ELTHAM PROPERTIES LIMITED v MRS A KENNY; MR B RAINFORTH; MR J BARKER LRX/161/2006

UPPER TRIBUNAL

LANDS CHAMBER

LRX/161/2006

Case No LRX/161/2006

Between

ELTHAM PROPERTIES LIMITEDApplicant

MRS A KENNY; MR B RAINFORTH; MR J BARKERRespondent

Before

A J Trott FRICS

Katharine Holland (instructed by Pinsent Masons) for Appellant

Mr Gurin Hanspal for Respondent

with the leave of the Tribunal for Respondent

Venue Scarborough County Court, Pavilion House, Valley Bridge Road

Date 3 December 2007

Hearing 24 October 2007

Property: 19 The Esplanade, Scarborough, North Yorkshire, YO11 2AF

[1]On 3 November 2005 three tenants of 19 The Esplanade, Scarborough, North Yorkshire YO11 2AF, Mrs A Kenny (flat 4), Mr B Rainforth (flat 3) and Mr J Barker (flat 5) (the respondents in the present appeal) made an application to the Leasehold Valuation Tribunal for the Northern Rent Assessment Panel under section 27A of the Landlord and Tenant Act 1985 to determine the service charge in respect of that property for the year commencing 1 January 2005. In its decision dated 9 April 2006 the LVT determined that the landlord, Eltham Properties Limited (the appellant), had failed to comply with one of the consultation requirements under section 20 of the 1985 Act in respect of external painting works, which were qualifying works under that Act. As a result of this failure the contribution of each tenant to the costs of those works was limited to £250 rather than £1,419.40 (including VAT) as sought by the landlord.

[2]On 9 May 2006 the landlord applied to the LVT under section 20ZA(1) of the 1985 Act for a determination to dispense with the said consultation requirement. The LVT refused this application on 11 July 2006 and refused leave to appeal against its decision on 5 October 2006. The landlord then applied to this Tribunal for permission to appeal on 2 November 2006. This was granted on 21 December 2006. The appeal is limited to the single issue of whether the LVT should have dispensed with the consultation requirements in respect of the external painting works. The appeal was heard by way of a review rather than a re-hearing.

[3]Katharine Holland of counsel appeared for the appellant. Gurin Hanspal represented the respondents as a friend with the permission of the Tribunal. Facts

[4]The appeal property is situated at the end of a terrace and is located at the junction of The Esplanade and Albion Road overlooking South Bay. It is divided into five flats numbered from 1 to 4 from ground level upwards. Flat 5 is a garden (basement) flat. The respondents occupied flats 3, 4 and 5. The appellant has retained flat 1.

[5]The leases of flats 2 to 5 are all in substantially the same terms and each is for a term of 999 years from dates in or around 1986 at a fixed yearly rent of £25. It is agreed between the parties that the landlord is responsible under the leases for repairing, maintaining, renewing and cleansing the common parts of the building, such to include painting of the exterior, and that each tenant is liable to contribute and pay a one-fifth proportion of the cost of the same.

[6]The appellant served a notice describing the qualifying works on the respondents under section 20 of the 1985 Act on 22 June 2005. 2 Statutory provisions

[7]Section 20 of the 1985 Act provides that the relevant contributions of tenants to the cost of qualifying works shall be limited unless the consultation requirements have been either(a) complied with in relation to the works, or

(b) dispensed with in relation to the works by (or on appeal from) a leasehold valuation tribunal. The section applies where the relevant costs incurred on carrying out the qualifying works exceed an appropriate amount, ie an amount which results in the relevant contribution of any tenant being more than £250.

[8]The consultation requirements are contained in the Service Charges (Consultation Requirements) (England) Regulations 2003 (the Regulations). Part 2 of Schedule 4 to the Regulations applies, as in this appeal, to qualifying works for which public notice is not required. Paragraph 8 of that Schedule states:

“(1) A landlord shall give notice in writing of his intention to carry out qualifying works − (a) to each tenant .... .... (3) The notice shall also invite each tenant and the association (if any) to propose, within the relevant period, the name of a person from whom the landlord should try to obtain an estimate for the carrying out of the proposed works.”

