Consult thy neighbour – residential service charge legislation

 

My current legal “pet hate” relates to residential service charges and the failure of the law to cater for a very common situation, namely a tenant-owned block of flats. I admit this is personal because I have first hand experience of the headache that comes with being company secretary but even professionally I have encountered many situations where the law just does not sit well with the way it is in “the real world”.

Common misconceptions

I was recently shocked to encounter statistics indicating that a significant section of the population is under the misapprehension that there is such a thing in law as a “common law spouse”. As lawyers we know better. The same is true with the illusory “share of freehold”. Most owners of flats in a collectively owned building would describe themselves as “freeholders” and would be most bemused to discover that they had no interest in the freehold as such. The reality is that if they don’t get on with their neighbours they will be reliant on their status, not as part-owner, but as tenant.

However, I accept that the imposition of the corporate structure is probably the best solution. Leasehold title has served us well for hundreds of years and, more importantly, we know where we stand with it. After all, one could hardly say that there has been a run on the new commonhold system to date. So, it looks as though I will have to continue to manage the company books, file annual returns at Companies House and the like, but then I can just about manage that.

Not the fault of the judges

To be fair to the judiciary, it has usually done its best to adapt the law, so far as permissible, to cater for reality. The law reports contain several examples of judges bending over backwards in favour of tenant owned landlords. For example, in Embassy Court Residents Association Ltd v Lipman (1984) 271 EG 545 the court permitted the company to recover the cost of employing managing agents even though the lease did not allow the recovery of such cost in express terms. Cumming-Bruce LJ indicated that an individual landlord, as opposed to a residents’ company, would need to have included explicit provisions in the lease to achieve the same result. Similarly in New Pinehurst Residents Association v Silow [1988] 1 EGLR 227 it was held that the individual residents on the committee had both sufficient expertise and independence from the tenant owned corporate landlord to act as managing agents under the lease. In both cases, common sense prevailed.

Consultation

The real issue is Parliament’s seemingly total failure to appreciate that many blocks of flats are tenant-owned and managed. As a prime example, take the consultation provisions. In the “real world” flat owners communicate with their neighbours by chatting in the hall or more frequently by email. However, under the 2003 Consultation Regulations we are no longer expected to communicate with our neighbours, we must “engage in formal consultation” with them. The new regulations are complex and convoluted. In particular the process is often disproportionate to the sums involved and fails to draw any distinction between the traditional model and the “share of freehold” situation.

What “share of freehold” owners want is a cheap, simple and fair consultation process. They want to delegate someone to go and get some quotes, with a view to circulating them (most sensibly by email) before a meeting at which the choice would be put to a vote.

But no, this is what the owners have to do if they want to paint the front of the building. Formal initial notices will have to be served on each tenant inviting observations and nominations. Then a proposal has to be drawn and again sent to each tenant for further consultation. Even when the decision has been made a further notice explaining and justifying that decision has to be served.

Most people would probably chance an email vote in the hope that if things subsequently turned nasty the LVT would exercise its discretion to dispense with the consultation requirements retrospectively. But, why should they have to take this risk? If one neighbour is difficult, or a flat is assigned to a new owner who doesn’t want to pay for arrears, the company might find itself unable to recover the totality of the service charge expenditure. Where, as is likely, the company was bought off the shelf and has no assets, the result will either be insolvency or the company being bailed out by the other tenants, neither of which is an attractive outcome.

And the moral is…

I could go on. It is not just consultation, although that is the main culprit. The residential service charge legislation as a whole fails to draw this important distinction. Yet, largely as a consequence of collective enfranchisement and the right of first refusal, an increasing number of blocks are becoming tenant owned such that the need for reform becomes ever more pressing.

And the moral of the tale is this: if whilst chatting (or consulting) in the common parts, your neighbour asks you what you do for a living, be creative – do not tell them that you are a lawyer and more importantly a property specialist to boot – not unless you want to become company secretary that is.

Camilla Lamont
Landmark Chambers