Rooting out heresy

This is a post about the consultation provisions in ss.20, 20ZA, Landlord and Tenant Act 1985, applicable in respect of service chargeable costs. If you’re not interested in long leasehold law (which, looking at the site stats for most popular pages, is most of you), then look away now.

On Friday, the Court of Appeal handed down the decision in Francis and another v Phillips and others [2014] EWCA Civ 1395 and, thankfully, the decision of the High Court was overturned (in part).

The thrust of ss.20, 20ZA, 1985 Act is that, if a landlord (which can include a management company under a tri-partide lease) wishes to recover more than £250 from any tenant in respect of “qualifying works” or more than £100 per tenant in any accounting period in respect of a “qualifying long term agreement” then he must either consult in accordance with the prescribed requirements or obtain dispensation from the FTT/LVT.

One obvious issue is how should this £250 be calculated? In Martin v Marylands Estates Ltd [1999] EWCA Civ 3049 (a case on the consultation provisions as they read prior to the amendments in the Commonhold and Leasehold Reform Act 2002), the Court of Appeal indicated that it was a “triviality” threshold and that it was, in effect, a “major works project” test. So, if replacing the roof cost £150 per tenant, there was no need to consult; if, within the same financial period, the landlord then spent another £150 per tenant replacing broken doors, then, again, no obligation to consult arose. Most (indeed, probably all) practitioners thought that this approach would carry through into the post-2002 Act consultation regime.

Which brings us Philips v Francis (as it has become known). We’ve covered the background in our previous post on the case (here) and, in summary, the position is this. The landlords decided to do works to a development which had the effect of (in broad terms) doubling the service charge costs per year. The leaseholders objected and issued proceedings in the county court seeking declarations as to, inter alia, the recoverable service charges. Two issues were of particular importance for us:

(a) the landlords were paying themselves around £100,000 in wages for managing the site, reimbursed by the service charges;

(b) the tenants contended that the works should have been the subject of consultation and, as they had not been, the £250 cap applied.

We can skip over the county court decision since there isn’t a full transcript and it is only the county court. The High Court found against the landlords. The first issue (management fees) was relatively simple and clear; the lease terms relied upon (and set out in the previous post) provided a right to recover the costs of third party management, not self-management.

On the second issue, the landlords (and county court judge) had approached matters on the basis that these works were, for the most part, seperate “sets”, such that, applying Martin v Marylands, there was no (or only very limited) obligation to consult. The High Court disagreed. The focus of the consultation regime was on the cost to the leaseholder; if the £250 threshold was crossed, even on a cumulative basis, then the consultation requirements were triggered. Furthermore, the £250 figure had to be applied annually and would include day-to-day (reactive) repair costs, not just major works.

Now, I confess that when the High Court case came out, I was quite tired and didn’t really appreciate the significance. It wasn’t until a few days later (as you’ll see in the comments to the previous post), that the implications hit me. In particular:

(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?…

Athough not mentioned by me at the time, there was another problem for leaseholders in that the effect of the decision would have been to increase service charge costs, given that most landlords/agents charge a fee for conducting a s.20 consultation exercise. Given that you might now need 10 such exercises a year, rather than one every few years, that could get quite expensive.

The Court of Appeal

Taking the “qualifying works” issue first, the Court of Appeal were satisfied that the “aggregating” approach (as it became known) was wrong. It could give rise to very serious practical problems, particularly if urgent work became necessary. It was no answer to say that a landlord could seek dispensation from the Tribunal as that would have legal and administrative costs and, of course, litigation risk. To consult leaseholders on all items of expenditure would add greatly to the cost of management. The real remedy for leaseholders was always s.19, Landlord and Tenant Act 1985, i.e. the requirement that service charges be reasonably incurred and represent reasonable value for money.

The annual approach was also wrong as a matter of construction. Service charges were not necessarily calculated on an annual basis.

It was unnecessary to consider whether Martin v Marylands was right. What was clear was that whether or not work was one single “thing” or separate “sets” was a question of fact which should be answered in a commonsense way, taking account of al the relevant circumstances. That would be likely to include (i) where the work was carried out; (ii) whether they were the subject of the same contract; (iii) whether they were done at more or less the same time; (iv) whether the works were of the same or similar character. Ultimately, it will be a question of fact and degree.

Interestingly, the Court of Appeal also went on to consider (albeit briefly) what “qualifying works” actually were. Unhelpfully, the Act just defines it as “work to a building or other premises”. There was, said the Court of Appeal, no requirement that the works have any permanent effect or modification.

