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.