A failure to comply with the Service Charge (Consultation Requirements) (England) Regulations 2003 (“the Regulations”) could be relevant to the reasonableness of the amount of service charge to be paid under section 19(2) of the Landlord and Tenant Act 1985. However, it is simply one factor to be considered. In the instant case, the non-compliance comprised including within the estimate the estimated cost of works not within the proposed works; the amount demanded would be reduced by excluding that ‘extra’ work.
The relevant property was a house converted into four flats. In June 2013, the management company sent the tenants a notice of intention to carry out qualifying work at the property. The work described was the rendering and painting of the exterior of the property. It was also said that further works may be necessary to the roof area, but further consultation will be carried out if and when that need is made clear by the contractors.
In September 2013, a surveyor’s report revealed works to the roof, external render and paintwork of the property was necessary. The appellant management company obtained three estimates, the amounts quoted being £39,060, £38,167 and £34,200. Copies of these estimates were sent to the tenants in May 2014 under cover of a letter requesting written observations within 30 days. No observations were sent.
In June 2014, the management company sent each tenant an on-account demand for £10,200, being one quarter of the following estimated costs: the cost of the work based on the lowest estimate plus 10% in respect of a contingency amount and 10% as an estimate for a surveyor’s fee for checking the work and signing it off.
The First-tier Tribunal held that:
- the notice procedure under section 20 of the Landlord and Tenant Act 1985 had been invalidated by the fact that, largely due to the vague and defective nature of the specifications given to them, none of the estimates gave sufficiently specific details of the extent of the areas they based their tenders on or "unit prices";
- that the demand for £10,200 was unreasonable, having concluded that until an adequate specification including satisfactory references, normal safeguards for security of funds, and supervision of the work had been successfully tendered, any estimated demand was premature; and
- accordingly, that the amount payable by each tenant should be limited to £250.
- Whether the appellant had failed to comply with the Regulations;
- Whether the FTT was entitled to limit the amount of ‘on-account service charge’ payable to £250; and
- Whether the amount of service charge demanded on-account was reasonable (under s.19(2) of the 1985 Act).
Decision on appeal
The appeal was allowed in part:
- The word “estimate” is not defined in the Regulations. There is nothing in the Regulations which requires estimates to contain unit prices or specific details of the areas on which they were based. Insofar as the FTT based its decision on those points, it was wrong to do so.
- However, under para 4(5) of Schedule 4 to the Regulations, the estimate must be an estimate for the carrying out of the proposed works. Each of the three estimates mentioned work that went beyond the work proposed in the June 2013 notice. Accordingly, the FTT was right to hold the appellant had not complied with the Regulations.
- The FTT was not entitled to limit the service charge payable in advance to £250 per flat, because the statutory limit under s.20 of the 1985 Act only applies to claims where work has been carried out and there is non-compliance with the Regulations.
- A failure to comply with the Regulations could be relevant to the reasonableness of service charge to be paid under s.19(2) of the 1985 Act, however, it is simply one factor to be taken into account.
- There is a two-stage test: (a) whether the landlord’s decision-making process was reasonable, and (b) whether the sum to be charge is reasonable. The need for the works, lack of prematurity to the demand for payment in advance, the attempt to comply with the statutory consultation process, the lack of engagement of the tenants with the process, were all relevant to the first stage of the test. As for the amount, it was reasonable to use the figure in the lowest estimate and deduct from that sum figures for the work which was not included in the proposed works as set out in the June 2013 notice. That meant that each tenant would pay £7,810.50.
There are three main take-away points:
- As we know too well, landlords of residential tenants are required to comply with (or obtain dispensation from) a statutory consultation process before carrying out major works which would result in each tenant having to contribute more than £250. This case highlights some of the practical challenges a landlord may encounter when carrying out major works.
- However, more significantly, the Upper Tribunal has recognised that the consultation requirement is not necessary in order to collect a sum in excess of £250 by way of on-account service charge for future works.
- Further, a failure to comply with the Regulations could be relevant to the reasonableness of a service charge based upon estimated costs. This is worth bearing in mind when following the statutory consultation process.