Daejan Investments Limited v Benson and others

On 6 March 2013, by a majority of three to two, this Court allowed an appeal brought by Daejan Investments Ltd (“Daejan”) against the decision of the Court of Appeal, which had unanimously upheld a decision of the Upper Tribunal (Lands Chamber) (“the UT”), which had in turn upheld a decision of the Leasehold Valuation Tribunal (“the LVT”). The effect of the decisions below was that Daejan was not entitled to a dispensation under section 20ZA(1) of the Landlord and Tenant Act 1985 (“the 1985 Act”), as amended, which it had sought from the LVT, to enable it to recover any payment by way of service charges from the respondent tenants, in respect of the cost of certain works of repair (“the works”) which it had carried out to a block of flats.

In our decision, we decided that Daejan was entitled to such a dispensation (a “dispensation”), albeit on terms. The effect of our decision is that, notwithstanding its failure to comply with some of the procedural steps set out in Part 2 of Schedule 4 to the Service Charges (Consultation Requirements) (England) Regulations 2003 (SI 2003/1987) (“the Regulations”), Daejan is entitled to recover service charges in respect of the cost of the works from the respondents, subject to (i) a deduction of £50,000 and (ii) terms as to costs.

The issues which now arise between the parties concern the details of the consequential order (“the Order”) which the Court should make as a result. In order to deal with those issues, it is unnecessary to set out the factual history, the relevant law, the procedural background, or the reasons for the decision, as they are fully set out in our earlier judgment (“the main judgment”) – [2013] UKSC 14, [2013] 1 WLR 854.

The parties are agreed that the Order should contain the following provisions:

The parties are not agreed about a number of other terms of the Order, and the purpose of this judgment is to deal with those disputed terms. In their written submissions, the respondents suggest that our decision on some of the points which divide the parties may be relied on in future cases where a landlord seeks a dispensation. Partly for that reason, and partly because the submissions raise a number of issues, some of which are not straightforward, it is right not merely to give our decision on the terms of the Order, but also our reasons, in the form of this brief judgment, for that decision.

To get one point out of the way, there is an arid argument as to whether the provisions which Daejan must comply with in order to obtain the dispensation (i.e. under paras 4(iii), (iv) and (vi) above) are “terms” or “conditions”. Nothing hangs on this, although it is probably preferable to call them conditions, which is the description which I shall adopt. The important point is that, unless and until Daejan has complied with the conditions in so far as they require compliance, it is not entitled to give effect to the dispensation and to recover the service charges the subject of these proceedings.

The first issue concerns the point touched on in para 4(iii)(a) above. It has three aspects.

On analysis, there is, in truth, little, if any, difference between the two formulations, but that of the respondents is to be preferred. As to (i), the respondents’ wording spells things out more fully and leaves less room for argument. It is true that Daejan’s wording follows para 85 of the main judgment, but the meaning of the respondents’ wording is quite consistent with what is said in that paragraph. So far as (ii) is concerned, the only objection to the respondents’ proposal is that it amounts to surplusage: an order for costs in relation to proceedings is not limited to costs incurred after the proceedings start. However, as Daejan opposes the respondents’ proposal, it should be adopted to ensure there can be no dispute. As to (iii), at first sight it may appear surprising that the respondents can claim as costs in relation to the issue decided in a later determination (viz. that mentioned in para 26 of the main judgment) expenditure incurred on issues decided in an earlier determination. However, as Daejan appears to accept, although there were two determinations, at least some of the evidence and the arguments in relation to the first were important and relevant in relation to the second determination.

The second issue between the parties is touched on in para 4(v) above. Daejan says that there should be no order for costs in the UT, in the Court of Appeal and in this Court, whereas the respondents contend that they should be able to recover their costs from Daejan in all three tribunals insofar as they fall within the scope of the form of order they have proposed as quoted in point (i) in para 7 above (and which is accepted in relation to the LVT costs – see para 8 above).

It is not open to Daejan to seek any costs in the Court of Appeal or in this Court, as it was granted permission to appeal to each court on terms that it did not seek its costs (see paras 33 and 37 of the main judgment). That was for the very good reason that Daejan, as a large landlord, had a significant interest in the issue in this case being conclusively determined, whereas the respondents had no such interest. When one adds to that point the fact that it was Daejan’s default which ultimately caused these appeals to be necessary, and the fact that the decision of this Court can be said to have represented a change in what the law was perceived to be, it seems right that Daejan should not claim its costs in the UT any more than in the Court of Appeal or in this Court.