The management charge issue can be dealt with quite shortly. There was in fact two possible contractual rights to management costs; one made express provision and one by more general words. The express provision governed and the more general words could not be relied upon since it would allow double recovery. I won’t say any more about this since, frankly, it all turns on the wording of the particular lease.

Conclusion

So, although the Court of Appeal declined to say whether Martin v Marylands was still good law, they have ended up adopting almost the same idea – “sets” of works are fine and it’s a question of common sense /fact and degree whether it is one or multiple “sets”. That, I believe, is a good result for both landlords and tenants and the brief Morrittian Heresy has been suppressed.

About J

J is a barrister in London. He loves service charges and all things leasehold law related. He also likes beating rogue landlords and mortgage companies.
Posted in Housing law - All, Leasehold and shared ownership and tagged , , .

12 Comments

  1. Pingback: Rooting out heresy – NearlyLegal | Current Awareness

  2. Firstly, although this judgement appears to resolve the issues of ‘qualifying sets’, threshold for those sets remains at £250. According to the inflation calculator on the Bank of England’s website, £250 in 2003 would be worth £344.90 in 2013. In effect, then, the threshold has in effect been gradually decreasing. Over time this risks drawing an increasing number of ‘trivial’ or ‘minor’ works that the ‘sets’ approach was intended to exclude from being draw under the umbrella of eligibility for consultation. To maintain a ‘common-sense’ approach, this arbitrary limit surely needs to be addressed.

    Secondly, whilst there is no doubting the power and importance of the Section 19 provision, it must be remembered that its role is to ensure the reasonableness of charges, and does not protect the wider benefits of the Section 20 process. For example, consultation gives leaseholders an opportunity to nominate contractors, and to give observations on specifications and estimates which the freeholder must have ‘due regard’ to. These need not be restricted merely to matters of cost. Whilst a greater list of factors will surely improve the assessments of what counts as a set and what does not, and may help prevent some tactical avoidance of consultation, leaseholders should remain vigilant of being disenfranchised of their voice, as well as their money.

  3. Bryan its actually the other way around s19 is far broader than s20 as it applies to all costs not merely qualifying works. So for example while major works have to be consulted but the professional fees (LTAs excluded)of the building surveyor planning coordinator etc are often substantial they only have to be reasonable etc under s19 ( Im sure there is wrinkle for RSL/ALMO types too).

    I agree, under the 85 Act which if I recall used the limits in the old housing finance act at £500 or £25 a flat, it was increased by SI in 88 to £1000/£50 and sat there until CLRA was enacted. If an index was used you can see landlords waiting for the 1st April to defer works.

    • An index would just be a pain to administer and a boon to lawyers. If you look at, say, the welfare benefit uprating legislation, you end up with quite small increases from year to year and don’t get round figures. You can easily see a landlord (whether commercial or leaseholder owned/controlled) forgetting about the uprating and failing to consult despite being only a few pence over the threshold.

      I also can’t see any desire to change the limits. As AM rightly says, the limits have only been increased rarely and the current limit was much more generous than the last one under the 1985 Act.

  4. I am sure that if left to the industry we would quickly find a workable rounded figure, however the sucking mudpit that is the civil service will manage to find a suitably convoluted formula that once tested at FTT ( once referred to as F titty before a quite word was had) will be found, sicut per solita, as “round objects”.

    While I agree J, if the government had the “round objects” to do so the recent reforms and a.c.o.p. would apply to all landlords, big plc estates depts or smelly lady and her cat in the basement, not simply agents, to ensure leaseholder rights and LL obligations are understood and met.

    As much as the press is filled with the stories of the former big landlord /agent and their abuses, what it doesn’t see is the mess of small un-informed landlords, inc resident controlled ones, and what can often be described as a reign of tyranny and bullying as quote ” we are share freeholders(GRR!!), this (sct 20) does not apply” . I have been in correspondence with the last chairman of LEASE about overhauling their approach from a LL vs FH focus to helping and advising the small landlord and resident controlled groups who badly need to understand their obligations so that at least they can be “turned round”.

    • What I have no feel for (and would be interested in hearing your views on) is how much of an issue ‘bad landlordism’ (whether ‘for profit’ or lessee controlled) actually is. I mean, I only see cases where something has gone wrong. The courts and Tribunals only see similar cases. There are around 10,000 FTT cases a year (for all leasehold work, including enfranchisement) but many millions of flats. Do most people just make it work?

  5. On lessee control…..

    The fairest way to answer is “ but for the grace of God” buildings are managed from properly, in all or most respects, to left to fall into ruin, by a mix of goodwill, luck to outright bullying and “the committee Diktat”. I would like to say that professional management improves matters however the sector has it shortcomings and while you can lead a client to a webinar, you can’t make them listen.

