Knowing the law: magicians need not apply

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What is a good property manager? A surveyor? An accountant? A lawyer? A detective? A psychologist? A magician?

The answer is probably all of the above at various points in time, and there is ARMA guidance on many property management topics. Unfortunately however, not even the IRPM, the property manager’s Hogwarts, runs a module for wannabe property manager magicians.

Knowledge of the legal framework on which the landlord and lessee/tenant (the two mean the same thing) relationship is based is however a good starting point. Residential landlord and tenant law is technical and, although it affects millions of people across England and Wales, cannot be found in just one place. Over time, Parliament has legislated to correct and improve perceived problems, squeezing new sections into chronologically numbered statutes. Hence we now have sections and paragraphs with letter suffixes such as 5A; 20B; 20C; 20ZA and 21B.

The result of Parliament’s industry is a network of provisions which are scattered across several Acts. The Acts themselves are frequently lengthy and contain more than a handful of Schedules.

The aim of this article is to flag up the three main Acts of Parliament with which landlords, lessees and therefore property managers should be familiar when looking after properties and providing services to lessees. They are:

  • The Landlord and Tenant Act 1985
  • The Landlord and Tenant Act 1987
  • The Commonhold and Leasehold Reform Act 2002

The Landlord and Tenant Act 1985

The 1985 Act is the prima donna of service charge disputes.

Liability to pay service charges

In the case of Morshead Mansions v Di Marco [2014] EWCA Civ 96, Lord Justice Lewison helpfully cantered through a number of the service charge provisions of the Act and their enforcement, taking in section 20B, aka the 18 month rule; section 21B, the summary of rights and obligations that must be served with a demand, and sections 21 and 22, which were the main focus of the appeal before the court.

Those latter two sections entitle lessees to a summary of service charge expenditure incurred in the last accounting period, and then to inspect the accounts and documents that support that summary.

The opacity of that part of the Act leads some lessees to consider that if the summary and/or inspection are not forthcoming, they are entitled to withhold their service charges. That is however not the case at the time of writing. The section (21A) which allows for that remedy is not yet fully in force.

Disputes

More often than not tribunal proceedings about service charges will have been based on section 27A. It is the foundation of all applications to the First-tier Tribunal for determinations about liability to pay service charges.

Provisions relating to service charges appear are sections 18-30 of this Act: technical terms are defined in sections 36 to 39. The key sections governing service charges include:

  • The definition of a service charge (s.18). Fixed service charges are not service charges for the purposes of the Act;
  • The reasonableness provisions (s.19). It is not simply a question of “is the charge reasonable?” The service charge must be reasonably incurred; reasonable in amount and for services that are reasonable in standard.  
  • The imposition of a requirement to consult (s.20), supported by cumbersome and – in the writer’s view – otiose regulations, and
  • The power of the Leasehold Valuation Tribunal (in Wales) and the First-tier Tribunal (in England) to dispense with the requirement to consult (s.20ZA). Since the Supreme Court’s judgment in Daejan Investments Ltd v Benson [2013] UKSC 54, dispensation has been considerably easier to come by.

An order made under section 20C prohibits a landlord from putting the legal and other costs of proceedings in the Tribunal through the service charge, even if in principle the lease permits that to be done.

Residents associations and the 1985 Act

A residents’ association may ask a landlord for recognition under section 29, and, if the landlord declines recognition, the association may apply to the First-tier Tribunal for recognition.

There is one key difference between a residents’ association and a residents’ association which has achieved recognised status. A recognised tenants’ association (or “RTA”) gives the association the right to appoint a surveyor to advise on any matters relating to, or which may give rise to, service charges payable to a landlord by one or more members of the RTA.

The surveyor’s appointment becomes effective on notice in writing to the landlord. It carries statutory rights of access to the documents and premises detailed in Schedule 4 to the Housing Act 1996.

The case of Rosslyn Mansions Tenants’ Association v Winstonworth Ltd [2015] UKUT 0011 (LC) is a useful read for more on the criteria relevant to recognition of a residents’ association.

The recent Housing and Planning Act 2016 inserted a new section (29A) into the 1985 Act.

Its purpose is to require landlords, on a request from an unrecognised residents’ association, to provide the contact details of lessees who would qualify to be members of an RTA so that invitations to join the as-yet unrecognised association can be extended to them. The obligation will arise if/when the Secretary of State makes regulations to that effect. None have yet been made.  

