Section 20 consultation and procurement - Sian Evans at PfH Live 2015

Service Charges and Section 20 Consultation

Sian EvansPartner, Weightmans LLP

Contents

1 Setting the scene

2 Obligations of landlords in dealing with repairs/improvements

3 Consultation – process and pitfalls

4 Dispensation with consultation process

5 First Tier Tribunal Property Chamber (formerly Leasehold Valuation

Tribunal)

6 Recent case law/developments

Setting the scene

Gradual increase in protection for leaseholders and tenants with variable service charges

Service charges can now be challenged in respect of whether they should be paid at all or if reasonable

Requirements for consultation prior to expenditure

Power to dispense with consultation requirements when necessary

Obligations for landlord in dealing with repairs / improvements

Does landlord need to consult the leaseholder or tenant with variable service charge?

Statutory Requirement

Section 20(1) and Section 20(2) of the Landlord & Tenant Act 1985 provide that:

Where this Section applies any qualifying works or qualifying long term agreements, the relevant contributions of the tenants are limited in accordance with sub-section (6) or (7) (or both) unless the consultation requirements have been either – Complied with in relation to the works or agreements, or Dispensed with in relation to the works or agreements by (or on appeal

from) a Leasehold Valuation Tribunal

“Relevant contribution” in relation to a tenant and any works or agreement is the amount which he may be required under the terms of his lease to contribute by payment of service charge to relevant costs in carrying out the work

What are qualifying works?

Works are not defined under Section 20 or Section 20ZA of the LTA 1985 or in the consultation regulations other than to confirm that they are works on a building or other premises.

However see S18 Landlord and Tenant Act 1985

Most statutory controls adopt the definition of “service charge” in S.18 of the Landlord and Tenant Act 1985

What are qualifying works?Section 18 Landlord and Tenant Act 1985

18 (1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a dwelling as part of or in addition to the rent -

(a) which is payable directly or indirectly, for services, repairs, maintenance, improvement or insurance of the landlord’s costs of management; and

(b) the whole or part of which varies or may vary according to the relevant costs.

(2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable.

(3) For this purpose –(a) costs includes overheads; and (b) costs are relevant costs in relation to a service charge

whether they are incurred or to be incurred, in the period for which the service charge is payable or in an earlier or later period.


Managing agent’s fees – services not works?

Retaining contractor to maintain a garden - works?

Employing a caretaker and making payment of wages – service?


One set of works or several sets of work?

The landlord is not entitled to artificially split up works into separate contracts. It may however be appropriate to split a contract into two parts to permit further consultation if e.g. opening works have been carried out for example.

Supervision Costs

The costs of supervision and employing experts should be included with calculation of cost of works for the purpose of qualifying costs.


Current Threshold for Cost

Section 20 (5) of the LTA 1985 provides that (5) an appropriate amount is an amount set by regulations made by the Secretary of State and the regulations may make provision from either or both of the following to be an appropriate amount –

An amount prescribed by, or determined in accordance with, the regulations, and

An amount which results in the relevant contribution of any one or more tenants being an amount prescribed by, or determined in accordance with, the regulations

The threshold is currently more than £250. This is on the basis that if any leaseholder/tenant with variable service charge is liable to pay more than £250 as his proportion of the service charge costs for the qualifying work.


Consultation Requirements

Landlord must send a Notice of Intention to any registered tenant association (RTA) tenant with variable service charge/leaseholder describing the proposed works.

The tenants/leaseholder then have 30 days to:

Make observations as to the works provided

Nominate a person or persons from whom landlord should try to obtain an estimate for the carrying out of the proposed work.

Landlord then obtains the minimum of two estimates: Landlord must try and obtain an estimate from one and in some case two of the tenants nominees. At least one estimate must be from a contractor wholly unconnected with the landlord.


Landlord serves on all tenants/leaseholders and any RTA statements free of charge summarising at least two of the estimates setting out any observations received and landlord’s response to the observations. All estimates should be made available for inspection whilst at the same time landlord should make estimates available to all tenants and the RTA, inviting observations on the estimates. The RTA tenants/leaseholders have 30 days to respond.

Landlord is obliged to consider the observations but is otherwise free to enter into contract for the carrying out of the works if landlord contracts with the person nominated by the leaseholder/tenants or RTA or with the person who supplied the lowest estimate.

