Leaseholders defeat landlord trying to dodge consultation over a section 20 dispute in Court of Appeal

Liam Spender is a Trustee of the Leasehold Knowledge Partnership. Personally affected by the cladding scandal, Liam is a Solicitor-Advocate and Senior Associate at Velitor Law practising commercial litigation and arbitration in the City of London. Views in this article are personal and do not constitute legal advice.

On 7 May 2021 the Court of Appeal handed down its judgment in the closely watched case of Aster Communities v. Kerry Chapman and Others [2021] EWCA Civ 660 (https://www.bailii.org/ew/cases/EWCA/Civ/2021/660.html).

The LKP has previously covered the Upper Tribunal decision in this case here:

Is ‘Chapman’ the new ‘Daejan’?

And here:

Andover asphalt major works war sees landlord forced to pay for leaseholders’ expert

In a significant departure from the custom and practice of the First-Tier Tribunal, the Court of Appeal held that a landlord wishing to dispense with statutory consultation requirements in relation to major works may be subject to a condition, as a grant of dispensation, that the landlord pays for the leaseholders to obtain an expert opinion on whether the works would prejudice them.

In other words, if the landlord wishes to avoid consultation requirements, it may have to pay for the leaseholders to have an expert to help them work out if works are necessary or could be done in a different, cheaper way to avoid unnecessary works or unnecessary expense.

This is a significant development because following the Supreme Court’s 2013 decision in Daejan Investments Limited v Benson [2013] UKSC 14 (https://www.supremecourt.uk/cases/docs/uksc-2011-0057-judgment.pdf), dispensation from consultation is routinely granted on the condition that the landlord pays the leaseholders’ reasonable legal costs of dealing with the application. Typically landlords will also agree to meet their own legal costs of the application, as opposed to collecting them via the service charge. If not, the First-Tier Tribunal has the power to order that the landlord pays its own legal costs of making the dispensation application.

Benson made clear that it is up to leaseholders to demonstrate financial prejudice if they wish to challenge a dispensation from consultation application. In many cases that is difficult to do because it usually requires obtaining the opinion of an expert surveyor or other professional to demonstrate that works could be done differently, not at all or else cheaper than proposed by the landlord.

Once dispensation from consultation is obtained, leaseholders typically have no oversight of the costs actually being incurred until they are presented with a service charge demand.

Typically, dispensation from consultation orders also allow the landlord to conduct any other works it deems necessary which arise during the works for which it already has dispensation. Leaseholders may find that additional works are done without having any opportunity to challenge the scope or necessity of the works.

This case helps to redress the balance between landlords and leaseholders. In appropriate cases, leaseholders who can demonstrate they would have sought expert advice on whether the works proposed would prejudice them should now be able to argue that the landlord pays for the costs of an expert to establish the extent of any prejudice as a condition to obtaining dispensation.

The case may be of significance in some cladding cases where there is a dispute over whether the works are more extensive than necessary or where there is an argument that the landlord is partially improving the property at the same time as remediating cladding or fire safety defects.

The downside is that the leaseholders still carry the burden of proving that they would suffer prejudice before they can ask for a condition on the basis of this decision. Leaseholders often lack the highly technical knowledge of building works to know whether there is a risk that works have been unnecessarily over specified (“gold-plated”) or whether costs are too high.

There is often a conflict of interest in relation to the cost of major works because managing agents charge percentage-based project management and administration fees on the cost of the works. The higher the project costs, the larger the fee income.

So, whilst this case is welcome for leaseholders, it underlines the need for there to be better legal protection in relation to major works and service charge expenditure generally.

The upcoming leasehold reform package the government has promised carries the opportunity to make sensible reforms to protect leaseholders’ interests. Some of these ideas have already been proposed by the Law Commission. Sensible reforms include the following:

1. Restricting dispensation from consultation to cases of genuine urgency which must be proven by the landlord before the application will be entertained.

2. Requiring managing agents to publish a clear and detailed statement justifying the substantive reasons for any major works, together with easy online access for leaseholders to all supporting documentation, cost estimates and relevant reports.

