Daejan Investments v Benson: Supreme Court flies in face of the legislation

The Supreme Court, in the case of Daejan Investments v Benson (PDF) has produced a judgment that undermines protections for leaseholders of blocks of flats when faced with big repairs by their landlords – and on the face of it flies in the face of the will of Parliament in how those protections should work.

Under the Landlord and Tenant Act 1985 Section 20 any lessees in a block of flats have to be consulted regarding works done for the benefit of the whole block, the costs of which would go onto the service charges and cost more than £250 each. The main reason is that such works can be costly and lessees should have some say in the cost, their own “relevant contribution” under the terms of the lease and necessity for the work. Section 20ZA (5) of the Act outlines regulations that include lessees being given details of the works, possibly via a tenants’ association, along with estimates for the work. The lessees might suggest other builders from whom to get estimates and have other observations about how the work should be done.

Failure to consult comes with a big penalty for landlords. They can seek dispensation from a Leashold Valuation Tribunal (LVT), but if they fail they may be limited to recovering a fixed sum of only £250 per lessee for the work, whatever the actual expenditure.

Section 20ZA (1) says: “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.”

This was the situation for Daejan Investments who wanted to recover £280,000 through service charges for major works on Queens Mansion in Muswell Hill, North London.

In 2006 Daejan had served a notice under paragraph 4(5) of Schedule 4 to the Consultation Regulations on five lessees regarding the work that was to be done and estimates it had for the work. However, it failed to make all the estimates available to the leaseholders and proceeded to award the contracts before the consultation period was over. Daejan had offered to reduce the bill by £50,000 to take account of any prejudice to the lessees through failure to follow the procedure – while arguing there was no such prejudice.

In 2008 an LVT ruled that failure to consult had resulted in substantial prejudice to the leaseholders. It further ruled that “the financial effects of the grant or refusal of the application for dispensation on the landlord or tenant are not to be taken into account”. The sanctions for failure to follow the procedures are draconian. Unless the landlord can get a dispensation from the LVT, it would be allowed to claim only £250 from each lessee towards the work.

‘Tenants will be in the same position as if the Requirements have been satisfied, and they will not be getting something of a windfall’ – Lord Neuberger

But according to the LVT, the fact Daejan would only receive £1,250 from the five leaseholders towards the £280,000 of work was irrelevant. It was an all or nothing situation. No dispensation was given. The Court of Appeal took the same view.

It is this position that has been countered by the Supreme Court, on the face of it changing the intention and mechanism of the 1985 Act. The majority in the Supreme Court, led by the President, Lord Neuberger, held that the important issue was the prejudice that the lessees had suffered rather than how far the landlord had breached the consultation regulations.

Rather than the “all or nothing” provisions of the Act, the LVT should come to a view of how far the breach of the consultation regulations resulted in prejudice. It can then put a money value on that and, in effect, give a discount to the lessees rather than almost exempting them from the bill as required by the Act.

In effect the judgment means the burden of proof and nature of proof required to be put before the LVT have changed. Before, the lessees would have to show the requirements were not followed and the landlord would have to show why it should have a dispensation. Now the lessees must show why the landlord should not get the dispensation, proving to the tribunal that they have suffered prejudice and putting a figure on it.

As Lord Neuberger put it: “Insofar as the tenants will suffer relevant prejudice as a result of the landlord’s failure, the LVT should, at least in the absence of some good reason to the contrary, effectively require the landlord to reduce the amount claimed as service charges to compensate the tenants fully for that prejudice. That outcome seems fair on the face of it, as the tenants will be in the same position as if the Requirements have been satisfied, and they will not be getting something of a windfall.”

‘In my opinion it should be, and is, open to the tribunal to take that view in the interests of preserving the integrity of the legislation’ – Lord Hope

So in this case the LVT and Court of Appeal did not feel it necessary to arrive at a compromise figure between £1,250 and £280,000. The law lays down £250 per lessee so that is the figure.

