Court of Appeal reverses controversial decision: when does a residential landlord's duty to consult on service charge works arise?

Court of Appeal reverses controversial decision: when does a residential landlord's duty to consult on service charge works arise?

When does a residential landlord's duty to consult on service charge works arise? The Court of Appeal has reversed a controversial High Court decision, confirming that the High Court’s ‘aggregated’ approach to qualifying works was wrong.

What was the issue?

The Landlord and Tenant Act 1985, s 20.provides that the service charge contributions recoverable from tenants in respect of 'qualifying works' are limited to the 'appropriate amount' (currently £250 per tenant) unless the consultation requirements have either been complied with in relation to the works or dispensation has been obtained.

Before the High Court decision in Phillips v Francis [2012] All ER (D) 225 (Dec), the generally accepted view was that the correct approach to the meaning of 'qualifying works' was to identify separate sets of works or projects for the purpose of identifying whether the relevant costs exceeded £250 per tenant so triggering the statutory consultation process.

In the High Court, the Chancellor decided that the correct approach was to aggregate all works in any given year (aggregating approach) without division into separate sets of qualifying works (sets approach). The decision is unpopular with landlords and has been the subject of considerable criticism. The Secretary of State intervened in the appeal to the Court of Appeal because:

'...the point raises a question of statutory construction of public importance with the potential to affect a large number of residential landlords and tenants throughout the country. The Chancellor had construed the legislation in a way which is at odds with what, it seemed, had previously been the general understanding of the position'

Court of Court of Appeal has held that the High Court's aggregating approach was wrong

Phillips and another v Francis and another (Secretary of State for Communities and Local Government) [2014] EWCA Civ 1395

The Court of Appeal decided that the aggregating approach in interpreting 'qualifying works' in LTA 1985, s 20 was wrong:

  • The language of the statute did not expressly provide an answer. However, the aggregating approach was not sensible. It required that, at the very latest, once the limit for contributions has been reached (£250 per tenant), the landlord must consult the tenants on any service charge item, however small (presumably subject only to the de minimis exception). This gave rise to serious practical problems and could not have been intended by Parliament.
  • The legislation required the landlord to have regard to the observations of the tenants in each consultation. To apply this obligation to every item of maintenance and repair (some of which may be of an emergency nature) was not sensible and in many cases would be unworkable. The added administrative burden must increase costs for landlords which would be passed on to tenants who would therefore have to pay for the protection of consultation even on minor matters. This could not have been Parliament's intention.
  • The consultation requirements placed significant administrative burdens on a landlord. It must describe the works it wishes to carry out or provide notice of the place where a description may be inspected. If this were required for every piece of minor repair work that a landlord wished to carry out over a year, it was likely there would have to be perpetual consultation. The landlord would have to consult on emergency matters or to consult in respect of works that were below the limit in case works were required later in the year which took the annual total over the £250 per tenant limit.
  • In addition, it was questionable whether a protective consultation in respect of potential works would be valid. Therefore, the landlord was caught between two unworkable alternatives:
    • consultation on every minor piece of work one at a time which would clog up the system and make running a site very difficult, or
    • consult prospectively which may not be valid consultation at all

The real protection afforded by LTA 1985 to residential tenants was that all service charges must be reasonable and reasonably incurred under LTA 1985, s 19. This was the sensible way to control routine works of repair and maintenance which were unlikely to be the subject of a detailed plan in advance.

The High Court's incorporation of an annual limit was also wrong. This was contrary to the language of the statute which expressly provides that the contributions are not limited by reference to the period to which the demand relates.

What constitutes a single set of works?

The Court of Appeal confirmed that what comprises a single set of qualifying works was a question of fact. It would depend on the individual circumstances. However, the court set out a non-exhaustive list of factors that were likely to be relevant:

  • where the items of work are to be carried out (whether they are contiguous to or physically far removed from each other)
  • whether they are the subject of the same contract
  • whether they are to be done at more or less the same time or at different times
  • whether the items of work are different in character from, or have no connection with, each other

In most cases it should be obvious whether works comprise one or more sets.

What are the lessons for lawyers?

Landlords will welcome what must be seen as a common-sense outcome and the Court of Appeal's guidance on what constitutes a set of works will be useful to landlords and tenants alike.

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About the author:
Joanna is a commercial property specialist. Prior to joining the LexisPSL Property team, she was a transactional lawyer. She qualified in 1995 at Shoosmiths and subsequently worked at Nabarro, Charles Russell, Bircham Dyson Bell and Pemberton Greenish. She has wide-ranging experience of all non-contentious property transactions, with a particular emphasis on landlord and tenant work.