A recent decision of the High Court has overturned the previously accepted view of how S20 consultation should be carried out by landlords.
At this stage, it is not possible for ARMA to issue definitive guidance about when S20 notices are now required following this decision. But we have set out the potential implications of the case in this special briefing.
About the decision
The case concerns an estate of over 150 holiday chalets let on 999 year leases in Cornwall. In 2008 the estate was bought by a new owner who informed the lessees that a programme of works would follow to bring it up to a first class standard. The lessees were then asked to pay large increases in service charges.
In 2010, the lessees brought a case to confirm that restrictions on service charges in the 1985 Act did apply to lessees of holiday chalets. That case decided that the chalets were dwellings as defined in the S38 of the 1985 Act as amended.
In 2011, the lessees applied to the county court to challenge the service charges levied. Various issues were in dispute, but the most important one was the application of S20 to the works undertaken. In the county court the judge decided that the works carried out were not one set of works for S20 purposes and so, because each separate item of work was not over the 250 threshold per lessee, the costs were recoverable.
The judge in the county court referred to the Court of Appeal case of Martin v Maryland (1999) in which the question of the fragmentation of works was considered. In that case, the following approach was laid down and has been accepted for many years.
(a) A common sense approach was necessary as Parliament has not made it clear how to make a division, if at all, between works being undertaken.
(b) Extreme fragmentation of works in a major scheme of development "plainly would be absurd".
(c) The fact all the works were covered by one contract is not a decisive factor.
(d) The legislative purpose of the limit on recovery in the absence of consultation is to provide a triviality threshold rather than to build into every contract a margin of error."
In the present case, the lessees appealed to the High Court (Chancery Division) and judgment was handed down just before Christmas 2012. The High Court allowed the appeal and took a radically different view to the county court judge. The High Court attached considerable significance to the fact that the definition of qualifying works in the 1985 Act had been amended by the 2002 Act. Qualifying works are now defined as works on a building or any other premises. The limitation on service charges is now defined by the contribution of lessees and the appropriate amount - currently 250 per lessee. In the previous version of the 1985 Act the limit was based on the cost of the works.
Here are the key paragraphs in the Chancellors decision with ARMAs underlining added:
35. 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.
36. In my view the legislation in point on this appeal entitles me to construe it in the foregoing manner unconstrained by the conclusion of the Court of Appeal in Martin v Maryland Estates, save in its reference to the need to use common sense. In addition such a construction conforms more closely to the ongoing works of repair and maintenance likely to be necessary on an estate in multiple occupation. They are unlikely to be identified as parts of a complete set of works which can be costed at the outset. In the normal way they will be carried out as and when required. The need for some limitation on an obligation to contribute is at least as necessary with sporadic works of that nature as with a redevelopment plan conceived and carried out as a whole.
37. Accordingly, in my judgment the judge applied the wrong tests when seeking to apply the 1985 Act. It is not disputed that all the works he considered in paragraphs 361 to 367 were qualifying works within the statutory definition. Accordingly, all of them should be brought into the account for computing the contribution and then applying the limit. It may be that they should be spread over more than one year thereby introducing another limit. With that exception, the provisions relating to this service charge do not require any identification of 'sets of qualifying works' or the avoidance of 'excessive fragmentation'.
What does this mean for S20 consultation?
It is not clear what this decision means. Because of the definition of qualifying works the Chancellor appears to bring into scope all works to a building as possibly requiring S20 consultation.
Works can therefore mean day-to-day repairs for which an annual budgeted figure is calculated; planned maintenance such as lift and fire equipment maintenance; reactive emergency repairs; and major works. What is not included as works are services such as gardening, cleaning and window cleaning.
Further, by referring to the amount of the contribution as an annual one and that possibly setting a limit, it appears to mean that agents need to consider aggregating the cost of any works in any one financial year. All the works in any one financial year should be viewed as one set of works for S20 purposes. So if major works are spread over more than one financial year the decision appears to suggest that the costs are split according to the contributions demanded in each year.