In contrast the Supreme Court majority decided the lessees had suffered relatively minor prejudice – they had not been allowed to have an alternative contractor considered for the work. The justices considered “ the relevant prejudice to the respondents could not be higher than the £50,000 effectively offered by Daejan”.

In contrast the minority in the Supreme Court (Hope and Wilson) considered it was necessary to consider the gravity of the non-compliance with the consultation requirements. “This includes distinguishing between breaches or departures according to their level of seriousness, without having first to consider the amount of prejudice they may cause or may have caused.” Since the LVT considered non-compliance to be serious, a dispensation was not given and so the statutory figure of £250 per person was applied.

Comment
Presumably when Parliament passed the draconian penalties for failure to consult it did so with a purpose. The intention was to concentrate freeholders’ minds, not to give them some form of opt-out from consultation accompanied by an offer of some small amount of compensation.

The purpose of the requirements was noted by Neuberger: “to ensure that the tenants are protected from (i) paying for inappropriate works or (ii) paying more than would be appropriate”. Apart from the lack of incentive for freeholders to get the best deals from contractors on behalf of the leaseholders (who, after all, are paying the pipers), there are clearly also potential problems of freeholders doing sweetheart deals with contractors, adding a bit to the bill and splitting the difference. Many of these cases involve local authority blocks with private lessees in them, and local authorities are often tied in to umbrella contracts that may be suited to large scale works but seem less appropriate for individual lessees. Consultation is a minimum protection and Parliament’s view was presumably that the best way to achieve protection was the “all or nothing” approach.

Lord Hope, in his dissenting judgment, puts the matter thus: “I do not think that it is fanciful to assume that there could be extreme cases where the breach or departure was so serious, or so flagrant, that it would on that ground alone not be ‘reasonable’, as section 20ZA(1) puts it, to dispense with the consultation requirements. In my opinion it should be, and is, open to the tribunal to take that view in the interests of preserving the integrity of the legislation, and to do so without conducting any such inquiry [into prejudice].”

In other words the legislation was intended to ensure transparency and consultation. The majority decision flies in the face of this intention to make consultation a mere matter of barter between the parties.

Daejan’s failure to follow the regulations properly and then turning up at an LVT hoping for post hoc sanctioning of its conduct through dispensation is not at all unusual. It will be even more likely now the Supreme Court has declared that LVTs should take into account the level of prejudice when making their decision (though lessees will first have to haggle with freeholders over some level of compensation).

The clue as to why the Supreme Court has taken this view is in Neuberger’s word “windfall” above. Clearly he considers the Act somewhat generous in allowing lessees the substantial benefits of expensive work at a tiny cost of £250. The law, on this reading, supplies a huge windfall benefit to leaseholders for perhaps technical breaches.

But if that is what the law does, it must surely be the case that that is what the law was intended to do.

Note: Here is a good piece by Coventryman on Daejan and another leasehold repairs case, Phillips v Francis, taking a markedly different line on the implications of Daejan: How do we pay for the repairs. His view is that the Neuberger decision has “dusted off” a failing s.20ZA(1) to make it a useful tool. It is fair to say that LVTs may welcome the option of giving dispensations but with conditions attached (including compensation payments for  ”relevant prejudice”) as opposed to the nuclear “all or nothing” option that they might be reluctant to use, to the detriment of leaseholders. But really the whole area needs reform by decent workable legislation.

Here, though is a Nearly Legal post closer to the views expressed here.

Wanted: responsible landlords and tenants for housing law shake-up

A UK parliamentary inquiry into private renting might, just might, be an opportunity to get desperately needed reforms to the private rented sector in England which encourage supply of homes for renting and also optimal security for those renting them.

These two aims are usually seen as antithetical. It is assumed that private landlords want laws allowing them to eject tenants at the drop of a hat so that they have absolute flexibility in setting new rents or disposing of their properties at will. Meanwhile tenants are assumed to need security in terms of being able to treat their rented property as a home, to all intents and purposes their own.

The economic assumption has been that the more security tenants get, the less supply will be offered to the market.

