Back in May 2010, we covered the case of Philips v Francis (QBD, Truro District Registry) on whether or not holiday chalets let on long leases were “dwellings” within the meaning of the Landlord and Tenant Act 1985, and, hence, the service charges payable by owners of the chalets were subject to terms of the 1985 Act. The High Court held that they were (see here).
The case is still on-going, and the most recent judgment was handed down in December 2012 – Philips v Francis (No.2) [2012] EWHC 3650 (Ch). And, like the first one, it promises to be quite important (although you do feel for the parties involved here – the service charges in question are for the 2009 year!)
In short, when Mr & Mrs Francis acquired the freehold reversion, they decided that the estate needed considerable work in order to bring it up to a “first class standard”. This, in turn, led to a more than doubling of the service charges demanded in 2009. The leaseholders objected and issued proceedings seeking, inter alia, declarations about the scope of the service charge provisions in the lease.
By the time of the present appeal, two issus remained live. First, the demands included over £100,000 in respect of wages paid to Mr & Mrs Philips and management charges. Secondly, whether there were any “qualifying works” within the meaning of s.20, Landlord and Tenant Act 1985 (if there were, then it was common ground that there had been no statutory consultation as required by s.20, 1985 Act, such that the service charges were capped at £250 per leaseholder).
Management charges
The lease provided for the recovery of costs of the
…[m]anagement of the Estate and its appurtenances including where applicable the charges wages pensions contributions insurance and provision of uniforms and working clothes of any staff employed by the Lessee and the provision of telephones (if any) and also the cost of providing tools appliances cleaning and other materials bins receptacles together with any amounts of fees paid to architects agents surveyors and solicitors employed by the Lessor in regard to the management of the Estate
That, said the High Court, was apt to cover only monies paid to third party agents performing professional duties and did not extend to wages paid by the freeholders to themselves in respect of their management activities.
Qualifying works
This is the more important issue. The effect of s.20, 1985 Act and the regulations made thereunder is that, if a landlord carries out work to which any leaseholder will be asked to contribute more than £250 in an accounting period, then he must either consult the leaseholders in the prescribed manner or obtain dispensation from the LVT. If this is not done, then the recoverable costs are capped at £250 per leaseholder.
The issue in the present case was whether the proposed works were one set of qualifying works or whether they could be broken down into sub-components. If they were one set, then the total costs were capped at £250 per leaseholder, whereas, if they were separate, then some did not require consultation at all and, in any even, more money would be recoverable. The trial judge found that they were separate items and that it was not until relatively late in the day that any sort of unified project emerged. The reality was that one job had simply led to another.
The High Court disagreed. The idea of looking at “sets” of qualifying works came from the case of Martin v Marylands Estates [1999] EWCA Civ 3049. But that case was about the previous version of the consultation requirements. Under those old provisions, the focus had been on the cost of the works. The new approach was on the cost to the leaseholders. Further, the old consultation requirements were just about price, whereas the new approach included a requirement to consult once the intention to proceed had been formed. There was no reason to look for “sets” of qualifying works. The correct approach was to look at each of “the works” and decide if consultation was required.
I’ve been thinking about this major works point a bit more.
The decision is quite difficult to follow and I expect that we won’t really get to the bottom of what practical impact this case will have until we’ve had some further LVT and UT(LC) cases trying to apply it.
Having said that, there are, I think, three scenarios to consider:
(a) Where major works are being done which are already qualifying works (i.e. costing any one leaseholder more than £250), then this decision doesn’t change anything. For example, if you were replacing the roof (cost £300 per leaseholder) and windows (£350 per leaseholder), then you already should have been consulting on each project. Nothing in this decision affects that.
(b) The first problem comes, however, where the individual works were not going to cost over £250. Say, for example, that the roof repair costs were £200 per leaseholder and the windows a further £200 per leaseholder. Prior to this case I think most people would have said that there were no qualifying works here as neither project was costing a leaseholder more than £250. This decision means that we’d be wrong to continue with that approach. Now, we have to look at the total cumulative cost to the leaseholder (in this example, £400). Which means that we now need to consult.