S20 regulations about qualifying long term agreements specifically refer to contributions of more than 100 per lessee per year. But this decision seems to want to use this approach for works as well.
The decision does not deal with the question of reserve funds and in what way those contributions in any financial year should be dealt with.
The decision does not explain what to do about leases where service charges are collected in arrears on demand without necessarily referring to financial years.
What should agents be doing to respond to this decision?
It is difficult to see any workable solution that agents and their landlord clients can follow arising from this decision. The approach suggested by this decision of looking at all works in any financial year and applying the S20 threshold to that total leads to severe practical difficulties as well as extra expense for managing agents which would be passed on to leaseholders in service charges.
ARMA has met officials at the Department of Communities and Local Government (DCLG) and a legal advisor from the Leasehold Advisory Service (LEASE) and underlined with them that the implications of this judgment are potentially serious and far-reaching. At this stage the priority is to understand the full implications of the judgment and we will work with these organisations and legal commentators to achieve that.
Notwithstanding the briefings put out by various legal advisors, it may take a little while to arrive at a broad consensus. We will also work with others to assess as rapidly as possible, whether anything can be done to counteract the effects of the judgement. However a court judgment can only be countered through further court action or by a change in the law, neither of which remedies can be applied quickly.
ARMA cannot therefore give definitive guidance on what to do at this stage. It will be in managing agents interests and those of their clients, to develop a reasonable response to the judgment, taking account of their own particular circumstances. They should also discuss what to do to protect them from future challenges based on this decision.
ARMAs view of this case
The decision in this case has overturned accepted legal views on how landlords and their agents should comply with S20 consultation. Whether the High Courts views are right or wrong in law the decision is likely to have adverse consequences for everyone involved with residential leasehold dwellings.
For lessees, it could mean their landlords - including RMCs and RTMCos - will be cautious and serve more S20 notices before carrying out relatively minor repairs. That will mean delays in getting works done. A repair to the door closer or door entry system of a block of flats for example is needed quickly to maintain security; it is not meant to wait for two months whilst two consultation notices are served. Moreover, planned maintenance works for, say, fire equipment can often be obtained more cheaply and at better value to lessees if negotiated for longer periods than one year.
Another consequence for lessees is that the cost of management is likely to go up. Many more S20 notices may be sent and notices would have to go to all lessees in a block each time.
It introduces uncertainty for landlords, including RMCs and RTMs, because there is no clear guidance in the decision on when it is necessary to serve S20 consultation notices. Failure to serve the correct notices can result in failure to recover expenditure on repairs. RMCs and RTMCos in particular do not have monies to fall back upon if they cannot obtain payment through service charges from lessees.
It is unworkable for managing agents. They want to advise their clients about the need to consult with lessees about works but there is no clear position now, after this case. If agents adopt an overly cautious approach they are likely to get complaints from their client landlords and lessees that urgent repairs are being delayed because of the need to serve S20 notices for minor repairs.
What is ARMA doing about this case?
When ARMA heard about this case it hoped that the landlord involved would seek leave to appeal the decision and so be able to challenge it in the courts. We made it known to the landlord that we would be willing to issue a document to support their case for an appeal because it was in the general public interest to do so. ARMA cannot appeal this decision because it is not a party to it.
If an appeal had been granted then any subsequent challenges to service charges based on the decision in this case would normally not have proceeded pending the outcome of the appeal. When we learned on the 10th January that the landlord had decided not to seek leave to appeal it was clear that the ruling would become operative.
One way in which this decision could be clarified or overturned is for there to be cases in which it forms the basis of judgment and for those cases to be appealed. But the only court that can overturn this decision of the High Court is the Court of Appeal. Regrettably any appeal will take a long time and cost a great deal of money. So all parties concerned are left with uncertainty about whether they are now dealing with S20 consultation correctly. ARMA is keen to hear of any Tribunal cases where this decision is used to challenge service charges.
We are continuing the discussions we have started with DCLG and other interests and will issue further briefings when we have more news.