    It is quite common that the seeds of disaster are widely sown, from failing to calculate and bill service charges in accordance with lease terms and timing, failure to provide the statutory information notices and summaries, or comply with say section 20. Likewise there are variations from the lease in terms of a variety of practices whether billing as above, apportionment, to enforcing restrictions on alterations consents letting and sales which have no contractual basis and/or run contrary to the 27 54 88 and 95 L&T (etc) Acts and good old CLRA, to the issuing of regulations where the lease grants no authority to do so or worse still contradict the lease terms. Very often the style and manner of communication, not to mention inspections or access, qualifies as harassment, not to mention slander and libel in healthy doses, or a breach of quiet enjoyment ( “but I didn’t make any noise…..!!”)

    When you then consider the broader world of health and safety, it is common to see that neither fire risk assessments nor common areas risk assessments are carried out, and where a contractor is used to look after lifts, boiler, gates etc, it is expected, contrary to law, that they will discharge the obligation and assume all liability. There are many building elements that do not get such attention particularly utilities like electricity, employed staff not having the correct documentation training or support, even breaks, or the minimum wage as “they make it up in tips”, or even an understanding of equality and diversity telling a wheelchair user not to moan about the lift being out as they “were stupid to buy an xth floor flat” (no wait that was a manager at a plc house builder- they are “retired” now..).

    A common failing is the habit of reporting as a dormant company failing to understand that it only the income that is in trust all the liability for expenses even if you use an agent falls on the freeholder/landlord. But when companies house get it horribly wrong, who can blame them? Following on from that is the failure to realise that freeholder accounts aren’t the reporting that a lease requires nor a substitute for a section 21 account and certificate, as the Judge in the County Court said.

    In turn where rights like right to manage or enfranchise has been exercised, the leases rarely allow for company costs and expenses to be recovered in the service charge, whether or not the lessee is a participant, and therefore fail to ensure their articles allow for separate funding. They often forget to put in provisions to manage themselves and their dealings especially disputes, lease extensions sales and division of income equity and proceeds or loan capital whether in a trust or partnership deed or like provisions for the company in off the shelf Articles.

    By far the greatest risk though is not adequately insuring a building based on rebuilding costs and using the sum of the sale prices, plus a bit for the stairs. While insurers allow uplift factors to allow for that, in both cases both underinsuring or over insuring have huge consequences for the freeholder and the lessees.

    All is well until, well, it isn’t, when for reasons as varied as a new owner moves in and takes over, falling out, loss of employment or a death, the charges raised are challenged and unpaid, and legal costs quickly racked up by legal firms unaware of these requirements( I kid you not), lead to serious risks to cash flow and solvency. That is assuming that the cash is not protected by the bank account under section 42-it usually isn’t, even the banks struggle to do that.

    That these rarely reach the Court or Tribunal (or insolvency or being led away in handcuffs by the heath and safety Police) is in part the factors above but largely ignorance of the rights and responsibilities and remedies available. Buyers will know the Ikea catalog inside out or have a team of personal shoppers and can tell Hepplewhite from Chippendale at a 30 paces, but rarely trouble themselves with this thing called a lease, especially term, or it’s terms and rent, as, after all, the estate agent selling it rarely enquires about or lists term, despite the enormous effect on value and mortgagability, saying “leave that to the lawyers”. Who tell their buyer on the eve of exchange when the kids are packed away in boxes for their new school. No wait that was just us, and only once.

    While in many cases it is blissful ignorance by both landlord and tenant, the assumptions common sense and string that is often used instead of reading a booklet, or your solicitors report to you, even a stray managing agents bumbling attempts to welcome you and explain how it all works, are accompanied by a common disease.
    I call it “share of freehold-it is” and setting aside joint tenancies and tenancies in common in equity etc, what was a pretty weak attempt at shorthand to describe owning a flat and group (flock of residents)/corporate ownership of the freehold, there is no such thing, but it has morphed into a third form of title (ignoring the suicidal act of buying one of the rare commonhold units).

    Not only does this leave buyers unaware of a short lease and the difficulty borrowing on it or selling it, but barring agreement, there is no guarantee that the rest of the freehold flock/company won’t decide to ask for a full market premium to extend, arguing that they will each in turn pay a premium. While many will agree to extend and offset, assuming leases are similar in terms, there is usually one or two (usually with viscous white cats and a faint smell of bleach and lavender) who would rather go on a cruise with your premium money and ultimately lie in state watching the estate (and beneficiaries) tear itself apart. That is if they haven’t left it to the cats.

