SECTION 20 LOBBY UPDATE: TO REFORM OR NOT TO REFORM
By Ben Jordan FIRPM, Managing Director Premier Estates and ARMA Council Member
Given the current pace of world events Section 20 of the Landlord and Tenant Act 1985 seems almost an irrelevance and indeed may prove to be if, as seems likely, our legislators get bogged down for many years in unpicking the thousands of acts of parliament related to the UK’s membership of the EU following the country’s decision to Brexit.
One of the most positive recommendations of the 2014 Competition and Market Authority (CMA) Market Study into property management services was reform of the Section 20 consultation process for major works. Encouragingly the Government's response to the Study was an undertaking to consider reform of Section 20. And so the scene was set.
ARMA considered that this was one of the CMA's recommendations that it should take a lead on, as it could have significant consequences for its members and the wider world of leasehold management.
Three round-table stakeholder meetings were held during 2015 and early 2016, which were attended by officials from the Department of Communities and Local Government (DCLG) and CMA together with representatives from the FTT, RICS, FPRA, IRPM, LEASE, BPF, LKP/Carlex and Centra Living. The purpose of these meetings was to explore what was not working as well as it should with Section 20 and to try and reach agreement across the sector as to what changes would improve Section 20 for both leaseholders and landlords, and therefore managing agents (who are generally the organisations conducting the consultations).
At the beginning of the discussions a broad consensus was established that the concept of Section 20 was to provide an important protection to leaseholders when landlords are considering spending a large amount of their money and therefore whatever reforms were suggested should not erode that protection. However, it was also widely agreed that Section 20 consultations, either directly or indirectly, cost leaseholders’ money and therefore avoiding unnecessary consultations is also to their advantage.
The officials from DCLG very helpfully advised that the outcome of the meetings should be a comprehensive “wish list” of what a reformed Section 20 should ideally look like, whilst caveating that advice with the reality check that any changes requiring secondary legislation were far more likely to be achievable than any changes requiring primary legislation (and that was before the word Brexit even existed!). They also pointed out that any changes would require a comprehensive impact assessment and would be subject to public consultation.
With DCLG’s advice in mind the first meetings went on to consider all areas of the effectiveness of the current consultation requirements and a number of issues were identified. These included how well leaseholders understand the notices and the lack of prescribed notices, to the fact that the thresholds for consultation have been fixed for over 10 years and therefore have been eroded by inflation and changes in the VAT rate.
It was agreed at an early point in the process that anecdotal evidence of problems with Section 20 was an insufficient basis upon which to recommend change and therefore factual evidence was required, particularly to inform any subsequent government impact assessment. Therefore, ARMA undertook to carry out a survey of its members regarding their experiences with Section 20.
ARMA’s survey was conducted electronically over a six-week period during August and September 2015 and asked members a number of questions regarding their experience of Section 20 during the previous 12-month period. 135 corporate members took part in the survey (thank you if you were one of them) and it is estimated that those members collectively manage 522,000 leasehold flats and apartments. The results of the survey were compiled and an attempt made to extrapolate the results to the entirety of the 4.1 million leasehold flats that it is estimated exist in England in order to try and use the data collected from ARMA members to estimate what is going on in the country as a whole.
The first question the survey posed was how many qualifying works consultations had been carried out during the last 12 months including those that did not progress further than the Notice of Intention. Respondents indicated that they had started 3,471 consultations indicating that approximately 27,260 consultations a year may be being carried out nationally.
The other useful data the survey captured was:
- Approximately 36% of consultations (9,685 consultations nationally) that are started do not progress through the entire process
- Dispensation from consultation is used rarely – only in approximately 2.8% of qualifying works that would otherwise require consultation
- The number of consultations that receive observations from leaseholders is low at only 8.4% (2,278 observations nationally on 27,260 consultations undertaken)
- The number of observations that result in a leaseholder or residents association nominated contractor is lower still at only 3.4% (927 nationally)
- Qualifying long term agreements (QLTA’s) are entered into very rarely (of the respondents to the survey only 12 QLTA’s were in existence).
Thresholds for consultation
Perhaps the most useful data captured by the survey was intended to inform discussion about the thresholds for consultation. Members were asked to indicate the number of completed qualifying works consultations where the highest contribution fell into a number of financial bands. The results were as follows:
£250 - £299 – 12.1%
£300 - £349 – 12.4%
£350 - £399 – 9.94%
£400 - £449 – 9.32%
£450 - £499 – 10.9%
£500 - £549 – 9.32%
£550 - £599 – 6.83%
£600 - £799 – 9.63%
£800+ – 19.6%
Clearly one of the “quickest wins” in reforming Section 20 is to revise the thresholds, which have not increased since they were set in October 2003. Taking into account the increase in the Consumer Price Index and the fact that the VAT rate has increased from 17.5% to 20% since that date means that the value of the £250 threshold for qualifying works consultations in October 2003 has now increased to approximately £350. The value of the £100 threshold for QLTA’s has increased to approximately £140.
What our survey indicates is that just increasing the threshold for qualifying works consultations to take account of the increase in the value of money and the increase in the VAT rate would result in 24.5% fewer consultations being required, which equates to approximately 6,680 fewer consultations a year nationally.
Following completion of the survey a final round-table meeting was held to consider the results and agree on a series of recommendations to be put to DCLG.
Recommendations to DCLG
The meeting considered whether the process should be changed to introduce greater certainty prior to commencing consultation to determine whether or not consultation is actually required to try to eliminate the 36% of consultations that are started and that do not progress through the whole process.
The conclusion was that the current two-stage process should remain as the real benefit to leaseholders of the Notice of Intention is to notify them that major works are being contemplated and to allow them to nominate a contractor. However, it was felt that the introduction of prescribed notices would improve the understanding of leaseholders as to what they were being asked to make observations on. It was also felt that leaseholders would have greater clarity on what was being proposed if the notices included an estimated timescale or a time limit on the proposed works.
Despite our survey indicating a low level of use of applications for dispensation from consultation consensus was reached that this remains the best solution for urgent works. It would be virtually impossible to legislate in a different way for all of the different scenarios that could apply whereas the FTT will hear each case on its individual merits.
The low level of use of QLTA’s in the private sector was considered and the possible detriment that this causes to leaseholders in terms of not being able to benefit from the reduced cost of longer term contracts. It was also pointed out that in the public sector QLTA’s are used regularly because of the procurement rules that apply to Housing Associations and Local Authorities. However, in the public sector the agreements being entered into are often more about securing good basket rates for, for example, kitchens and bathrooms for general needs tenants, which have no benefit for long leaseholders who must be included in the consultation. Given that Section 19 rights of reasonableness are not lost by the use of QLTA’s and the fact that the consultation requirements actually appear to cause detriment rather than benefit it was concluded that the recommendation to be put to DCLG should be to consider whether they should be scrapped altogether. However, if it is concluded that they should remain their length and value should be reviewed.
There was unanimous agreement that the threshold of £250 for qualifying works consultations should be fully reviewed and it was agreed to recommend the reintroduction of a minimum amount for small developments, where the current system means very minor works can trigger consultation.
The final recommendation put to DCLG was that if primary legislation is to be used to amend the Section 20 process, consideration should be given to the problem of notices needing to be cascaded between landlords, head-leaseholders, leaseholders and sub-leaseholders. Whilst good practice dictates that the parties communicate with each other and allow more time for notices to be cascaded, in reality this issue causes problems that could be resolved through legislation.
In summary, whether anything will change remains to be seen. However, I hope this has given you a flavour of the work that ARMA has undertaken behind the scenes to drive reform of Section 20 and of the reforms that we will continue to lobby for.