Otherwise landlord must with 21 days of entering into the contract serve a Notice on the tenants or LTA stating landlord’s reasons for awarding the contract, setting out observations received and landlord’s response to those observations.

If the tenant’s contribution is over £250 but there has been no consultation then the cost claimed will be limited to £250.

Long Term Qualifying Agreements

A qualifying long term agreement means an agreement entered into by or on behalf of a landlord for a term of more than 12 months

Section 20 applies to a qualifying long term agreement if relevant costs incurred under the agreement in any accounting period exceeds an amount that results in the relevant contribution of any tenant in respect of that period being more than £100 per leaseholder.

The effect of Section 20 applying to qualifying long term agreement means that consultation requirements must either be complied with in relation to entering into the agreement or dispensed with by the Leasehold Valuation Tribunal.

If consultation or dispensation does not take place then the amount that the tenant can be required to contribute by way of service charge as relevant to costs incurred under the qualifying long term agreement is limited to £100 in respect of each accounting period.

Consultation Requirements – Qualifying Long Term Agreement

The consultation requirements in relation to qualifying long term agreements to which Section 20 applies are provided in Schedule 1 of Services Charges (Consultation Requirements) (England) Regulations 2003.

http://www.opsi.gov.uk/si/si2003/20031987.htm

The difference is that if OJEU applies is that whilst the tenants are invited to submit any observations that they may made they do not have the right to nominate a contractor in this agreement.



Overview

Landlord serves a “Notice of Intention” to enter into the qualifying long term agreement on all tenants and any tenants organisation describing the goods or services to be supplied to be carried out under the QLTA and landlord’s reasons for wishing to enter into the QLTA. If is an OJEU matter the notice should also state the reason why the landlord is not inviting nominations for contractors because a public notice for the relevant matter has been given.

The tenants or the recognised tenants association then has 30 days to make observations as to the proposed QLTA.

The landlord then prepares a proposal in respect of the proposed agreement. The proposal should contain a statement of the name and address of every party to the proposed agreement and any connection between the party and the landlord

The proposal should include:

Where it is reasonably practical for the landlord to estimate the relevant contribution of each tenant, a statement of that estimated contribution;

Alternatively where it is reasonably practical for the landlord to estimate the total amount of the expenditure, a statement of that estimated expenditure;

Alternatively, where it is reasonably practical for the landlord to ascertain the current unit cost or hourly or daily rate applicable to the relevant matters, statement of that rate or costs;

Alternatively a statement of reasons why the landlord cannot provide a statement of costs or rate and the date by which he expects to be able to provide an estimate.

If the landlord proposes to appoint an agent in his place a statement containing details of the membership of that proposed agent to any professional body or trade association subscription to any code of practice or voluntary connotation scheme.

A statement of the intended duration of proposed agreement.

The landlord’s response to any observations received.

The proposal should be served on the leaseholder/tenant/registered tenant’s association who then has 30 days to respond with the observations.

Landlord is obliged to consider the observations and must within 21 days of receipt of the observations state landlord’s response by note of the person who made the observations.

Consultation in respect of qualifying works once the QLTA is in place

By way of contrast where a fairly extensive consultation scheme applicable where there is no QLTA, the consultation requirements in respect of qualifying works under a QLTA are more limited.


Once the QLTA is in place the contractor will usually have the exclusive right to carry out proposed works. The relevant consultation requirements are set out in Schedule 3 to the consultation regulation and the overview is as follows:

The landlord serves a Notice of Intention on all tenants and any registered tenants association describing the proposed works and inviting observations.

The tenant or RTA then have 30 days to make any observations as to the works proposed and as to the landlord’s estimate expenditure.

The landlord is obliged to consider the observations and must within 21 days of receipt of observations state his response by notice to the person who made the observations or otherwise landlord is free to carry out the work.


If Landlord is entering into a qualifying long term agreement then landlord needs two sets of consultations:

In respect of entering into the QLTA in the first place and

A shorter consultation that the contractor has been appointed for the work to be carried out.

Points to note

Four schedules in regulations provide different consultation regimes

Key differences are existence of a QLTA and necessity of public notice

Check requirements for lease/tenancy regarding any additional consultation that may be required.

How will this apply to you?

Consultation will be required at the time the Frameworks are set up if you are the landlord

Consultation may be required at call off state if Section 20 criteria is satisfied if members are entering into a contract with the contractor/supplier.