However, although one must have some sympathy for the respondents, it would not be appropriate to go further by making any order in their favour so far as the costs in the UT, the Court of Appeal or the Supreme Court are concerned. In the absence of special circumstances, Daejan can fairly say that the normal order for costs in a case where the ultimate appeal court decides in favour of one party (“the successful party”) is that that party recovers all its costs from the opposing party. In this case, there are undoubtedly two special factors, namely (i) the successful party only succeeded on the basis that it should have succeeded at first instance on terms that it paid some of the opposing party’s costs (see paras 59-64, 73(ii) and 85(ii) of the main judgment, and paras 7 and 8 above), and (ii) the successful party is precluded from seeking its costs in this Court and the Court of Appeal (see paras 33 and 37 of the main judgment).

In these circumstances, to deprive Daejan of its costs of the hearing before the UT (in addition to the Court of Appeal and this Court) could be said to be generous to the respondents, although, for the reasons briefly given in para 10, it is appropriate in this case. However, it would not be right to make an order for costs in the UT or higher courts which was more favourable to the respondents than no order for costs.

It is said by the respondents that they acted reasonably in resisting Daejan’s successive appeals. That is true, but Daejan also acted reasonably in pursuing the appeals, and, unlike the respondents, Daejan was ultimately successful.

It is also true that Daejan has to pay a large proportion of the respondents’ costs before the LVT, even though it obtained the dispensation it was seeking, but that is because it was asking for an indulgence from the LVT (as explained in paras 58-64 of the main judgment). However, the appeals concerned a point of law, namely the correct approach to a dispensation application by a landlord who had failed to comply with the Regulations, and it was a point on which, ultimately, Daejan won and the respondents lost. Prima facie, therefore, Daejan should have its costs of the appeals, but, as explained in para 10, the correct order in respect of the appeal costs is that there be no order.

It is also argued by the respondents that, as Daejan raised the argument at all levels of appeal that the financial consequences to it of refusing a dispensation represented a relevant factor when deciding whether to grant it a dispensation, the fact that this argument failed should be reflected in any order for costs on the appeals. In arguments about costs, it is normally inappropriate to single out a particular strand of argument (in this instance, prejudice to the landlord) in connection with what is in reality a single point (the principles applicable to granting a dispensation), particularly on an appeal, where no question of the cost of particular evidence arises. This case is no exception. Furthermore, while prejudice to the landlord was rejected as a relevant factor, it does represent the windfall to the tenants which is relevant (see para 51 and 71 of the main judgment).

This leads to the third issue. As a result of the conclusion on the second issue, Daejan is entitled to recover any costs which it has paid to the respondents in respect of the UT or Court of Appeal hearings. However, the respondents should be entitled, despite Daejan’s objection to the contrary, to a direction for a stay on any order that they repay these costs, while the parties await the decision of the LVT as to the sums which Daejan should be required to pay to them pursuant to the order referred to in para 4(iii) above, with a view to setting off any such costs liabilities against each other. However, if the respondents unreasonably delay matters being determined by the LVT, Daejan has the right to apply to the LVT to lift this stay.

The fourth issue arises from an argument about the wording of the provision which gives effect to the term described in para 4(iv) above. Daejan suggests that it “is not to include in the service charge costs its costs of applying for dispensation in the [LVT] or its costs of appealing from a refusal of that dispensation”. The respondents’ proposal is that it should be the costs which Daejan incurred in “resisting a determination that it had failed to comply with the Regulations or in respect of its application for dispensation”. Daejan’s formulation is arguably too narrow, and the respondents’ formulation could apply to any application in the future. The appropriate form of words is that Daejan must not “include in the service charge costs its costs of (i) resisting the respondents’ application for a determination that it had failed to comply with the Regulations, (ii) supporting its application for dispensation (including any costs it has to pay to the respondents), or (iii) appealing from a refusal of that dispensation”.