3. Imposing a fiduciary duty on landlords and managing agents to act in leaseholders’ best interests when spending service charge money. This would force them to actively test the market for goods and services and to demonstrate why any item of expenditure was necessary and at reasonable cost. It would also provide easier avenues to restrict hidden commissions and high management fees.

4. Abolishing landlords’ rights to automatically recover their legal and administrative costs of First-Tier Tribunal proceedings via the service charge. This distorts incentives because landlords and managing agents know that they can refuse to answer legitimate questions until leaseholders commence proceedings and then engage lawyers to come up with heavily detailed extensive statements and documents justifying their position. Permissible costs in the First-Tier Tribunal should also be fixed at the same rates as on the civil litigation Fast Track to avoid landlords engaging expensive legal teams to defend their commercial interests at leaseholders’ expense. Landlords should also only have a right to recover costs via the service charge if the landlord succeeds in defending the application, which mirrors the position in ordinary civil litigation.

5. Requiring all managing agents to maintain a readily accessible and up-to-date online database containing all documents, invoices, receipts and bank statements supporting service charge expenditure for each development. This would give teeth to the current inadequate leaseholder information rights.

6. Simplifying the Right to Manage legislation so that it involves a simple up/down vote on whether the incumbent managing agent should be replaced or not, regardless of the configuration of the site in question. The managing agent should be forced to hold a vote whenever 15% or more of residential leaseholders demand one. The right to vote should be restricted to leaseholders who spend more than 180 days a year living at the site. At sites where the Right to Manage has not been exercised, there should be a mandatory ballot every 5 years on whether the incumbent managing agent should be replaced. The requirement for the leaseholders to pay the landlord’s costs of completing the Right To Manage process should be abolished.

What are major works?

Under section 20 of the Landlord and Tenant Act 1985 a landlord has a statutory duty to consult leaseholders before undertaking certain types of works or entering into certain types of contracts.

These consultation obligations arise in three distinct circumstances. The first is where the landlord proposes to spend more than £250 per leaseholder on works. The second is where the landlord proposes to enter into a qualifying long-term agreement, meaning an agreement lasting for 12 months or longer and which will cost more than £100 per leaseholder. The third is where a qualifying long-term agreement is in place and works under that agreement will cost more than £250 per leaseholder.

The consultation requirements comprise four different stages and take several months to complete. If a landlord does not comply with the consultation requirements, then it is limited to recovering no more than £250 per leaseholder in respect of any qualifying works or no more than £100 per leaseholder in respect of any qualifying agreement.

What happened in this case?

In 2016, the leaseholders were told that the landlord, Aster Communities (“Aster”), intended to undertake works to the exterior of their properties. Aster sent some of the required section 20 consultation notices but did not complete the full consultation process. This included providing estimates and allowing leaseholders to inspect those estimates. At a late stage in the process, Aster announced that these works would include the cost of replacing asphalt on the balconies, estimated at £300,000. These works were not mentioned in the initial notices or cost estimates shown to leaseholders.

Aster applied for a dispensation from consultation order to conduct the works without completing the full section 20 consultation process. Aster also applied for an order under section 27A of the Landlord and Tenant Act 1985 confirming the amounts payable by leaseholders under the service charge in respect of the works.

The leaseholders disputed the cost of the works and the dispensation from consultation. In deciding the section 27A application on the cost of the works, the First-Tier Tribunal reduced the amount chargeable for the works.

The leaseholders argued that the dispensation from consultation application should not be granted because Aster had failed to provide any evidence justifying why the balcony asphalt should be replaced. The leaseholders also argued that by withholding the fact that it was considering replacing the asphalt, Aster had prejudiced them because they had been unable to take expert advice and to suggest a cheaper alternative before the works were commissioned.

The First-Tier Tribunal agreed with the leaseholders. In accordance with the Benson decision, it ordered that there would be dispensation from consultation on three conditions. The first was that Aster would pay for the leaseholders’ costs of expert advice in determining the proper scope of works on the balconies. The second was that Aster would pay the leaseholders’ reasonable legal costs of opposing the dispensation application. The third was that Aster would meet its own legal costs of making the application and not pass the costs on via the service charge.