Certainly private renting became residualised in the last decades of the 20^th century while, home ownership became the ideal and social housing merely a safety net for the vulnerable. Conservative initiatives in the 1980s to create new forms of more flexible tenancies, particularly the assured shorthold tenancy, may have had some effect in increasing private renting but it looks as if tougher economic conditions are now driving an accelerating increase. Private renting started to grow in the late 1990s reaching 9% of tenures in 2001. According to the latest census this had risen to 15% by 2011. Meanwhile the number holding mortgaged property had fallen from 39% to 33%, a situation dubbed “generation rent”.

The concern is that the supply of decent private homes will not meet the growing demand (indeed, is not meeting it now if you take the word “decent” seriously), a demand driven by immigration as well as rising house prices and the mortgage drought. Some of the supply is being produced by people who can’t sell their home so rent them out. Some has come on tap thanks to the buy-for-let sector (with rented housing perhaps seen as more lucrative than declining pensions); this, almost by definition, finds properties from other sectors rather than generating new supply itself.

If private renting is to be the “new normal”, there needs to be a new legal infrastructure to square the circle of supply and security, and this, presumably, is what the Communities and Local Government Committee will be looking at and seeking to achieve.

Fortunately the answer may be staring committee members in the face – and has been since 2006 when the Law Commission produced it’s final Renting Homes report (available here with its materials).

The suggestion is that the law is too complex with its layers of common law distinctions (between tenants and licensees for example) interwoven with legislative provisions and regulation creating various forms of tenancy depending in part whether one is in the private or HMO (housing in multiple occupation), local authority or housing association sector. Neither tenants nor landlords are clear about their rights and obligations as a result. What is needed is simplification and integration.

Importantly what is also needed is an economic incentive to draw investment into the rented sector and increase supply – likely to also improve quality of accommodation more effectively than bureaucratic controls – particularly given cuts in local authorities. The good would not instantly drive out the bad but would provide competition that would make them raise their game (and perhaps cut their rents).

Great harm has been done through the long standing over-promotion of home-ownership and marginalization of renting – not only to those who have taken on substantial financial burdens which they cannot afford but also to those who are demonised by their exclusion from the presumed privileges of ownership

The Commission rejected a licensing scheme that would be yet another layer of probably unworkable regulation. It favoured instead “enhanced self-regulation” involving landlords, agents, local authorities and tenants. There would be accreditation schemes, a single code of practice for letting and management and regulation of accommodation agencies. In effect this would aim at “responsiblising” the private rented sector rather than demonising it.

In its report, Renting Homes, the Law Commission proposed requiring landlords to provide written model contracts or tenancy agreements that are fair, transparent and easily understood by the parties to those contracts. They could be adapted to individual circumstances but would contain the legal rights and requirements as set out by Parliament.

Other proposals include a requirement to use a tenancy deposit scheme.

The Commission rejected the pre-1988 regime of statutory tenancy security, but there would be flexibility, rejecting the assumption behind the creation of shorthold tenancies that private landlords only wanted to offer short lets. Many are forced into doing this by the fear of otherwise locking themselves into particular rent levels while the market may be changing.

With a more dynamic market and easier entry for new-build private homes, more diverse tenancies could be available. Those wanting security could seek out landlords willing to offer it; those who don’t need it, such as the young and mobile, would find their ideal letting.

If this sounds like a somewhat free market answer to a sector where only waves of legislation have seemed to been the answer in the past, well it is. But it is an answer that would not impose rigid paradigms based on the twin bogeys of the rogue landlord and the bad tenant that have generated legislation in the past.

The inquiry, by looking at such ideas, could provide a productive contrast with the continued promotion of home ownership by the government whose solution to the current housing crisis seems to rest in a relaxation of planning laws and hopes for another housing bubble.