The fifth issue arises from the respondents’ request for a direction under section 20C(1) of the 1985 Act (“section 20C”) in connection with the costs incurred by Daejan in relation to its application for a dispensation. Section 20C permits a tenant to apply “for an order that all or any of the costs incurred … by the landlord in connection with proceedings before a court, … [LVT], or [UT], … are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge …”. At first sight, there seems little point in including such a direction, given the agreement to the provision set out in para 4(iv), and discussed in para 17 above. However, as the respondents point out, the agreed provision in para 4(iv) is, strictly speaking at least, no more than a condition imposed on Daejan as a term of granting it the dispensation it seeks. In theory, Daejan might not take up the dispensation. Accordingly, as it would be wrong for Daejan to seek to include the costs involved in a future service charge demand, the order sought by the respondents under section 20C should be granted.

Sixthly, the respondents wish the Order to record that any dispensation will take effect on the date on which Daejan complies with the conditions set out in para 4(iii). At first sight, the question of when the dispensation takes effect may well not matter, and, if it does, it should be determined as and when the reason for which it matters is identified. This point appears to be linked to another issue.

That is the seventh issue which divides the parties. It arises from the fact that the lease under which each respondent holds his or its flat from Daejan provides for interest on late payments of money due under the lease at the rate of 14% per annum. The respondents seek to be released from liability for this interest in relation to the service charges which Daejan anticipates recovering in the light of the main judgment.

There is no need for the respondents to seek a release of this liability to pay contractual interest. It seems clear from the wording of section 20(1)(b) of the 1985 Act (which applies in this case and limits the service charge contribution as explained in para 10 of the main judgment “unless the consultation requirements have been ... complied with”) that, where that provision applies, the date on which any service charge would fall due (“the due date”) must be the later of (i) the date when the service charge would fall contractually due in the absence of any statutory restriction, and (ii) the date when any dispensation becomes effective. And, in this case, the due date must be the day on which the conditions imposed on Daejan for the grant of the dispensation are complied with.

This means that interest will only start to run on the service charges the subject of these proceedings once the costs payable by Daejan in accordance with para 4(iii) above have been determined and, if appropriate, paid (within fourteen days of the determination). It may well be that the costs will be less than the costs already paid to the respondents in relation to the orders for costs made on the appeals in the courts below (see para 16 above), and therefore no payment will be due from Daejan to the respondents. However, that would not undermine the point made in para 21 above: until the conditions on which the dispensation is granted are known and quantified, there is no operative dispensation, and time does not begin to run for interest.

If the respondents were to delay paying Daejan the service charges assessed in accordance with the Order (beyond fourteen days, to allow time to organise payment) once the dispensation becomes operative, there would (at least in the absence of special facts which have not so far arisen) be no basis for depriving Daejan of its contractual right to claim interest at 14% per annum.

Accordingly, the Order should include a provision to deal with the sixth and seventh issues. That provision should state that the dispensation will take effect once all conditions subject to which the dispensation is granted have been determined (and, where appropriate, satisfied), and that interest pursuant to the terms of the respondents’ leases can only run from a date fourteen days after the dispensation takes effect.

The eighth issue relates to the agreed remission of the matter to the LVT, referred to in para 4(vii) above. The respondents wish the remission to be to the same panel as heard the proceedings and gave the decisions referred to in paras 23-28 of the main judgment (“the original panel”), whereas Daejan argues for a different panel. There is possible advantages in having the original panel, given that it heard this matter, including evidence and arguments, over more than eight days, but the benefit is likely to be slight as that hearing was some time ago, and a different panel would have the benefit of two very full decisions of the original panel. There is nothing in Daejan’s argument that the original panel would be, or would appear to be, inappropriate because its decision has been reversed. The reversal was based on an issue of law, and does not cast doubt on the panel’s ability to determine the issues which are now to be determined, if they cannot be agreed.

The correct direction to give in this connection is simply to remit the issues, which remain to be determined as a result of the Order, to the LVT, on the basis that it can be, but need not be, the same panel who heard the proceedings in 2007 and 2008. This is on the basis that there may be some value in the original panel hearing the matter, but it is unlikely to be very advantageous, and that there may be difficulties in getting the original panel to reconvene.

The parties can no doubt now agree a form of order which reflects what they have agreed as augmented by what we have decided in this further judgment.