditional Dispensation: The LVT has power to grant a dispensation on such terms as it thinks fit – provided that any such terms are appropriate in their nature and their effect.
Thus, the LVT can require a landlord to reduce the recoverable cost of the works by an amount equivalent to the additional cost of the works caused by the failure to comply with Consultation Requirements.
The LVT has power to impose a condition that the landlord pays the tenants’ reasonable costs (including surveyor and/or legal fees) incurred in connection with the landlord’s application under section 20ZA(1).
The Approach To Prejudice: The legal burden of proof remains throughout on the landlord. The factual burden of identifying some ‘relevant’ prejudice that they would or might have suffered is on the tenants. ‘Relevant’ prejudice is given a narrow definition; it means whether non-compliance with the Requirements has led the landlord to incur costs in an unreasonable amount or to incur them in the provision of services, or in the carrying out of works, which fell below a reasonable standard, in other words whether the non-compliance has in that sense caused prejudice to the tenant.
Lord Neuberger anticipates that LVTs will view 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. The more egregious the landlord’s failure, the more readily an LVT would be likely to accept that the tenants had suffered prejudice.
Where the tenants were not given the requisite opportunity to make representations about proposed works to the landlord, the tenants have an obligation to identify what they would have said, given that their complaint is that they have been deprived of the opportunity to say it.
Once the tenants have shown a credible case for prejudice, the LVT should look to the landlord to rebut it.
The Dissenting View: In strong dissenting judgments, Lord Hope and Lord Wilson held that Lord Neuberger’s conclusion that the gravity of the landlord’s non-compliance with the Consultation Requirements is relevant to dispensation not of itself but only insofar as it causes financial prejudice to the tenant “subverts Parliament’s intention”. Lord Neuberger’s conclusion that real prejudice to the tenant should normally be the sole consideration for the LVT departs from the width of the criterion (“reasonable”) which Parliament has specified. Lord Neuberger’s inevitable further conclusion that the “factual” burden lies on the tenant to prove such prejudice, as a matter of reality, reverses the burden of proof which Parliament has identified. The hypothetical exercise in which Lord Neuberger’s conclusions require the parties to engage and the LVT to adjudicate upon fails to recognise the complications in comparing estimates. It is very doubtful whether a tenant can often discharge the burden which Lord Neuberger has cast upon him. A serious failure of the landlord does not need to be described as amounting to “prejudice” to the tenant but the LVT should weigh the gravity of the non-compliance with a consultation requirement in determining whether to dispense with it along with any prejudice in the narrower financial sense (which will often be a matter of prime importance).
Comment: Many landlords will welcome this decision. Dispensation is likely to be granted in far more cases, albeit on terms. Landlords are likely to have to pay their own costs of the application for dispensation and the tenants’ reasonable costs in so far as they reasonably tested its claim for a dispensation and reasonably canvassed any relevant prejudice which they might suffer but it is difficult to envisage many situations whereby a tenant’s contribution to the cost of major works will be capped at £250.
Tenants will be able to identify what they would have said with the benefit of hindsight and assisted by a surveyor. If and to the extent that tenants establish relevant (financial) prejudice, dispensation will be granted on condition that the recoverable costs are reduced to compensate such prejudice.
OM PROPERTY MANAGEMENT LTD  UKUT 9: Breaches Of Consultation Requirements Do Not Cause Prejudice
Summary: Two breaches of the consultation requirements had not caused lessees to suffer any relevant prejudice in respect of the scope or cost of the major works. Accordingly, dispensation was granted on condition that (i) the landlord pays the cost of instructing counsel incurred by the leaseholders who participated in the proceedings before the LVT on the landlord’s application for dispensation; and (ii) the landlord shall not include in the service charge its costs of the appeal or its application for dispensation.
R (ON THE APPLICATION OF SPAUL v UPPER TRIBUNAL (ADMINISTRATIVE APPEALS CHAMBER), UNREPORTED 22 MAY 2013 (QB) (LEGGAT J): Requisite Consultation Notice On Major Works Costs Not Received By Lessee
Facts: The managing agent of a building in London applied to the LVT for a determination that the costs to be incurred on major works were reasonable. In accordance with the Leasehold Valuation Tribunals (Procedure) (England) Regulations 2003 reg.5 the LVT had sent notice of the application to those named as respondents, including the claimant lessee. The notice had been sent to the address provided by the managing agent which was the claimant’s flat in the building. The lessee’s case was that he had not received the requisite notice of consultation under s.20 of the 1985 Act, nor notice of the application to the LVT. He said that he did not live at the flat and that the managing agent knew that, and knew his proper address which it had not given to the LVT. Furthermore, the failure to give notice of the consultation and of the application was a “substantial procedural defect” justifying the grant by the Upper Tribunal of permission to appeal against the decision of the LVT, within the relevant Interim Practice Directions and Guidance of the Upper Tribunal (Lands Chamber). The Upper Tribunal refused permission to appeal on the ground that there was nothing to suggest that the managing agent knew that the lessee’s address was not at the building and that the managing agent knew what that address was. The lessee applied for judicial review of the Upper Tribunal’s decision refusing his application for permission to appeal from a decision of the LVT on the ground that, if the Upper Tribunal had properly considered the evidence, it would have been bound to decide that there were reasonable grounds for finding that there had been a substantial procedural defect in the decision of the LVT.
Decision: In dismissing the application, Leggatt J held that the evidence presented to the Upper Tribunal on the critical issue was wholly unsatisfactory and there was no witness statement to indicate what that material was. It appeared that the application for permission to appeal had been presented to the Upper Tribunal on the incorrect basis that the application to the LVT was by the landlord rather than by the managing agent. His case was that he had informed the landlord and the managing agent of his change of address and he said that there had been some evidence to that effect before the Upper Tribunal in the form of a letter. However, he failed to show that that letter had been included in the material before the Upper Tribunal. In any event the managing agent’s case in opposition to the lessee’s application for permission to appeal contained a detailed rebuttal of the allegation that the managing agent was aware of the lessee’s address. There was compelling contemporaneous documentary evidence that the lessee had been asked by the managing agent for an address for correspondence apart from the flat and that none had been forthcoming. In the circumstances, although the Upper Tribunal might have gone too far in stating that there was nothing to indicate that the managing agent knew that the lessee had an address other than the flat and what that address was, it could not possibly be said that on the material before the Upper Tribunal it was not entitled to conclude that there were no reasonable grounds for asserting that there had been a substantial procedural defect. The lessee’s claim for judicial review failed.