A Landlord's obligation of consultation in relation to service charges.

One of the main features of a long lease of a flat is that the landlord has obligations to repair and maintain the block and the tenant has to meet those costs by way of a service charge.  This could place the tenant in a vulnerable position if the landlord were able to set the charges he wishes.

With this in mind, parliament introduced provisions under the Landlord and Tenant Act 1985 ("the Act") to help protect tenants from having to pay excessive or unreasonable charges for work and services not carried out to a reasonable standard. There is also a requirement under section 20 of the Act for landlords to consult with tenants about proposed building works and service contracts. The specific consultation requirements are found in the Service Charges (Consultation Requirements) (England) Regulations 2003. These Regulations not only apply in circumstances where the landlord is undertaking repair work, but can apply to a wide variety of building, service and maintenance contracts.

If a Leaseholder challenges the charges and the landlord cannot show that he has consulted properly, he will be limited to recovering maintenance or service charges of a maximum of £250 per tenant. This can leave a landlord severely out of pocket.

Landlords do have a saving provision if they fail to follow the consultation procedure correctly. Section 20ZA of the Act allows Leasehold Valuation Tribunal (LVT) to exercise its discretion to enable a landlord to claim full service charges if he has made minor mistakes in the consultation process effectively if the landlord can show he has acted in the spirit of the Regulations. 

The recent case of Daejan Investments led v Benson & Others (2011) confirms the position regarding the consultation requirement. In this case, the landlord was the owner of a block of flats that required major works. The costs of the works were recoverable from the tenants under the service charge obligations in their long leases. In accordance with the Regulations, the landlord sent his tenants a notice of intention to carry out these works.  He then provided the tenants with only one of four tenders by contractors before serving notice that the contract had been awarded to that contractor and stating that the consultation period had ended. The landlord was seeking payment of £270,000 in service charges from his tenants for the works.

As the landlord failed to fully comply with the Regulations an application was made to the LVT under s.20ZA of the Act for leave to dispense with the consultation requirements. The tribunal refused to dispense with the consultation requirements and the decision was appealed.

The Court of Appeal held that it would not be reasonable to dispense with the consultation requirements in this instance and that the landlord's failure to follow the statutory requirements was a serious failing. The landlord was therefore unable to recover the £270,000 and could only claim the statutory payment of £250 in service charges from each tenant.

The court held that when considering whether to dispense with the consultation requirements, the financial consequences for the landlord or tenant to the grant or refusal of dispensation under s.20ZA(1) were irrelevant. The nature of the landlord, however, was relevant - a more rigorous approach can be justified in respect of corporate landlords. The court also said that consideration of whether the tenant would suffer significant prejudice if the consultation requirements were dispensed of is of first importance. This was the deciding factor in this instance.

This case must be of real concern to Landlords and their agents as it severely limits the ability of a landlord to rely on section 20ZA when mistakes are made in the consultation process. If mistakes are made when following the consultation requirements then the consequences  could prove to be extremely costly!