    It’s more dangerous symptom however is the belief that whether it is a company or flock of flat owners, there is either the assumption or strident insistence that “I/we are share of freehold” and therefore leases, when recognised as existing, are mere devices and can be varied or ignored, for the purposes of management, at the whim of the committee or majority vote. Most fail to understand that while a company or flock of can make any lawful decision it likes, it is bound by it’s contracts, the leases, with each individual owner and the law that applies to them, and if they want to recover expenses they have to run service charges as the contracts-leases- and the law requires.

    While an owner of flat can balance their shareholder/member or “flock of” hats on their head and agree to do something, those that disagree or abstain cannot be compelled to do so contrary to the terms of the contract-the lease- e.g. the majority oin a residents controlled block might decide to shut down the block gym, and for good economic reasons, but one resident who insists that it be available, under their lease, wins in Court. If they decide not to recover costs as service charge, even after Morshead, it is less than certain that you can and the cost of examination of the documents and project is usually far far in excess of just complying.

    This extends to a general assertion or belief that little or none of the legislation applies to them leading them into the dangerous waters above, and it is sustained, to be frank, by ignorance, luck, goodwill or a reign of terror, rather than judgement.

    All of which keeps me in donuts :)

  6. I should just add of course that there are the cases where a party to lease manager RMC, RTM or freehold company assume control, everyone looks at each other until, eventually, they appear in the London Gazette, and Her Majesty, God bless her, becomes the landlord.

  7. Freeholder control.

    It is less one or the other (ignoring of course the pubic sector) and more of a rainbow from one extreme to another. As it was explained to me “decide, poacher or gamekeeper” and in the main the profession has been dominated by gamekeepers and landowners with a long term interest. The larger owners landed estates and institutions tend to fall in this camp but there is strong element of the poacher in the new build and retirement markets under the guise of asset managers and one stop shops looking for short term gains and not getting rich by providing a service but by driving the service in their own short term interests.

    Starting at the other end of the spectrum there are the well publicised stories of “Big Agent and Big Landlord”. Some firms big or small are asset owners and managers rather than property managers and whose goal is to reap as much profit as can be raised and as the law will allow, or as some argue, beyond that, on the basis that dragging them to a court or tribunal is likely too expensive, win or lose, or by outgunning the flat owners.

    Having control of large chunks of money that flies out the door by stray dog (used for refunds to leaseholders) cheque or BACS, there is a temptation to try and keep it in house via commissions, commercial arrangements, payment discounts, treasury management ( immediately deducting a suppliers costs from a service charge account and placing it in a company money market account for 3 weeks until payment date which I am pretty sure is not how you run money on trust, but what do I know) or tender rigging, as the OFT determined.

    Major works projects are aggressively pushed through as are service “improvements” along with competitive re-tendering, to wholly or partly owned subsidiary contractors or contractors who rebate “consultancy fees “of 10 to 20 %, not to mention in house or sister technical services firms who over see the work at another 10 to 15 %. Plus 20% to George.

    Buying into insurance brokers suppliers or buying them out has been a popular wheeze and keeps ever hungry shareholders happy, as is using your buying power to obtain discounts and absorb those in commissions or profit, until like BCCI, the hedgehog (an erinaceous creature) meets the headlights and its spilled milk everywhere. It is a fundamentally flawed process, and as the market does, it self regulates, and they disappear until the next Herbert or Vincent looks at a cylinder and thinks that they have invented the wheel. Only to be run over, eventually, by a wheel that already works.

    Now’t wrong with profit, it’s the difference between the Scrooge that went to bed and the one that got up the next day. Dispensing with fair and reasonable as for many flat owners that is defined by “what I want and the cost I want when I want it” as sole arbiter of F ‘n’ R, and, instead, using balanced and proportionate, entirely external sensible freeholders/agents will take the view that there is a mutual interest in maintaining the investment and amenity by providing a planned and organised level of service and at a cost which reflects and which is consistent with, the building itself, its use and occupation and local environs.

    That way residents actually pay their suitable charges, services are provided and the post box or inbox aren’t full of vitriol, suspiciously squidgy envelopes, or a piece of paper covered with sticky back plastic in true Blue Peter fashion encasing a note and several dead cockroaches “ now do you believe me” from a posh London address. We did believe him, it was just that they were better off in a home for the bewildered and no contractor would agree to attend. Social Services were of course too busy in meetings or too weak to climb the five flights of stairs being vegetarians.

    Should pistols be drawn in the nearby corporation park, the man on the Clapham Omnibus would have a poke round the block and charges, tip his hat and say “looks reet to me lad “ and judgement would be issued by the beak .