(c) The second problem comes with what might be called “totting up”. Suppose lots of small projects are being planned in any year (drain flushing, minor repairs, etc). It might be said that if those cumulatively add up to more than £250 being charged to any leaseholder, then s.20 is now applicable. That, I suspect, is the worst case scenario. How would it work with an unexpected repair which suddenly took the total costs over £250? Is there a distinction between planned works and unanticipated costs?
In addition, I have concerns about people applying this decision retrospectively. My scenario (b), above, seems likely to be relatively common. Are leaseholders (particularly those who are recalcitrant payers) now going to suddenly allege retrospective breaches of s.20 and not pay their service charges? Do agents/landlords/RMCs need to apply for retrospective dispensation? I’m not sure there are any proper answers yet. As I said at the beginning, I rather fear that we won’t really know how far this case goes until we’ve had some LVT or UT(LC) cases trying to apply it
The bizarre outcome of this gentleman’s decision is that having totted up expenses mid year, you could end up with an emergency dispensation request for a lightbulb.
The courts and practitioners have been able to recognise “if it looks like a duck” so that four jobs for four new lifts avoiding Section 20 is an abuse, or a serious of related work, as in this case. While I agree that qualifying works are not defined , his thinking seems based on QW being building works, that works done in the year and which reach a limit can be postponed until the next year, a a ” new limit” and that there are no limits beyond section 20s £250. As we know QW are far more than building works, and as a result costs are going to increase with more works put into LTAs with more provisions so that cleaning would include for several one off visits and deep cleaning, which can be omitted at year end. Oh and add the fees for Section 20 notices etc.
It could lead to a relatively simple issue of a lightbulb or no heating hot water or cold water for a repair that could be quickly done save that he cannot without risk of non recovery or the need for a section 20/dispensation.
Section 20 does not operate in isolation section 19 give and overriding restriction of fair and reasonable, so that in analysing costs over year, if they have been unreasonably incurred- breaking them up as indicated in this case- they can be challenged, and can be find to have been consulted on and therefore capped.
It seems preposterous that this conclusion is reached in the High Court while the Supreme Court is considering Daejan.
Sorry about the typos above :)
Not a problem. I entirely agree that the problems you outline are, well, problems!
One idea does occur to me. Perhaps landlords should now be looking to do Sch.3 consultation? That is to say, do a QLTA for all (as yet unidentified) works over a 5 year period and then just do the limited Sch.3 consultation for those works.
Just came back to this thread to mention leave to appeal was granted – but you have already posted.
On your last reply the decision at the LVT (now Futpuck) on Hackney Homes on the QLTA is quite interesting and mirrors an earlier one on LBTH trying to take that approach. It is one that we reviewed for larger schemes and implemented
where the scale and type of work justified it – its not for the average small block..
In some cases concerns were expressed that it was a licence to print money! You cant win.
I’m not sure I follow – do you mean the various cases in which various local authorities have tried to get dispensation from the s.20 process in order to enter into overarching framework agreements?
You refer to tenants being asked to contribute more than £250 “in an accounting period.” The trial judge says this at paras 35 and 37. Excuse my lack of knowledge in this area, but where does the LTA 1985 say that if qualifying works straddle two service charge years, the landlord can collect £500 per tenant? is there case law to support this interpretation? If relevant costs exceed £250, is not the amount of the relevant costs incurred on carrying out the qualifying works limited to £250 full stop – not service charge period?
It’s a difficult mess. The 1985 Act and regulations made thereunder don’t deal with any accounting periods for works (cf QLTAs, which are on an accounting period). It’s the judge who has come up with this accounting period points for works.
Permission to appeal was granted today.
Appeal now listed for 14 and 15 May 2014
So, the appeal was due to be on 14 and 15 May, but, a few days before it was due to start, the Secretary of State was granted permission to intervene and the appeal has been bumped into October.
Very interesting to see what the SoS has to say. Can anyone remember the last L&T (as opposed to housing/human rights/public law) case he intervened in?