The legislation limits residential service charge recovery unless there is the requisite consultation before qualifying works.
The High Court’s approach to qualifying works would have led to excessive consultations.
The Court of Appeal’s more sensible approach applied the limit and need for consultation to individual sets of works.
Landlords breathe a sigh of relief at Court’s residential service charge decision.
The Court of Appeal decision in Francis v Phillips [28 October 2014] has a significant impact on residential landlords and tenants. By adopting a sensible approach to the relevant legislation, the Court has avoided landlords having to engage in excessive consultations with tenants over minor service charge expenditure. This would have led to undue administration, the cost of which may have ended up with the tenants.
Section 20 of the Landlord and Tenant Act 1985 limits to £250 per tenant the landlord’s recovery of the cost of qualifying works from residential tenants by service charge, unless the landlord complies with a prescribed consultation process or obtains a dispensation from doing so from the appropriate tribunal. A key question related to the meaning of “qualifying works”, because that influences the maximum amount of costs that can be incurred without having to consult or seek dispensation.
The High Court adopted the “aggregating approach”, according to which all works in any given year are aggregated without division into separate sets of qualifying works and, therefore, there is no distinction between different sets of works or projects. The effect of such approach is that once the limit for contributions has been reached of £250 per tenant, the landlord would have to consult the tenants on any service charge items, even if they are small. This was not sensible, would give rise to serious practical problems and could not have been intended by Parliament. It was also different from the approach, generally, accepted by the property industry.
The Court of Appeal preferred the rival “sets approach”, by which section 20 should be applied by reference to individual sets of works. The difference between the two approaches is best illustrated by the following example. A block of flats has four tenants and the annual regulatory limit is four x £250 = £1000. The landlord carries out works to the building costing £225, but does not consult. In the same year, he also carries out door and window works costing £800 and £400 respectively.
On the “sets approach”, the landlord would not need to consult on any of those items. They are all distinct sets of qualifying works, none of which costs more than £1000. The landlord could respond immediately and carry out the works. The tenants have the statutory protection that the costs are reasonably incurred and the works are of a reasonable standard.
On the “aggregating approach”, the annual limit is exceeded by the door works. The landlord is, therefore, obliged to consult on them, which takes time and costs money. If instead he carries out the works immediately without consultation, he has no right to recover the full amount without court dispensation.
The Court addressed the issue of what is a single set of qualifying works. This is to be determined in a common sense way, taking into account all relevant circumstances. Relevant factors are likely to include (i) where the items of work are to be carried out (whether they are contiguous to or physically far removed from each other); (ii) whether they are the subject of the same contract; (iii) whether they are to be done at more or less the same time; and (iv) whether the items are different in character from, or have no connection with, each other.