In this Legal Update we focus on two cases that have a bearing on when dispensation might occur and how section 20C might adversely affect a landlord generally and in relation to even a successful dispensation claim.

Dispensation - Aster Communities v Chapman and others [2020] UKUT 177 (LC)

Where a Landlord is looking to undertake works at a development, the cost of which it will be looking to charge to the Leaseholders, and where the Leaseholder’s individual liability is more than £250, the Landlord must have either

1. Completed fully the consultation procedure pursuant to section 20 Landlord and Tenant Act 1985 (“s.20”) before commencing those works or,

2. Obtained dispensation from the Court or the First Tier Tribunal (“FTT”) from the consultation procedure.

In default of compliance the Landlord may be prevented from recovering more than £250 from each Leaseholder.

Since Daejan Properties Ltd v Benson (2013) it has been generally considered that so long as the Court or Tribunal have due regard to, and dependent upon, the level of any prejudice suffered by the Leaseholders through the Landlord’s failure to consult, or to do so fully in compliance with the requirements of s.20, dispensation is likely to be obtained. Whilst the Landlord in any dispensation claim is likely to have to bare its own costs and possibly some of the Leaseholder’s costs too, dispensation is likely to be the outcome. We focused on the decision in Daejan in our Legal Update from June 2019 called “Dispensation from Major Works Section 20 consultation” (see here).

In the case of Aster Communities v Chapman and others concluded in the Upper Tribunal (“UT”) last month, the decision was to uphold the FTT’s imposition of conditions when granting the Landlord (“LL”) dispensation from the consultation requirements.

LL had undertaken works including the total replacement of balcony asphalt on five low rise apartment blocks without consulting on any part of that work. In response to the LL’s application for retrospective dispensation the FTT ordered LL:

1. To pay the Lessees’ costs of instructing an expert to advise on the necessity of replacing all the balcony asphalt;

2. To pay the Lessees’ costs of the dispensation application itself; and

3. That no part of the LL’s legal costs could be recovered through the service charge (s.20C).

LL appealed to the UT on the first two points and argued that because the Lessees didn’t obtain an expert assessment for the FTT to show that they would suffer prejudice from the failure to include asphalt replacement in the consultation, they hadn’t shown prejudice, so weren’t entitled to demand conditions on the grant of dispensation and couldn’t recover the costs of an expert they hadn’t yet instructed. The UT held that:

• a Lessee can discharge that factual burden of proving prejudice without calling any evidence;

• the dispensation application is not heard in a vacuum, so the FTT should have regard to what has happened previously between LL and Lessee, and what is likely to happen in the foreseeable future;

• the Lessee should not be required to prove that the proposed works are inappropriate or too expensive before the FTT imposes conditions, otherwise the process of dispensation would be frustrated;

• conditions requiring LL to pay money to Lessees are not limited to expenses already incurred in the application, but can include future costs, such as the instruction of an expert.

Accordingly, the UT refused to interfere with the conditions and the appeal was dismissed.

Whilst this is good news for Leaseholders, it represents a stark warning to Landlords that despite the perception since Daejan that dispensation was increasingly a formality, it is not without potential cost and, in some cases, not insubstantial cost at that.

This decision highlights that in a situation where there is a dispute over the necessity or extent of works, even where the Leaseholders don't have initial expert evidence on this, the Tribunal may order the costs of expert investigation to be paid by the Landlord, at least in circumstances where the Landlord had not established clearly the necessity or scope of works.

This case highlights the importance of fully complying with the requirements of the Section 20 consultation process and the cost consequences that can arise should the process not be followed correctly.

Section 20C orders - Sandoz and others v Francis and another [2020] UKUT 131 (LC)

Long leases may provide that the Landlord is entitled to recover, through the service charge, its legal costs arising out of an action insofar as those costs cannot be recovered from a defaulting Leaseholder individually. The Court or Tribunal can order under section 20C, Landlord and Tenant Act 1985 (“S.20C”) that the Landlord cannot rely on that right so as to prohibit recovery of a proportion, or all, of the costs from those parties to the application in which that order is made. Accordingly, even where the order is made, the Landlord can still place the costs against the service charge and recover the respective proportions from all Leaseholders, save for those parties named in the application. The shortfall will need to be covered by the Landlord.

The appellants in this case were Leaseholders of properties of which the respondents were the Freeholders. In previous proceedings in the FTT, an order was made disallowing certain service charges for the period 2008-2012. Additionally, the FTT made an order under s.20C prohibiting the freeholder from recovering costs “in respect of proceedings relating to the service charge from 2008 to 2012” . In 2015, the Landlord engaged an accountant to reconcile the service charge accounts for the period 2010-2012 so as to give effect to the earlier FTT decision. The Landlord subsequently sought to recover the professional fees of the accountant from the Leaseholders by way of a service charge. The Leaseholders contended that the costs fell within the terms of the s.20C order and were not payable by them.

The FTT found for the Landlord.

The UT allowed an appeal and found for the Lessees on the basis that the accountant’s fees were incurred in connection with the period for which the s.20C order applied and were therefore not recoverable.

In litigation there is never any guarantee that the Landlord will recover all, some or even any of the legal costs it incurs in pursuing a Leaseholder for breach of lease. That can be the case even where the lease/transfer provides a strong contractual provision and obligation on the Lessee/Owner to pay such costs. Any award of costs is entirely at the discretion of the Court or Tribunal and in some cases no order for costs will be made. Notwithstanding the above, KDL Law always try to recover all costs from the defaulting Leaseholder, even when the contractual provision is not strong, and we are, more often than not, successful in doing so!

Should you have any questions in relation to the above, then please do not hesitate to contact Susan Fox, Senior Litigation Executive, on Susan.Fox@KDLLaw.com or 01435 897 297.

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