Aster appealed the case to the Upper Tribunal. On 4 February 2020, the Upper Tribunal agreed that the conditions imposed were reasonable and were in accordance with the principles established in Benson.

What did the Court of Appeal decide?

Aster appealed the February 2020 Upper Tribunal decision to the Court of Appeal.

Aster argued that the conditions regarding payment of the leaseholders’ costs and costs of the leaseholders’ expert should not have been imposed. Aster argued this for three reasons. First, the leaseholders had not demonstrated they would have acted differently if the consultation process had been completed. Secondly, that only one leaseholder had claimed she would have acted differently and the other leaseholders could not rely on her evidence. Thirdly, that the conditions were improper in any event.

The Court of Appeal dismissed the first argument on the grounds that the leaseholder in question had taken the trouble to examine the cost estimates herself. The leaseholders had all consistently objected to the cost of replacing the asphalt when they became aware that was what was proposed. The Court of Appeal also noted that Aster had not insisted on an oral hearing for the dispensation application, so it was decided on the papers without the leaseholder in question being cross-examined.

The Court of Appeal found that it had been proven that the leaseholders would have acted to obtain expert evidence of their own had they been given the full facts. As it happened, they could only obtain an expert opinion once Aster disclosed the full facts to justify its section 27A application to fix the costs of the works recoverable by the service charge.

The Court of Appeal dismissed the second argument on the basis that the cost of the works were being shared across all leaseholders via the service charge. Every leaseholder would therefore be prejudiced if the works cost more than necessary. In those circumstances, the fact that only one leaseholder had said she would have done something different did not mean every other leaseholder had to demonstrate his or her own individual prejudice.

The Court of Appeal dismissed the third argument, holding that in this case, because the landlord had asked the Tribunal to determine the costs payable for the works (the section 27A application) at the same time as seeking dispensation from consultation, the leaseholders could not have determined the extent of prejudice without expert assistance. The usual order that the landlord pays the leaseholders’ reasonable costs of dealing with the dispensation application therefore deprived leaseholders of protection from prejudice, which was part of the reasoning in imposing conditions explained in Benson.

The Court of Appeal underlined the fact that landlords will usually always be ordered to bear their own costs of making any dispensation application and not recover them via the service charge. Indeed, Aster’s own QC did not push the point at the Court of Appeal hearing.

What happens next?

It is likely that Aster will seek permission to appeal to the Supreme Court. Landlords everywhere are unlikely to welcome having to pay to help leaseholders pick holes in their major works costs.

The right to appeal to the Supreme Court is not automatic. The Supreme Court will consider any application and decide if an appeal will be allowed and on what grounds. We should know the outcome of any application, if made, in the next few months.

Does the decision really help leaseholders?

The decision is binding on the Upper Tribunal and the First-Tier Tribunal unless and until the Supreme Court decides otherwise.

Leaseholders are often faced with vague section 20 notices that do not explain the full scope and justification for major works and qualifying long-term agreements, which then turn into applications for dispensation and a section 27A applications to fix the costs payable under the service charge.

In circumstances where the leaseholders learn that the works in question will be more extensive than originally proposed and consider that they should not be done at all or could be done more cheaply, then this decision will be of assistance. That is providing that the leaseholders can obtain a credible expert opinion supporting their position.

The decision may be of use in some cladding cases. For example, where works are being undertaken even though a competent fire engineer has already said they are unnecessary or that not all elements are necessary to meet fire safety standards. The decision may also be of use where other works not related to cladding or fire safety are being undertaken, perhaps ahead of time, because the landlord claims it will be more cost effective to do them at the same time as cladding works.

The degree to which the decision is useful will depend on whether landlords continue to seek dispensation from consultation in non-urgent cases and how thorough landlords and managing agents are at explaining the reasoning and costing for major works in advance.

Landlords can avoid paying for any leaseholder costs if they complete the section 20 consultation process in full and do not seek dispensation.

The courts in this case were unimpressed with the landlord’s belated explanations for undertaking costly works. The decision may not have gone in leaseholders’ favour if the landlord had provided timely and complete explanations and figures justifying the need for, and rationale behind, the works in question.