Great harm has been done through the long standing over-promotion of home-ownership and marginalization of renting – not only to those who have taken on substantial financial burdens which they cannot afford but also to those who are demonised by their exclusion from the presumed privileges of ownership. the necessary social re-integration of renting while avoiding the simplistic solution of imposing long-term security in the private rented sector. As history has shown, such solutions tend to dry up supply, promote avoidance strategies by landlords (often colluded with by occupiers who are desperate for housing) and divert resources from housing into the policing of statutory boundaries.

The Law Commission proposals, although ignored by the Westminster government (both Labour and Coalition), are now actively being considered in Wales where they are seen as a crucial foundation to a modern and successful rented sector.

Communities and Local Government Committee Terms of reference:
Quality of accommodation
Rent levels
Regulating landlords
Regulating letting agents
Regulating houses in multiple occupation
Tenancy agreements and security of tenure
Use of private rented sector to discharge local authority homelessness duties.

Evidence to the first meeting, including from Prof Martin Partington, former Law Commissioner:
Written evidence on the private rented sector (PDF 321 KB)

Law commission materials:
Renting Homes: The Final Report [PDF, 1.42mb]
Renting Homes: Draft Bill [PDF, 0.68mb]

USA v Nolan: When must redundancy consultation start?

The European Court of Justice has balked at a decision that is urgently needed to clarify the requirements imposed on employers to consult workers’ representatives before making staff redundant.

In the case of United States of America v Nolan (Case C-583/10 ECJ), the court decided it had no jurisdiction to rule on the matter. Christine Nolan worked for the US Army in Britain and the relevant EU Directive “does not apply to workers employed by public administrative bodies or … by equivalent bodies” – including the US Army.

Nevertheless her case (which will return to the Court of Appeal) epitomises the issue. Redundancies are governed by the EU Directive 98/59. Article 2 of that directive provides:

1. Where an employer is contemplating collective redundancies, he shall begin consultations with the workers’ representatives in good time with a view to reaching an agreement.

2. These consultations shall, at least, cover ways and means of avoiding collective redundancies or reducing the number of workers affected, and of mitigating the consequences by recourse to accompanying social measures aimed, inter alia, at aid for redeploying or retraining workers made redundant. [Emphasis added]

Furthermore to enable workers’ representatives to make constructive proposals, an employer is bound, in good time during the course of the consultations, to supply them with all relevant information and to notify them in writing of the matters specified in subparagraph 2.

But what does “contemplating” mean and hence what is “in good time”? Section188 of the Trade Union and Labour Relations (Consolidation) Act 1992, which is intended to transpose the Directive into British law, requires consultation when the employer is “proposing” redundancies. What does “proposing” mean? Is it different from “contemplating”?

The Act sets a minimum of 90 days consultation when 100 or more workers are to be made redundant or 30 days for less than 100 – but how far down the line of decision-making can management already be before it activates the statutory consultation period? “Contemplating” seems to be something you would do rather earlier in the process than “proposing”, so unions have argued that consultation must come at that earlier stage.

USA v Nolan

In USA v Nolan Christine Nolan worked at a US army base in Britain with about 200 civilian staff. By March 2006, the US had decided to close the base at the end of September 2006 (six months or so ahead). On 21 April 2006 plans for closure became public and in June staff representatives were told all employees were at risk of redundancy. The US Army considered consultation on the redundancies started on 5 June (more than 90 days before closure was planned).

On 30 June, the Army gave the employees notices of dismissal, to take effect at the end of September. Nolan, a worker representative, brought a claim on behalf of those employees on the basis that the US had failed to comply with its collective consultation obligations by not consulting before 5 June.

The USA argued that: “no employer has an obligation to consult with its employees about a proposed operational decision to close a workplace that will lead to redundancies: it is said that the consultation obligation only arises after the employer has made such decision and is then proposing to dismiss the employees as redundant”.

Nolan, however, succeeded in a claim for a protective award (a penalty paid to each worker affected if there is not proper consultation) at an Employment Tribunal and at the Employment Appeal Tribunal. The Court of Appeal, however, sought guidance from the ECJ on when consultation should start.

