On Friday 31st October 2014, the Court of Appeal handed down its judgement in the case of Phillips v Francis  EWHC 3650 (Ch D). The Court of Appeal upheld (in part) the Landlord’s appeal against the ruling of the High Court, Chancery Division.
WHAT DID THAT MEAN?
The duty to consult is limited to where it is proposed to undertake sets or batches of qualifying works which will lead to any one tenant paying over £250. The Court of Appeal decided that the High Court was previously wrong to adopt an approach of adding together all qualifying works carried out in any one service charge financial year and that the duty to consult applied if the total costs of those works resulted in any one individual tenant paying more than £250.
The Court of Appeal held that to apply that obligation to every item of maintenance and repair gave rise to serious practical and administrative problems and could not have been intended by Parliament!
HOW DID WE GET HERE?
On 21st December 2012 the decision of the High Court in Phillips and Goddard-v-Francis  EWHC 3650 was given. This is an important case on the meaning of “qualifying works” in Section 20 and S20ZA of the Landlord and Tenant 1985 Act (The 1985 Act) for some time, had far reaching implications for landlords and managing agents alike.
Section 20 Landlord and Tenant Act 1985 (LTA 1985)
As is well know, Section 20 of The 1985 Act requires landlords to consult with lessees prior to committing to qualifying works or qualifying long term agreements. Failure to do so, without dispensation from the requirements, will result in the landlord not being able to recover from the lessees who contributes through their service charge to the cost of works or long term agreement more than £250 (in the case of works) and £100 (in the case of long term agreements).
The High Court Decision
The High Court decided that the common approach since the case of Martin v Maryland Estates  of considering whether a particular set of works are “qualifying works” was wrong. Instead all works that were “qualifying works” should be brought into the account for computing the lessee’s contribution.
In other words, the case seemed to indicate that landlords and property managers should not consider work projects individually, but collectively over the service charge year. The decision suggested that it was not the impact in service charge terms, on a lessee as a result of an individual project one should be concerned about, but the impact of all of the works that should be undertaken in the whole service charge year. If, collectively they were to result in any lessee paying more than £250 towards them, then consultation is required in relation to all those projects, however minor they might be, assessed individually.
For some time, this meant that it was necessary for a landlord to consult on all qualifying works, even if the tenant’s contribution to the cost of those particular works is less than £250.00, otherwise the tenant’s contribution to the total cost of all qualifying works in a particular accounting period will be capped at £250!
The case relates to long leases of chalets on a holiday site.
In 2008, Mr and Mrs Francis (the lessors) bought the freehold of a holiday park in Cornwall. In a letter sent to all lessees in May 2008 the lessors indicated their intention to bring the site up to “first class standard” and proceeded to carry out the works without consulting in accordance with the Consultation Regulations.
Although the idea of improvement was welcomed, a service charge of £3,120.00 per chalet in 2008 rising to £9,600.00 in 2010 was not. The lesses challenged the service charge demand on a number of grounds (including the increase in service charge) and sought declarations as to the construction of the leases and injunctions preventing forfeiture.
(1) whether the lessors were entitled to recover both £95,000 as wages for the lessors and a management charge of 5% of the total costs of certain items of expenditure; and
(2) which items amount individually or collectively as “qualifying works” for the purpose of S20 and S20ZA if the 1985 Act.
At first instance the judge, relying upon the reasoning in Martin v Maryland Estates  2 EGLR 53, applied a three stage test, namely:
(1) Which of the works fell within the definition of “qualifying works” contained in section 20ZA(2) LTA 1985 (i.e. “works on a building or any other premises”)?
(2) Did those works constitute one or more “sets of qualifying works”?
(3) Did any of those sets of qualifying works fall below the threshold set by the limit on the cost of those works?
He rejected the tenants’ submission that the works were one scheme planned in advance instead finding that there were many separate sets of qualifying works.
The lessees appealed on the grounds that the Judge at first instance had been wrong and the works should have been considered as a whole. Therefore, the entire excess over £250 per tenant ought to be irrecoverable.
On appeal, the Chancellor of the High Court had to decide whether the Judge at first instance had asked the correct questions (the three stage test above).
The Chancellor accepted that the stage (1) of the test (i.e. which of the works fell within the definition of “qualifying works” contained in section 20ZA(2) LTA 1985) was correct.
However, the Chancellor held in relation to stages (2) and (3) the case of Martin v Maryland Estates predated the changes in legislation. The Chancellor held:
“The distinction between that case and this is the change in the legislation. The limit then was by reference to the cost of the works; the limit now is by reference to the amount of the contribution. The consultation requirements then were the provision to the tenants of at least two estimates of the cost of the works; now it is a notice by the landlord to the tenants of his intention to carry out qualifying works and to describe them in general terms. Thus the emphasis has shifted from identifying and costing the works before they start to notifying an intention to carry out the works and limiting the amount of the individual contributions sought to pay for them after their completion. Accordingly, I see nothing in the present legislation which requires the identification of one or more sets of qualifying works. If the works are qualifying works it will be for the landlord to assess whether they will be on such a scale as to necessitate complying with the consultation requirements or face the consequence that he may not recoup the cost from the tenants’ contributions. As the contributions are payable on an annual basis then the limit is applied to the proportion of the qualifying works carried out in that year. Under this legislation there is no ‘triviality threshold’ in relation to qualifying works; all the qualifying works must be entered into the calculation unless the landlord is prepared to carry any excess cost himself”.
Implications of the High Court Decision
The Decision of the High Court was important albeit unwelcome decision for property management and landlords alike!
It is not an understatement to say that the decision caused a lot of consternation. Landlord and property managers were going to have to consider their budgets more carefully and consult far more frequently. For example, landlords were concerned that at the start of the service charge year they did not know whether they would need to consult as the total repair costs for that year were unknown. For example, an emergency repair during the year might tip the cost over £250 by which point it would be too late to consult on earlier works.
But how did that work in practice for Landlords and Property Managers? Anecdotal evidence suggested landlords were waiting the outcome of the appeal before deciding how to amend their procedures. In some cases for some time it was thought Landlords would have to, as an, alternatively option enter into long term agreement to provide qualifying works and then deal with the more limited requirements imposed thereunder when qualifying works are proposed.
COURT OF APPEAL
Clearly for some time the decision had far reaching consequences for Landlord and Property Managers alike (despite the anecdotal evidence). The Landlord in the case wanted to appeal against the decision of the High Court. However, the time for appealing had expired and so the Landlord needed first to apply to the Court of Appeal to extend the time to appeal – which was eventually granted.
COURT OF APPEAL
The Court of Appeal heard oral arguments about leave to appeal out of time and the merit of an appeal on 18 November. The Landlord was successful. The Court of Appeal decided as follows:-
- Application to extend time to appeal granted.
- Permission to appeal granted.
- Costs in the appeal.
In the Court of Appeal the landlord was successful.
The Court decided that a landlord is required to consult where Qualifying Works lead to any leaseholder paying more than £250. The limit is based on a single set of Qualifying Works.
The Court gave guidance as to identifying a single set of Qualifying Works when looking at a series of works. Points to consider are:
- where the items of work are to be carried out;
- whether they are part of the same contract;
- whether they are to be carried out at more or less the same time; and
- whether the works are different in character from, or have no connection with, each other.
As a result, the Court of Appeal has reinstated the position as it was before the Lord Chancellor’s decision.
For further information on this decision and/or advice on service charge/leasehold dispute issues please contact me at firstname.lastname@example.org or on 0207 644 7294