The LVT determined that the landlord had not complied with paragraph 8(3).

[9]Section 20ZA of the 1985 Act states:

“(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.”

The LVT decisions

[10]In its decision dated 9 April 2006 on the original application by the respondents under section 27A of the 1985 Act, the LVT stated at paragraph 26:

“Consultation − The Tribunal found that there was one matter which should have been the subject of the consultation procedures contained in section 20 of the Act − that relating to the painting work. It was a qualifying work as defined in section 20ZA(2) of the Act. The contribution required of each lessee (one-fifth) exceeded £250. The painting work was the subject of the section 20 notice dated 22 June 2005. The Section 20 notice − the Tribunal examined carefully the notice dated 22 June 2005 against the statutory requirements set out above.... Those requirements are 3 mandatory. It found that in all respects but one the notice read with the accompanying letter complied with the requirements. The one respect in which it did not comply was that it did not invite each Applicant to propose the name of a person from whom the landlord should try to obtain an estimate for the carrying out of the proposed works. For this reason the notice was invalid. The contribution from each Applicant towards the cost of painting must therefore be limited to £250.”

[11]In its decision dated 11 July 2006 refusing the landlord’s application to dispense with the consultation requirements the LVT stated that the test to be considered was not whether the landlord had acted reasonably but whether it was reasonable in all the circumstances to make the dispensation applied for. The Tribunal found that the landlord had, with one exception, generally acted reasonably. It also found that the respondents had accepted that the relevant work had been carried out reasonably well and that the external painting work needed doing and that they would have to pay for it.

[12]Although the LVT found that the landlord had acted reasonably in instructing a well- known and reputable firm of solicitors to advise it and to draw up and serve the section 20 notice, “the Applicant [appellant] under the law of agency was liable for the acts and omissions of its solicitors.” The LVT considered that:

“9(e) Those solicitors must have been expected to be able properly and accurately to advise the Applicant generally in relation to the matter and in particular to have been able to draw up the Notice so that it was valid and in accordance with the relevant legislation.”

The exception to the landlord’s reasonable behaviour was identified in paragraph 9(g) of the LVT’s decision:

“The letter to the Applicant from Mr Barker [one of the respondents] dated 17 February 2006 suggesting there had been a procedural defect should have warned the Applicant of a possible problem. In the absence of an early reply to the request for clarification and having already instructed solicitors it was reasonably to be expected that the Applicant would check with those solicitors that all the relevant requirements had been complied with. There is no evidence that it did so.”

[13]The LVT concluded that:

“9(j) It is impossible accurately to predict what difference the inclusion in the Notice the omitted part would have had. Although it seems unlikely, it might have alerted at least one of the Respondents to the desirability of another quotation being obtained. To alert a leaseholder to that is surely the purpose of its inclusion as a requirement of a section 20 Notice. (k) Although it was important that the external painting work be carried out it was not urgent to the degree that there would not have been time to serve a correct notice. 4 (l) It is overwhelmingly likely that what the Applicant describes as a ‘windfall benefit’ will accrue to leaseholders when a dispensation is refused. It might better be described as a sanction upon a landlord since the legislation is clearly intended to make sure that landlords observe the consultation requirements and fail to do so at their financial peril.”

The case for the appellant

[14]Ms Holland submitted that the LVT had been wrong to conclude that it was not reasonable to make the dispensation sought. She said that the LVT had not understood nor applied the correct policy behind the consultation requirements. Its view was stated in paragraphs 9(j) and (l) of its July 2006 decision in which it said that the requirements were a sanction which placed the landlord in financial peril if it failed to observe them. She said that this interpretation of the purpose of the legislation was wrong and she referred to the consultation document entitled “Revised Procedures for Consulting Service Charge Payers about Service Charges” published by the Office of the Deputy Prime Minister in August 2002. Paragraph 3 of Chapter 4 “Sanctions and Dispensations” of that document stated:

“The dispensation procedure is intended to cover situations where consultation was not practicable (eg for emergency works) and to avoid penalising landlords for minor breaches of procedure which do not adversely effect service charge payers’ interests.”

