As published in Property Law Journal, March 2014.
The number of residential service charge dispute cases being issued in the Property Chamber of the First-tier Tribunal and the Court are increasing year on year. Amongst these cases are a significant number which relate to consultation under Section 20 of the Landlord and Tenant Act 1985 (‘the 1985 Act’) and dispensation of the consultation requirements pursuant to Section 20ZA of the 1985 Act.
In this article we look at the basic principles of the consultation and dispensation provisions contained in Section 20 and Section 20ZA respectively. We also look at some recent significant cases where these provisions have been considered and what this means for landlords and managing agents.
Section 20 of the 1985 Act and the Service Charges (Consultation Requirements) (England) Regulations 2003 (‘the 2003 Regulations’) impose a statutory limit on recovery of service charges in certain circumstances.
Section 20 requires that a landlord or management company must carry out statutory consultation with its tenants if either:
- In the case of qualifying works (as defined in Section 20ZA), the relevant contribution of any one tenant in relation to the cost of the works would be more than £250; and
- In the case of qualifying long term agreements (‘QLTA’) (also defined in Section 20ZA), the relevant contribution for any one tenant in any accounting period would be more than £100.
The various consultation requirements are set out in Schedule 1 to 4 of the 2003 Regulations. The consultation procedure which must be used followed depends on whether the consultation relates to qualifying works or a QLTA and whether public notice is required in the Official Journal of the European Union under the Public Contracts Regulations 2006 (SI2006/5).
If the landlord or management company should have consulted and they have not, then in the case of qualifying works, recovery will be limited to £250 per tenant and in the case of a QLTA, recovery will be limited to £100 per tenant. Therefore, failure to consult could have severe financial consequences for a landlord or management company where major works or large contracts are involved.
In cases where a landlord or management company is unable to carry out Section 20 consultation or for some reason has failed to do so, the First-tier Tribunal (Property Chamber) has the power to dispense with the consultation requirements pursuant to Section 20ZA if it is satisfied that it is reasonable to do so.
Recent case law
In the last 18 months we have seen a significant number of cases dealing with issues relating to Section 20 consultation and dispensation under Section 20ZA. We consider below just some important cases and the impact the decisions in these cases may have on landlords and management companies in the future.
Daejan Investments v Benson and others (2013) UKSC 14
The recent case of Daejan Investments made its way to the Supreme Court where clarification was given on how the First-tier Tribunal should exercise its jurisdiction when dealing with dispensation claims.
This case involved a mixed use building in relation to which major work was required. There were five residential tenants. Due to the cost of the proposed work Daejan was required to consult with the tenants of the residential flats pursuant to Part 2 of Schedule 4 to the 2003 Regulations. Daejan gave notice to the tenant of its intention to carry out major works but did not comply with some of the remaining consultation requirements set out in the 2003 Regulations. The Leasehold Valuation Tribunal at first instance concluded that the statutory requirements had not been complied with and that the landlord’s recovery should be capped at £250 per tenant. The overall recoverable costs were capped at £1250 and the loss to Daejan in financial terms was significant.
Daejan therefore applied to the Leasehold Valuation Tribunal for dispensation under Section 20ZA. They also offered to reduce the costs by £50,000 to compensate the tenants for any prejudice which had been suffered. The Tribunal refused to grant dispensation on the basis that the failure to comply had caused substantial prejudice to the tenants. Daejan appealed to both the Upper Tribunal and the Court of Appeal, unsuccessfully in each case. Each Court considered that the fact that the financial consequences to a landlord were severe if dispensation was not granted, was irrelevant. The main consideration was whether there was any prejudice to the tenants.
The landlord appealed to the Supreme Court. The Supreme Court overruled the decision of the Court of Appeal and allowed dispensation in relation to the consultation requirements on certain terms. Dispensation was given subject first to a reduction of the recoverable costs by £50,000 and secondly to conditions as to costs.
The Supreme Court agreed that possible adverse financial consequences to the landlord were irrelevant in deciding whether to grant dispensation and that the question to be considered was whether the tenants would suffer any ‘relevant prejudice’ if the dispensation was granted. The Supreme Court found that it was arguable whether any prejudice had been suffered by the tenants in this case but that, in any event, the discount offered exceeded any possible prejudice which may have occurred.
