Real World - May 2013: Residential service charges – mixed news for landlords on statutory consultation

by Dechert LLP
Contact

The decisions in Phillips & Goddard v Francis and Daejan Investments Ltd v Benson cause further uncertainty in already muddied waters for landlords seeking to pass on the cost of works to residential tenants.

Phillips & Goddard v Francis

Under the Landlord and Tenant Act 1985 (as amended), a landlord is obliged to follow a prescribed consultation procedure prior to undertaking ‘qualifying works’. Failure to do so (or to do so properly) may result in the tenants’ annual service charge contributions being capped at, currently, £250 per tenant.

In Phillips & Goddard v Francis, the owners of holiday chalets in Cornwall challenged a service charge of £3,117.47 imposed by the site owners to recover the cost of various improvement works carried out. The tenants argued that all the improvement works undertaken during the previous year constituted a single set of qualifying works and that, because the landlord had failed to comply with the consultation requirements, the entire excess over £250 per tenant was irrecoverable.

At first instance, the judge (applying the reasoning of Walker LJ in Martin v Maryland [1999]) agreed with the landlord’s interpretation that it is necessary to consider whether the works constitute one or more sets of qualifying works and then to apply a ‘triviality threshold’ (i.e. the £250 contribution cap) to each relevant set.

On appeal, the Chancellor of the High Court disagreed with both the trial judge and Walker LJ’s reasoning in Martin v Maryland. The Chancellor noted that the comments of Walker LJ pre-dated changes to the consultation procedure introduced by the Commonhold and Leasehold Reform Act 2002 and reflected the position at a time when the limit was by reference to the cost of the works (as opposed to the amount of contribution demanded from the tenant). It was held that, as service charge contributions are payable on an annual basis, the limit should be applied to the qualifying works carried out during the service charge year and further that, under current legislation, there is no ‘triviality threshold’ in relation to qualifying works.

The effect of the judgment is that a prudent landlord should now consider consulting on all qualifying works, even where the cost will not require a contribution exceeding £250 per tenant. By way of illustration, if the landlord undertakes works requiring a contribution of £200 per tenant, failure to consult in relation to those works will limit the landlord to demanding no more than £50 per tenant in relation to any additional works undertaken in the same service charge year (regardless of the cost of the additional works).

Daejan Investments Ltd v Benson

A landlord gave notice to its tenants that it intended to carry out major works costing nearly £280,000 but failed to carry out all of the steps prescribed in the consultation procedure. Although failure to comply typically results in the tenants’ annual service charge contributions being capped, the Landlord and Tenant Act 1985 (as amended) allows the Leasehold Valuation Tribunal (LVT) to dispense with the requirements if it is reasonable to do so.

The Court of Appeal upheld the LVT’s refusal to grant dispensation from compliance and restricted the liability of the tenants to £250 each. By a majority of 3-2, the Supreme Court overturned the decision of the Court of Appeal.

The Supreme Court held that the question to consider was not whether the procedure had been complied with but whether, if dispensation was granted, the tenants would suffer any relevant prejudice. The Supreme Court acknowledged that the right to be consulted is not a free-standing right and that, other than in relation to prejudice caused, it is wrong to distinguish between a serious failing and a minor oversight. In this instance, the landlord’s offer to reduce the costs of the works recovered through the service charge by £50,000 was considered to exceed any possible relevant prejudice of the tenants.

The dissenting judgments argued that the degree of seriousness of the failure to comply with the consultation requirements should be taken into account irrespective of the degree of prejudice caused.

Comments

The decision in Daejan Investments Ltd v Benson is a welcome one for landlords, as it reduces the risk of huge financial loss caused by failing to comply fully with the consultation requirements, provided that the tenants are appropriately compensated for any prejudice suffered as a result of that failure.

However, the decision in Phillips & Goddard v Francis is worrying for landlords. Prior to the judgment, it was widely accepted that the need to consult only applied if a contribution in excess of £250 per tenant was likely to be required in respect of a particular set of works. Now, landlords should consider consulting on all qualifying works where the aggregate of all qualifying works during a service charge year is likely to result in a total contribution in excess of £250 per tenant. The landlord is appealing against the decision and the British Property Federation (BPF) has voiced its concerns in an open letter to the court. The BPF say the judgment will require landlords to consult unnecessarily and much more frequently than they presently do, which in turn will not only delay essential works but, ultimately, drive up service charges for residential tenants due to the additional consultation costs involved.

The BPF also suggest that the decision in Phillips & Goddard v Francis could prompt a dramatic increase in dispensation applications to the LVT, which applications will be impacted by the decision in Daejan Investments Ltd v Benson. Unless and until the decision in Phillips & Goddard v Francis is challenged, overturned or corrective legislation implemented, there is likely to be uncertainty as to its full implications. In the meantime, landlords and managing agents are advised to consider consulting on all qualifying works, even where (a) the cost of separate, individual qualifying works will not require a contribution exceeding £250 per tenant and (b) no additional qualifying works are currently planned or foreseen in the same service charge year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!