Criminalisation of squatting: how protection of property could crumble

Laws that seem to be pure commonsense when the press is demanding them and MPs making stirring parliamentary speeches backing them can soon look very different when they come into force and are tested to destruction in the courts. This will inevitably be the case with the criminalisation of squatting provision in the Legal Aid Sentencing and Punishment of Offenders Act 2012.

Criminalisation will have unintended consequences as a result of squatters’ response but also the response of property owners and the police – none of which can be predicted.

There follows a list of such actual and potential unexpected outcomes which it is intended will be updated as more become apparent.

Lords committee issues new criticism of Theresa May over immigration

A UK Parliamentary committee has issued further criticism of Home Secretary Theresa May’s attempts to get flawed British immigration rules accepted by the courts.

May placed 290 pages of immigration code of practice rules in the House of Lords in an apparent kneejerk reaction to the Alvi case where the rules were struck down by the Supreme Court (reported here).

The court took the view that the Home Office was trying to treat the code as law for the purpose of barring immigration and for deportations even though they had passed through no proper parliamentary procedure. The day after the case, on 19 July, May sought to gain some sort of parliamentary sanction for the code by placing it before the Lords – a few days before their summer recess (the House of Commons was no longer sitting).

The House of Lords Secondary Legislation Scrutiny Committee has questioned this latest move on the grounds that the rules “may imperfectly achieve their policy objective”. Under the 1971 Immigration Act S.3(2) to count as legislation, such rules should lie in both Houses of Parliament for 40 days to allow parliamentarians to object or debate them if they wish – the so-called “negative procedure”.

Theresa May’s meaningless statement on immigration rules

A UK parliamentary committee has expressed concerns about the procedure used by Home Secretary Theresa May to give enhanced democratic credibility to tougher action on immigration.

Her new Immigration Rules have been presented to Parliament in a constitutionally innovative manner that may have no legal validity. This involved not simply passing the rules through the two Houses of Parliament by the traditional means for secondary legislation but having an additional debate (with no vote) in the House of Commons (but not the House of Lords) to assert the legal power of the Rules against the claims of international human rights law.

The intention behind the Statement of Changes in Immigration Rules (HC 194) was to use the debate “as a vehicle to gain Parliament’s endorsement of its approach to Article 8 of European Convention on Human Rights to assist the courts when deciding appeals on immigration matters”, noted the Secondary Legislation Scrutiny Committee of the House of Lords. (Committee Report 4.3 pdf)

However, the committee implies that the procedure was of dubious validity and constitutionally unlikely to have the desired effect – to force judges to reduce their reliance on Article 8(1) when judging immigration and deportation cases.

Lord Pannick opposes plan for Lord Chancellor to sit on judicial appointments panels

Lord Pannick has introduced an amendment to the Crime and Courts Bill that would remove a new requirement that the Lord Chancellor (Secretary of State for Justice, currently Kenneth Clarke) sit on the panel to appoint the President of the Supreme Court and Lord Chief Justice.

Lord Pannick told the House of Lords on 27 June: My Lords, in moving Amendment 117, I shall also speak to Amendments 118, 131 and 132, which address an issue of constitutional concern. The Bill would allow the Lord Chancellor to sit as a member of the appointments commission for the posts of Lord Chief Justice and president of the Supreme Court. The amendments would deny the Lord Chancellor such a role …

At present the Lord Chancellor can ask the appointments commission to think again about a proposed appointee, but the Lord Chancellor is not a member of the commission. The Constitutional Reform Act 2005 rightly recognised the need for a clearer separation of powers between the Executive and the judiciary. The change proposed by the Government would regrettably go back on that and it would have substantial disadvantages. First, it would increase the danger of political partiality in the appointment of a senior judge. I recognise, as I am sure will all noble Lords, that the present Lord Chancellor would not contemplate acting in such a manner, but even Mr Kenneth Clarke cannot continue in political life for ever. He is already above the retirement age for judges – a matter that we will be discussing later this afternoon. It would be highly undesirable to give a future Lord Chancellor the power so actively to influence the appointment of the senior judiciary.