The Supreme Court also confirmed that the First-tier Tribunal (Property Chamber) has jurisdiction to grant dispensation on terms.
The Supreme Court’s decision in the Daejan case came as a huge relief for many landlords who were previously at risk of large financial penalties even in cases where there had been genuine errors during the consultation process. Of course there is a balance to be reached between ensuring the tenants are protected against an unscrupulous landlord who does not fulfil the consultation requirements and ensuring that tenants are not able to take advantage of a minor error in the process. However this case certainly seems to have gone some way to achieving this.
BDW Trading Limited v South Anglia Housing (2013) EWHC 2169
This case involved a scheme of residential flats in relation to which the developer had entered into a 25 year contract (a QLTA) for the provision of water and electricity to the flats. The costs incurred under this contract were to be passed onto the tenants in the future. However, at the time when the contract was entered into there were no tenants on the scheme. BDW Trading argued that the definition of a QLTA could not apply as the definition in S20ZA referred to the ‘landlord’ implying that a lease existed. Further if the consultation provisions did apply in those circumstances a landlord would be forced to apply for dispensation under Section 20ZA as consultation would be impossible.
South Anglia Housing did not agree and argued that the reference to ‘landlord’ must include future landlords. In addition the 2003 Regulations already makes specific provision for circumstances where there are no tenants. Regulation 3 contains details of agreements which are not QLTA for the purpose of consultation and this includes an agreement entered into for services when there are no tenants in the building and the term is for a period not exceeding five years.
The High Court decided that the proper construction of the 1985 Act and the 2003 Regulations could not possibly have meant that a landlord would be required to consult in circumstances where there were no tenants to consult with. The Court also confirmed that tenants could still challenge the costs levied under the agreement if they were unreasonable under Section 19 of the 1985 Act and so there was recourse for a tenant if the costs levied were excessive.
Obviously this will assist developers and landlords who are required to enter into QLTAs in excess of five years (such as CHP and district heating contracts) where there are no tenants in the building at that time. This will mean that unnecessary application for dispensation will not longer be required simply to protect a landlord’s position.
Trafford housing Trust Limited v Rubinstein and others (2013) UKUT 0581 (LC)
When issuing Section 20 notices, care must also be taken to ensure that the tenant has sufficient time to make their observations and nominations as required by the 2003 Regulations. The 2003 Regulations currently provide that the tenant has ‘30 days beginning with the date of the notice’ to make observations to a landlord.
This has been clarified in the case of Trafford Housing Trust Limited v Runinstein and others. The case related to Section 20 notices which were served by Trafford Housing Trust on eight of their tenants in relation to a QLTA which they were proposing to enter into. The notices were required to be served under Schedule 1 of the 2003 Regulations.
The notices were dated 11 March 2011 and were posted to the tenants on 16 March and were therefore likely to be served on the 18 March. The relevant date specified in the notice for the tenants’ observations was 15 April 2011. The Leasehold Valuation Tribunal found that Trafford Housing had failed to comply with the relevant provisions of the 2003 Regulations as the tenants had not been given the required 30 day period in which to make their observations. The Tribunal also held that dispensation under S20ZA should not be granted.
Trafford appealed, arguing that the wording in the Regulations was clear and the reference to “the 30 days beginning with the date of the notice’ meant that provided the notice was dated 30 days before the date for responding which was given in it, this was sufficient to comply with the Regulations.
The Upper Tribunal disagreed and said that ‘the date of the notice’ could not be taken to simply mean the date printed on it. They said that it meant the date on which the notice performs its crucial function; namely notifying the recipient of the information contained in it (for example the date of service or receipt). Accordingly the Upper Tribunal agreed with the Leasehold Valuation Tribunal that the landlord had not complied with the provisions of the 2003 Regulations.
This highlights the need for the landlord or management company to be careful when serving Section 20 notices and to ensure that they allow plenty of time for notices to be received.
Southern Land Securities v Hodge (2013) UKUT 0480 (LC)
Often, after the initial Section 20 consultation has taken place and once the major works are underway, it becomes apparent that additional work is required over and above that stipulated within the consultation notices. Previously when these circumstances arose a landlord was faced with the decision of whether or not they were required to consult again in relation to those additional works.