The Landlord and Tenant Act 1987

The 1987 Act plays a supporting role to the 1985 Act in relation to service charges, but it is thrust into the limelight in four important situations:

  • Where lessees make an application for the appointment of a manager (sections 21-24);
  • Where lessees apply for an acquisition order (sections 25-34);
  • On an application to vary the terms of a lease or leases (sections 35 to 37), and
  • In relation to the ownership and use of service charge money (section 42).

Like the 1985 Act, the 1987 Act contains a section defining technical terms. In the 1987 Act, it is section 60.

The management company difference

In these days of tripartite leases, where repairing and day-to-day services are often the liability, not of a freeholder or head lessee, but of a management company which is a party to the lease but has no proprietary interest in the building or development to which it supplies those services, one of the most important definitions in section 60 of the 1987 Act is that of “landlord”.

“Landlord” in the 1987 Act does not mean the same as “landlord” in the 1985 Act. The distinction it can make the difference between a lessee being liable and not liable to pay a demand.

Why?

Sections 47 and 48 require that, when any written demand is given to a lessee, the lessee must be provided with the landlord’s name and address, even if not in England and Wales, and an address in England and Wales where notices can be served on the landlord.

Sections 47 and 48 apply however only to service charge demands made by landlords as defined by the 1987 Act. A management company may fall within the meaning of “landlord” under the 1985 Act, but it is unlikely to be caught by the definition of “landlord” under the 1987 Act.

In Pendra Loweth Management Company Ltd v North [2015] UKUT 0091 (LC), Martin Rodger QC, Deputy President of the Upper Tribunal (Lands Chamber) gives a useful analysis of the difference.

The Commonhold and Leasehold Reform Act 2002

The 1985 Act runs to some 40 sections and one schedule, and the 1987 Act to 62 sections and four schedules.

By contrast the 2002 Act is voluminous, comprising 183 sections and fourteen schedules, many of which are not yet in force. Of those that are in force:

  • Part 2, Chapter 1 contains the code for acquiring the Right to Manage;
  • Sections 167 to 170 contain important brake on a landlord’s power to forfeit a lease on the ground of breach of covenant or non-payment of small sums of rent, service or administration charge, and
  • Section 176C provides for enforcement of First-tier Tribunals which are not decisions about sums of money.

For the purposes of this article, Schedules 11 and 12 are the important ones.

Schedule 11 and variable administration charges

Schedule 11 to the 2002 Act defines a variable administration charge. In summary, it is a charge that a lessee covenants to pay, but which cannot be quantified from the wording of the covenant itself.

Variable administration charges are regularly encountered in the context of consents to sub-letting or to carry out alterations or demands for payment of legal fees incurred in relation to breaches of covenant and forfeiture.

Paragraph 5 of Schedule 11 controls a landlord’s recovery of variable administration charges. That control was bolstered by the insertion of paragraph 5A by the Housing and Planning Act 2016.

The effect of paragraph 5 is that a lessee is only obliged to pay an administration charge to the extent that the amount demanded is reasonable. It is worth bearing in mind the amount that is reasonable is a moveable feast, depending on the amount of work involved in granting the consent. For example, if a lessee wishes to sub-let on a standard assured shorthold tenancy to a tenant with good references, the fee is likely to be lower than the fee for a bespoke tenancy to a company incorporated in the British Virgin Islands.

The effect of paragraph 5A, which has been in force since 06 April 2017, is almost identical to section 20C of the Landlord and Tenant Act 1985. It will allow the Tribunal to extinguish any obligation to pay the amount demanded if the Tribunal considers that it is just and equitable to do so. 

Schedule 12 and costs

Schedule 12, which is no longer applicable in England, but is still alive and well in Wales, governs procedure in the Leasehold Valuation Tribunal, and specifically costs where a person involved in LVT proceedings has behaved unreasonably.

Where next?

There has been little by way of major change in residential long leasehold law since the Commonhold and Leasehold Reform Act 2002. Commonhold has not, ahem, taken hold, and it is often said that there have been more books written about commonhold than there are commonhold developments.

In recent months however, the spotlight has swung sharply to focus on the risks – personal and financial – of leasehold as a form of property ownership. Will that focus be the herald of codification, and/or afford us the opportunity of reviewing the adequacy of residential long leasehold law as it currently stands?

Or will the IRPM be asking the Ministry of Magic to design a new syllabus? 

This article first appeared in AQD, the quarterly newsletter from ARMA.