Dispensation

S20A Landlord and Tenant Act 1985 “Where an application is made to an LVT for a determination to dispense with all or any of the consultation requirements in relation to any qualifying works by the QLTA the Tribunal may make a determination if satisfied that it is reasonable to dispense with all the requirements”.

Section 20A only requires the LVT to be satisfied it is reasonable to dispense with consultation and does not require the Tribunal to be satisfied that the landlord has acted reasonably.

If the landlord is aware before the event it is likely that consultation requirements cannot be complied with any application should be made before commencing the work.

Section 20 applies to statutory consultation requirements and would NOT allow landlord to dispense with any consultation requirements which may be present in the lease.

Dispensation

Daejan v Benson – Supreme Court March 13 - correct legal test is would a leaseholder suffer any relevant prejudice and if so, what relevant prejudice, as a result of the landlord’s failure to comply with the requirements. This means that the rules could now be relaxed and more dispensation applications could be granted.

Failure to comply with Section 20

Failure to comply means if the qualifying works for the amount claimed has to be limited to £250 per leaseholder/tenant with variable service charge of £100 per leaseholder/tenant.

No more Leasehold Valuation Tribunal

Now Property Chamber First Tier Tribunal which began work on 1 July 2013

Highlights from the new rules

Overriding objective “to deal with case fairly and justly”

Costs – the previous cap of £500 to penalise a person who has acted unreasonably in bringing, defending or conducting proceedings is now lifted

Pre-requisites for the recovery of service charge

S47 Landlord & Tenant Act 1987

A demand for rent or service charge must contain name and address of the landlord and of the address is not in England & Wales, an address where notices may be served

Failure to comply means service charge (but not the rent) is not due

Address for notices

S48 Landlord & Tenant Act 1985

A landlord must provide the tenant with an address in England & Wales at which notices must be served

Failure to serve notice allows the tenant to withhold payment of service charge

Summary of rights and obligations

S21B Landlord & Tenant Act 1985

A demand for payment of service charges must be accompanied by a summary of rights and obligations of tenant

The form of summary is prescribed by the Service Charges (Summary of Rights and Obligations, and Transitions Provision) (England) Regs 2007

A tenant who receives a demand which does not contain a summary may withhold payment

Stale service charges

S20B Landlord & Tenant Act 1985

If any of the relevant costs were incurred more than 18 months before the demand for payment of the service charge is served on the tenant, then the tenant shall not be liable to pay so much of the service charge

The 18 month rule will not apply if within the 18 months the tenant was notified in writing that those costs have been incurred and he would subsequently be required under terms of his lease to contribute to them

Phillips v Francis

Mr and Mrs Francis owned a holiday site with 150 chalets let on 999 year lease

Mr and Mrs Francis announced plans to carry out major works and demanded £3000 from each leasehold

Tenants argued as there had been no consultation their liability was capped at £250

On appeal

Decision over turned and huge sigh of relief in the industry!

Southwark LBC V Woelke July 13

Landlord trying to recover £4000 cost of major works billed separately from the service charge

Tribunal found that the bill was not yet payable as there was no provision in the lease which allowed for presentation of separate bills

Florrie’s Law

A new cap on the bills councils and housing associations can charge leaseholders for repair works came into force on 13 August 2014. The new cap will only apply where the work is to be full or part funded by a grant or other financial assistance from a programme.

The programmes are defined as the Decent Homes Backlog funding provided through the 2013 spending round or any other assistance provided by any Secretary of State of the HCA. These rules will only apply if an application is made for financial assistance after 13 August 2014.

• ‘Florrie’s law’ is named after 93-year old Florence Bourne, a woman living in a flat leased from Newham Council, who faced a £49,000 repair bill before her death from a heart attack in January 2010.

• The maximum level will be set at £10,000 outside London over five years, while a cap of £15,000 will apply to councils and housing associations in the capital. The cap will apply only to those who occupy their properties as their ‘only or principal home…

• New directions have also came into force on the same day which allows a social landlord to waive or reduce the service charge by an amount the landlord considers reasonable if the leaseholder is suffering exceptional hardship or some other reason . The landlord is able to waive or reduce a service charge already demanded or indeed paid to permit a refund.

• Councils and housing associations, which will now have to manage their portfolios carefully to ensure

compliance with the new law and to avoid service charge disputes.

Questions