Southern Land Securities v Hodge considered this problem. The case concerned a four-storey terraced house in London which contained a number of residential flats. Southern Land Securities had issued Section 20 notices notifying the tenants that it intended to carry out ‘external repairs and decoration works which were required under the terms of your lease’. The work went out to tender and Southern notified each of the tenants that it proposed to accept the estimate of the lowest contractor.
During the course of carrying out the works Southern’s engineer informed them that further work (in addition to that stated in the Section 20 notice) was required to a wall of the building. The landlord wrote a letter to the tenants advising them of this but did not issue fresh Section 20 notices.
The Leasehold Valuation Tribunal at first instance found that as the additional works were not within the scope detailed in the Section 20 notice, and a second round of consultation was required in respect of those additional works.
It was acknowledged in the proceedings that in some cases a problem is revealed whilst carrying out major works which has to be completed in order for the remaining work to be undertaken or that sometimes there are costs contained in the notices which turn out to be more expensive than originally estimated. However, this case did not fall into those categories. There was nothing to indicate that this was an unexpected item which could not have been envisaged at the time when the Section 20 notice was served.
The Upper Tribunal upheld the Leasehold Valuation Tribunal’s decision and confirmed the work did not come within the scope of work originally detailed in the consultation documents and that fresh notices should have been issued. They based their decision on the following:
- The Section 20 notice contained no reference to the additional work which was subsequently carried out; and
- Other than some very minor aspects, the additional work was not required to be carried out in order for the original contracted works to be completed.
Obviously this case is a warning to landlords and management companies that where a Section 20 notice is served reference to all of the work which may be carried out should be included. Such extra expense may only be allowed where there is strong evidence that the additional item of work was unexpected and was necessary in order for the original work to be completed.
Phillips and Goddard v Francis (2012) EWHC 3650 (Ch)
This is perhaps the most controversial of the cases we have considered and has left many landlords and managing agents confused about how they deal with their day to day repair and maintenance programme in terms of consultation.
The site in question consisted of 150 holiday chalets let on long leases. Various works were required to be carried out in order to bring the site into repair and the landlord issued demands for increased service charges. Each of the tenants was charged the sum of £3117.47 in relation to these works. As the work was to be carried out throughout the course of the year no Section 20 consultation was undertaken.
Qualifying works are defined as ‘works on a building or any other premises’. Earlier cases indicated that when considering the threshold for qualifying works, of £250 per tenant, a series of minor works being undertaken would generally not be considered as ‘a single set of works’ for the purpose of imposing the statutory financial limit on recovery.
In the Phillips case the lower Court held that the items of service charge did not constitute a single set of qualifying works for the purpose of the statutory threshold. The tenants appealed arguing that the accumulated works did constitute a single set of works in relation to which the charge to them was in excess of the £250 limit set out in the 2003 Regulations. The appeal was allowed on the basis that there was nothing in the legislation which required the identification of one or more sets of qualifying works and there was no ‘triviality threshold’ in relation to qualifying works. The Judge said that, as the contributions were payable annually, the limit should be applied to the accumulative cost of the work carried out during that year.
This controversial decision means that should a landlord consider carrying out a number of separate items of work during the course of the year then they must effectively add the cost together to establish whether that would result in a cost to each tenant of over £250. This could include not only planned maintenance but arguably reactive repairs.
The practical difficulties of this are obvious. It places a huge administrative burden on landlords and management companies who should now strictly consult under Section 20 in order to carry out basic maintenance work on a scheme if the cumulative cost of that work over that year exceeds £250. It is also almost impossible to take into account reactive repairs when carrying out the consultation at the beginning of the year and this creates its own difficulties.
There is some comfort for landlords and management companies as the landlord in the Phillips case has been given leave to appeal out of time and a provisional date for the appeal has been set to take place in May 2014. Hopefully the outcome of that appeal will provide landlords and management companies with some clarification on how these issues should be addressed.
Whilst there has been some clarification in terms of the consultation requirements and the circumstances when dispensation will be granted, there is still a great deal of uncertainty in particular areas. There is no doubt that there is plenty of scope for further case law and landlords and managing agents need to keep themselves informed as more issues are determined through the Courts.