Court of Appeal provides essential guidance on residential service charges
Phillips v Francis
15 January 2015
Landlords must consult with tenants before carrying out any 'qualifying works' that would oblige each tenant to contribute more than £250. The Landlord and Tenant Act 1985 ('the 1985 Act') provides that if such consultation is not carried out, a landlord will be barred from recovering any additional costs through the service charge, unless dispensation is applied for.
There is no definition of 'qualifying works' in the 1985 Act. The position until recently had been based on the case of Martin v Maryland Estates , after which it was widely accepted that the limit applied on a project-by-project basis.
The new landlord at a holiday site in Cornwall decided to embark on a series of improvements to the site, which was welcomed by the 150 or so tenants. They did not, however, welcome the significant increase in their service charge demands.
The landlord had not carried out a consultation in respect of the works, arguing that it was not necessary as the improvement works were made up of a number of smaller projects, each of which did not exceed the limit, which could be recovered from individual leaseholders without consultation. The judge at first instance in the Truro County Court agreed with the landlord, leading to an appeal by the tenants to the High Court.
The High Court controversially decided that following the amendments made to the 1985 Act by the Commonhold and Leasehold Reform Act 2002, Martin v Maryland Estates was no longer relevant. Accordingly, the definition of 'qualifying works' to which the consultation requirements applied included all works, no matter how minor, for which the landlord incurred costs during any given service charge period, not on a project-by-project basis.
Therefore, as the contributions were payable by tenants annually, the limit should be applied to all qualifying works carried out in that year. This meant that the landlord was limited to recovering £250 per tenant for each service charge year in respect of all the improvement works, leaving a shortfall of several hundred thousand pounds.
This decision left the landlord in an almost impossible position. The cautious landlord would have to carry out a consultation for all works to be carried out once the annual limit of £250 a tenant for each year had been exceeded, no matter how small. The High Court's decision made it clear that there was no triviality threshold, which would mean that strictly speaking, consultation would have to be carried out for fairly minor works, such as replacing a window.
This would be an administrative burden for the landlord and delays and additional costs for tenants. Alternatively, a landlord could opt not to follow the consultation procedures and risk not being able to recover those costs, which would have particularly disastrous consequences for Right to Manage Companies and Residential Management Companies with limited reserves. The decision was of such importance that industry bodies such as the Royal Institution of Chartered Surveyors and the Association of Residential Managing Agents supported the landlord's appeal to the Court of Appeal and the secretary of state intervened on the grounds that the decision had wide-ranging effects for all landlords and tenants.
The Court of Appeal fundamentally disagreed with the High Court's approach and said Parliament simply could not have intended for landlords and tenants to be encumbered in this way. They held that the correct approach to determining what constitutes qualifying works for the purposes of consultation is to identify individual sets of qualifying works.
The Master of the Rolls provided some helpful guidance to determine what a single set of qualifying works comprises. He described this as a multi-factorial question, the answer to which should be determined in a commonsense way, taking into account the relevant circumstances. The relevant (but non-exhaustive) list of factors includes:
- Where the items of works are carried out (whether they are contiguous or physically removed from each other);
- Whether they are the subject of the same contract;
- Whether they are done at more or less the same time or different times; and
- Whether the items of work are different in character from, or have no connection with, each other.
The Court of Appeal stressed that the policy of the act is to protect tenants from unexpected costs from major works. It was made clear that the 'sets' approach should not put tenants in a more vulnerable position, as they were still entitled to the separate protection in the act, which provides that a landlord can only recover costs where the works carried out are reasonably incurred and of a reasonable standard.
This decision will be a relief to the property management industry and provides a practical framework for landlords and tenants. The lack of a definition of 'qualifying works' in the 1985 Act has led to uncertainty, but this sensible decision puts flesh on the bones and gives a clear structure within which landlords will be able to approach works with a degree of certainty.
Lauren Fraser is a solicitor within the real estate litigation team at Charles Russell Speechlys