    Agents in the main have had a foot in both camps & their historic professionalism has balanced the needs of both, the stewards of everyone’s interests, and taken a suitable fee and taken commissions for running an approved vetted contractors list or insurance commissions to reflect dealing with claims etc, a commission I might add that is not an add on but an overhead in just the same way as the insurers own sales or broker network overheads.

    These sort of practices however still exist in the resident or small freeholder arena as is as mentioned earlier the head down “I am the freeholder and will do what I like and you will pay” attitude that features regularly in leasehold problem websites. The failings and shortcomings in compliance mentioned in lessee control abound here too as while big landlord/agent relish in generating fees in compliance, the smaller landlord is often blithely unaware of those obligations. That said they often take it as a money making opportunity and are quick to carry out works that vary from good well priced and fairly priced and shared, to the complete opposite. The failings extend just as much not taking action where they ought to over reacting and running matters with an iron hand, and as always the clueless but well intentioned.

    That is why when I came across two directors of a client company of a lessee controlled block taking commissions from major works contractors and the insurance broker, some might ignore it, and some like me will advise all the shareholders and residents and make it clear that we will have to resign,(and lurk about the garages selling pitch forks and wick torches) after all, who knew there is a bribery policy by law, and who knew ( well didn’t bother to read) that they had rights as a leaseholder.

    And that’s my point
    -landlords and agents must be regulated and subject to the acop
    -owners need to accept that leases are longer than tweets and it cannot be argued because the council or their gym do it differently therefore the lease must be wrong
    – the (spinal tap) cricket bat of common sense to be taken to the Judges that decide that legislation that says “you must produce a certificate” means just that and order accordingly
    – and to bring it back home, wheelchairs shawls and a sunny spot need be issued to some of the Judges who aren’t paying attention to their medication ( come on Phillips v Francis what other explanation is there other than they fundamentally had no idea about what you were delivering judgement on, and I’ll go toe to toe with the chancellor any time he chooses)

    There will always be the wide boys, fly by nights and the hapless or clueless but because, in the main, most bumble on getting it more or less right, the above steps will improve their collective lot and help those with a genuine battle on their hands, whoever it is with.

  8. AM

    Well, yes. We have all encountered seriously bad management by freeholder/agent or FMC, I’m sure. But that was rather J’s point. What we see is the bad stuff, because that is what reaches the lawyers. Or indeed you. What we have is anecdote (including the various leasehold sites). And apart from the odd high profile collapse, and Tribunal cases, there is not much else to go on.

    So the extent of the problem isn’t clear. My feeling is that it is widespread, but that could well be because people only contact me when things have gone seriously wrong…

    • Yes, that’s very much my point. I agree with a large amount of what AM says as it largely accords with my own experience, but what I don’t know is whether my experience is representative of the entire leasehold sector. I rather doubt it, but I can’t be sure. AM seems to have experience of property management work, so I was hoping to tap his/her experiences!

  9. I think that what I wanted to convey is that with any given set of buildings, your expectations are likely to be reflected. Take a series of white painted villas in W9 or glass and steel towers on the river, and while equally well maintained, one might be so through good will and common sense, another through solid management from within or without, but both could be tainted by procedural shortcomings and whopping errors. In terms of appearance amenity and value landlording is “good” however if the building is underinsured or risk assessments not done, it is bad in a technical sense. In the same way those owned by asset manager types might well be as well maintained and presented but the service cost high through inward looking sourcing of service providers eg wholly owned insurance brokers or contractors, high levels of fees on “extras” eg underletting. Equally there are very shoddy blocks where owners care little and cooperate less and it is usually one soul bravely trying to keep it working. From that point of view landlording is good, but the outcome is bad.
    I suppose in terms of a very general question I have given a very general answer as bad landlordism is a very general term. Therefore it speaks for itself that taking a trip outdoors, there are a lot of leasehold premises which sell regularly, they are not in rack and ruin, nor a blighted product as some websites would have politicians believe. Most therefore, by and large, get by, varying from “just about” to good levels of service by lessees or external landlords, both with or without agents, but like the public perception that ignores the hard working Romanian and sticks on the encampment at Marble Arch, the “nightmare forfeiture” ” price fixing” horror stories capture our imagination.

    While there is a tiny group of MPs that have jumped on one bandwagon they are all in for a bit of a surprise when they attempt to make real reforms and discover that waiting for them is the substantial landowner’s lobby in the Houses , representing the bulk of property ownership, and far outnumber the relatively small holdings of a much publicized BVI companies who are very much a rotten apple in an otherwise healthy orchard ( that granted needs a little work and could do better).

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