[15]The correct test was for the LVT to satisfy itself that it was reasonable to dispense with the requirements; it did not have to be satisfied that the landlord acted reasonably (as per Woodfall’s Law of Landlord and Tenant at paragraph 7.199.8). The LVT was aware of this test since it referred to it in its decision. But having noted the correct test the LVT then failed to apply it and focused instead upon the actions of the appellant’s solicitors. This emphasis was repeated in the LVT’s refusal to grant leave to appeal against its decision on the section 20ZA(1) application and was considered by Ms Holland to be misplaced and irrelevant.

[16]The letter dated 17 February 2006 from Mr J Barker to the Residential Property Tribunal Service (RPTS) did not specify the defect in the section 20 notice. It stated:

“From the advice we have received the landlord did not follow the proper procedure in accordance with the Landlord and Tenant Act (1985) and residents do not believe that they should have to pay anything towards the cost of the exterior decoration of 19 Esplanade Scarborough after being given a 15 year guarantee in 1999.”

The managing director of the appellant company, Mr Mark Leatham, replied to this letter on 2 March 2006 asking that the (then) applicants expand on their claim that the notice was defective so that “the legal experts can consider it in advance of the hearing.” But the first time that this defect was identified was at the hearing itself. Ms Holland submitted that it was incumbent upon the respondents to have clarified their position beforehand. 5

[17]The LVT’s conclusions in paragraph 9(g) of its decision were wrongly directed to the conduct of the landlord and were based upon two false assumptions, namely the finding that there was no evidence that the appellant had checked the accuracy of the notice with its solicitors and the assumption that the landlord should bear the burden when the tenants referred to, but did not identify, a defect in the section 20 notice. That defect, when eventually identified, was seen to be a technicality rather than a matter of substance that was the subject of evidence showing how the tenants had been disadvantaged.

[18]Ms Holland argued that the LVT was wrong to base its finding upon the absence of evidence that the appellant had sought legal advice on the accuracy of the section 20 notice. In fact it had done so, but as there had been no oral hearing, despite the appellant’s request for one, the LVT were wrong to rely upon an absence of evidence of privileged communications between the appellant and its solicitors. The Tribunal had been wrong to conclude that the appellant had acted unreasonably in this respect. Ms Holland referred to the other conclusions of the LVT, all of which showed that the landlord had generally acted reasonably.

[19]The respondents had not been prejudiced by the defect in the section 20 notice and Ms Holland noted that they had not responded to the application for dispensation. Furthermore she argued that the respondents had been very involved with the process of obtaining quotes. The third respondent’s wife, Mrs Barker, had herself contacted B C Gratton Decorating Limited, the company eventually used by the appellant for the exterior paintwork, for a quotation which was received on 10 October 2003. The LVT had said in its decision that this quotation “... was both in relation to a different specification and at a different price than that eventually obtained by the Applicant”. Ms Holland contended that this was not to the point. What mattered was that the tenants knew that they could go to other suppliers. Ms Holland also referred to e-mail correspondence between the appellant and the second respondent, Mr Rainforth, in which Mr Rainforth acknowledged the need for exterior decoration and asked the appellant to provide contractor quotations for the work “as in the past.”

[20]The LVT’s finding in paragraph 9(j) of its decision was not properly made. There was no evidence that the tenants would have acted differently had the consultation requirements been fully complied with. The respondents did not claim that they would have obtained another quotation had the defect in the notice not existed. The LVT had been wrong to speculate on the point. Also, the LVT’s observation that there would have been time to serve a corrected notice was not relevant since the application for dispensation related to the notice that was actually served.

