As the dust settles on the judgment in the notorious Daejan case, Brady Solicitors unpick the main points and their implications for managing agents.
Judgment in the notorious Daejan Investments service charge case was finally handed down on 6th March with an outcome that leaves a bitter taste for the leaseholders involved but essentially brings a healthy dose of common sense to property management law-making.
Readers will be familiar with the case, which concerned £280,000 of major works at Queens Mansions in Muswell Hill. The leaseholders claimed that Daejan had failed to follow the statutory consultation requirements for these works and consequently should not be allowed legal dispensation from these requirements. The case travelled through the LVT, Upper Tribunal and Court of Appeal with each judge ruling that Daejan could recover just £250 per leaseholder.
Unsurprisingly, Daejan appealed this outcome and it is the Supreme Court’s ruling on this appeal that we consider today.
The Supreme Court ruled – by the very slimmest of margins – in favour of Daejan and granted dispensation from consulting on the disputed major works. President Lord Neuberger, with support from two of his four judges, found that whilst there was an undoubted failure by Daejan to follow the requirements there was little evidence of prejudice – namely little or no adverse effect – on the leaseholders.
The Supreme Court (SC) considered two key areas of potential prejudice: 1) that the leaseholders paid for inappropriate works, or 2), that the leaseholders paid more than would be appropriate.
Lord Neuberger held that the only evidence of prejudice lay in Daejan’s lack of consultation around the choice of contractor. Subsequently the costs recoverable were reduced by £50,000 to £230,000 to reflect this. Read the full judgment here.
Daejan sets a precedent for considering the degree of prejudice suffered by the leaseholders rather than the degree to which the consultation requirements were breached. Essentially it moves on decision making from the black or white ‘dispensation or no dispensation from consultation’ and considers the actual outcome and impact upon the leaseholders concerned.
Brady Solicitors’ view
We welcome this decision and see it as a victory for common sense and fairness for both landlord and leaseholder. As Lord Neuberger explains in part 57 of his judgement: if a landlord were to carry out major works to the value of £1m but failed to comply with the consultation requirements to a small extent, eg in ‘accidentally not having regard to an observation’, it would be ‘grossly disproportionate’ to refuse the landlord dispensation. Instead, the degree of prejudice caused by the failure must be considered and the leaseholders’ contributions reduced accordingly.
Whilst minor breaches of the service charge consultation requirements have often gone unpunished, this Supreme Court ruling reinforces the importance of considering each case on its own merits.
More importantly however it should serve as a reminder to managing agents that they need to act at all times in the best interests of their leaseholders: only by demonstrating no or minimal adverse effect on leaseholders can a breach of the requirements be defended. Leaseholder communications must be impeccably and genuinely transparent, with landlords and managing agents making every effort to consult and engage with their leaseholders.
Find out more
For help or advice with any aspect of service charge recovery or property management disputes, please contact a member of the Brady Solicitors team on 0115 985 3450 or drop us an email.