For those of you that are familiar with building management, Section 20 of the Landlord & Tenant Act 1985 (as amended by the Commonhold & Leasehold Reform Act 2002), is proving to be a thorny issue indeed.
A potted history
Originally introduced to provide greater protection to leaseholders against unscrupulous landlords, Section 20 has proved to be increasingly challenging for managers of smaller buildings. This is in large part due to the low trigger point for qualifying works (£250 per lease per service charge year).
As costs for works have risen year on year, the Section 20 process is catching more works and increasing both the timeframes for works and the administrative burden on property managers.
In short while Section 20 has protected the interests of leaseholders with regards to major works it has always proved to be unfit for purpose in small buildings. This is because issues that were never intended to be included within scope of a notice became qualifying events due to the low trigger point.
Phillips v Francis [2012] EWHC 3650 (Ch D)
In late 2012 a legal judgement in the above case brought the issue of Section 20 to forefront of every of every Landlord/RMC’s agenda in the UK and once again highlighted the need for change in the existing legislation.
The High Court judge held that the county court has been wrong to focus on whether there were “sets” of works or “projects”. The question was whether or not cumulatively, the works resulted in service charges of more than £250 per leaseholder. In assessing that, one had to look at all the works being done, including “on-going works of repair and maintenance” and “sporadic works”. Further, this had to be considered on a year-by-year basis.
As noted by Roger Hardwick of Brethertons Solicitors, the decision has a number of significant implications:
- It means that neither you nor we can continue to treat s.20 consultation as something which applies only to major works projects.
- Rather, if the cumulative costs of all the works to a building result in a service charge demand which exceeds £250 for any one leaseholder, then s.20 applies to all those works, even though individually, none of them would be caught by s.20.
- In reality, this means that the obligation to consult is now going to arise much more frequently, since one must take into account all expenditure, including routine maintenance costs, ad-hoc repairs, etc.
- Failure to consult, even in relation to a small item of expenditure could result in the cost of all works carried out that accounting period being subject to the £250 limit.
Permission to Appeal
Leading professional bodies the Association of Residential Management Association (ARMA) & the Royal Institute of Chartered Surveyors (RICS) have not surprisingly taken a great interest in the case as it affects most of their members. Whilst all agree that it is right that the interests of leaseholders are protected, for law to be effective it must be workable in practice.
It is widely accepted that the decision is fundamentally unworkable in practice. Taken to its logical conclusion, a failure to consult over even a minor or trivial item of work to a building could result in the landlord’s recoverable expenditure for qualifying works being limited to £250 per tenant throughout the entire year, necessitating an expensive and time consuming application for dispensation.
On the face of it, the potential consequences for the leasehold property management industry (and, in turn, for leaseholders and landlords) are significant.
For example, this is likely to mean that landlords should be consulting much more frequently than they presently do. That in turn is likely to drive up service charges for leaseholders. As a matter of common practice, managing agents charge an additional fee above and beyond their general management fee for overseeing s.20 consultations.
Although the appellants failed to lodge their appeal in time the Court of Appeal accepted that the case raised a point of principle; and on the 18th November 2013, to much relief of the industry at large, the Court of Appeal granted permission to appeal out of time, with no conditions. The appeal is due to be heard over 14-15th May 2014. Let us all hope that common sense prevails and that the voices of the industry are heard.