[21]The LVT had approached the consultation requirements as imposing a sanction upon a landlord who did not comply with them. Its attitude to the landlord had been one of ‘get it wrong and you must pay the price’. This was a completely unreasonable exercise. The purpose of the dispensation power was to ensure that windfall benefits would not accrue to tenants where the landlord had made a minor infringement of the consultation regulations that had not prejudiced them. The legislation only protected tenants where it was necessary and in this case the tenants needed no such protection. The evidence supported the conclusion that 6 the tenants were seeking to take advantage of a technicality and Ms Holland submitted that this was a clear case for dispensing with the consultation requirements. The case for the respondents

[22]The respondents submitted that the appellant had twice failed to comply with the consultation requirements of the 1985 Act. Firstly, in a letter to the respondents dated 28 May 2005 the appellant stated that:

“ B C Gratton Decorators Ltd will be painting the front, sides, steel work etc in mid June 2005 depending on the weather. This is priced at £6,040.00 plus £1,057.00 VAT = £7,097.00.”

The respondents argued that this letter merely told them what was going to happen and did not satisfy the statutory consultation requirements. Secondly, the letter and attached section 20 notice from the appellant dated 22 June 2005 was defective. This had been pointed out to it in a letter dated 28 September 2005 from Mr Barker and Mrs Kenny to Pinsent Masons, the solicitors acting for the appellant. The last paragraph of that letter stated:

“We have been advised by Consumer Direct not to pay the £1,419.40 [per tenant] due to the proper consultation procedure having not been followed and should Eltham Properties Ltd pursue this claim, the tenants have been advised to seek a hearing with the Leasehold Valuation Tribunal with a view to resolving this matter.”

The respondents reiterated this point in a letter from Mr Barker to the RPTS dated 17 February 2006.

[23]The appellant received over six months’ notice of the defective section 20 notice but, despite being advised by solicitors, had failed to check its accuracy. The respondents’ views had not been invited and they had the right to propose a contractor. This was the most important part of the 1985 Act otherwise tenants would have no protection against inflated service charges. The respondents had been prejudiced by the appellant’s failure to comply with the consultation requirements of the Act. Mr Hanspal submitted that the onus for ensuring that the section 20 notice was correctly served lay with the appellant landlord and not the respondent tenants. There was no obligation upon the respondents to point out any defects in the notice to the appellant. The appellant’s failure to comply with the consultation requirements and its behaviour in merely telling the respondents what it intended to do were not reasonable.

[24]The respondents considered that the landlord had not been very responsible about maintaining the property for a number of years. The exterior painting had last been undertaken in 1997 using expensive Keim paint. However despite the respondents’ understanding that this work was covered by a 15 year guarantee the property needed repainting after just 8 years. Other houses in the area had been painted at much less cost and the paint was still in good condition. Under these circumstances the consultation requirements were an essential part of the process but they had been ignored. The appellant had relied upon correspondence with 7 Mr Rainforth but he was only one of the tenants and was out of the country for most of the time. The respondents were retired people without much money and they were neither under an obligation, nor in a position, to check the work of Pinsent Masons. Mrs Kenny emphasised the stress that the tenants had been put under as a result of the proceedings. Conclusions

[25]It is not disputed that the section 20 notice served on 22 June 2005 did not comply with paragraph 8(3) of Part 2 of Schedule 4 to the Regulations. The respondents submitted that this notice was preceded by an earlier notice comprised in a letter dated 28 May 2005. In my opinion that letter did not purport to be, nor was it, a section 20 notice.

[26]When an application is made under section 20ZA(1) of the 1985 Act the LVT may make the determination to dispense with all or any of the consultation requirements “if satisfied that it is reasonable to dispense with the requirements.” The determination is thus one for the LVT’s discretion, and the issue in this appeal is whether the LVT in making its determination approached the matter correctly in law. What it had to do was to consider whether it was reasonable to dispense with the consultation requirements. However, the LVT stated that “the legislation is clearly intended to make sure that landlords observe the consultation requirements and fail to do so at their financial peril.” This language suggests strongly that the LVT approached the matter on the basis that the legislation was to be applied as a punitive measure in order to punish landlords who failed to comply with the consultation requirements and that the dispensation power was to be exercised with this in mind. That was, in my judgment, an incorrect approach. What the LVT had to determine was whether it was reasonable to dispense with the consultation requirements, and the reasonableness of dispensation is to be judged in the light of the purpose for which the consultation requirements were imposed. The most important consideration is likely to be the degree of prejudice that there would be to the tenants in terms of their ability to respond to the consultation if the requirements were not met.

[27]It is evident that the LVT was aware of the correct statutory test because it referred to it at paragraph 7 of its decision dated 11 July 2006:

“The Tribunal noted that the test in section 20ZA(1) was not whether a landlord had acted reasonably but whether it was reasonable – that is in an overall sense or in all the circumstances – to make the determination applied for.”

But having correctly identified the statutory basis for the exercise of its discretion the LVT proceeded to focus upon a single aspect of the appellant’s behaviour which it concluded was unreasonable, namely its (presumed) failure to check with its solicitors that the section 20 notice was fully compliant having been told by the tenants that it was defective. The LVT concluded, having determined that these were not emergency works, that this warranted refusal of the dispensation sought. 8

[28]I note that the appellant informed the LVT in its application to appeal that it had in fact consulted its solicitors. The LVT in its decision dated 5 October 2006 said that this “…if anything justifies the decision of the Tribunal which is sought to be appealed.” So in practice it did not matter to the LVT whether or not such consultation had taken place; it appears to have viewed the failure to consult under the Regulations as an absolute reason to refuse dispensation. As Ms Holland argued, if the legislation was to operate as a sanction in such a way against landlords then the statutory dispensing power would not exist (except, presumably, for the case of emergency works). I consider that the weight the LVT gave to this point in reaching its decision was wholly disproportionate and focused wrongly and exclusively upon one aspect of the appellant’s behaviour (which in all other respects it acknowledged had been reasonable) rather than upon a broader consideration of what was reasonable under all the relevant circumstances.

[29]The LVT did not refer in its decision to the fact that at no time had the respondents identified the procedural defect referred to, despite having been asked to do so in a letter from the appellant dated 2 March 2006 to the RPTS. No evidence was produced by the respondents to show how they had been prejudiced by the defect. They merely asserted that they had been. The LVT did not make such a finding. The respondents’ main argument was directed against the need to redecorate the exterior of the building so soon after the last time and in the light of the guarantee they said they had been given about the durability of the expensive Keim paint that had been used previously. But the LVT found in its decision dated 9 April 2006 that the appellant had acted reasonably in deciding to have the painting carried out without seeking to enforce the guarantee and this point was not in issue in this appeal. The LVT concluded that it was unlikely that compliance with the Regulations would have alerted at least one of the respondents to the desirability of another quotation being obtained. The appellant argued that Mrs Barker had already approached the chosen contractor for a quotation in October 2003, albeit on the basis of a different specification. It also referred to correspondence with Mr Rainforth in which he asked the appellant to provide contractor quotations “as in the past”. Although the respondents made observations on the proposed works in accordance with the invitation included in the section 20 notice none of them raised the defect in that notice.

[30]It is reasonable to give dispensation from the consultation requirements where there has been a minor breach of procedure that has not prejudiced the tenants. I consider that the defective section 20 notice represents, in all the circumstances of this appeal, such a minor breach of procedure and that there is no evidence that the respondents were prejudiced or disadvantaged as a result. In the light of this finding and the LVT’s conclusions about the reasonableness of the landlord’s behaviour in all other respects, I conclude that, on the evidence before it, the LVT was wrong not to determine that it was reasonable to dispense with the consultation requirement under paragraph 8(3) of Part 2 of Schedule 4 to the Regulations.

[31]I therefore allow the appeal and the respondents shall each pay £1,419.40 inclusive of VAT, which is a one-fifth proportion of the cost of the exterior painting. 9 Dated 3 December 2007 A J Trott FRICS 10