Phillips v Francis – Is an end to the Crystal Ball Gazing in sight?
By Nicola Muir
Following the Supreme Court’s decision in Daejan v Benson, the chances of a landlord being reimbursed the costs he incurred in carrying out major works to a residential block via the service charge are vastly improved. However, ensuring full compliance with the consultation requirements is still a hazardous business. If the landlord fails to jump through each of the hoops set down by the Service Charges (Consultation Requirements)(England) Regulations 2003, he will only be able to recover £250 per tenant. Unless a dispensation is granted under s. 20ZA of the Landlord and Tenant Act 1985, the landlord can be left with a large shortfall on his expenditure. One decision which has caused particular difficulties for practitioners is Phillips v Francis  EWHC 3650 (Ch). Permission to appeal that decision has now been granted to the Court of Appeal.
Phillips v Francis concerned the thorny problem of whether items of expenditure constitute a single set of “qualifying works” for the purposes of s. 20 or whether there are several lots of “qualifying works”. The issue is of practical significance because, if the landlord fails to consult on “qualifying works”, he will be limited to recovering £250 per tenant for those works. If there is more than one “set” of qualifying works more than one lot of £250 will be recoverable.
Section 20ZA (2) says that “qualifying works” means “works on a building or any other premises” – not very illuminating. So if you are carrying out exterior works, is that one set of qualifying works or is the roof one job and the window refurbishment another? What if the landlord decided to repaint the front door while he was at it and the cost would be such that no tenant would have to contribute more than £250? Could the landlord avoid consulting on that element of the works at all because the cost fell below the “triviality threshold”?
Mr and Mrs Francis were the freeholders of a holiday site in Cornwall consisting of 150 chalets let on 999 year leases. They decided to upgrade the site to a first class standard and advised the chalet owners of their plans. The works included the removal of earth banks, the construction of an office/shop and a launderette/staff buildings. The plans for improvement may have been welcomed by the lessees but the increase in service charges under their leases was not.
The landlords ignored the prescribed consultation requirements in their entirety. In the ensuing litigation, the landlords argued that the works were made up of several individual projects each representing a single set of “qualifying works”. Some of those works fell beneath the “triviality threshold” and required no consultation. The tenants said – no – there was only one set of works and their liability for the whole of those works was limited to £250 each.
The leading case on this question was Martin v Maryland Estates Ltd  2 EGLR 53. Here additional works had been added to the project without further consultation and the Court of Appeal said that a common sense approach had to be applied. For example, if works were carried out under separate contracts they may be separate sets of work. However, that decision was made under the law as it was before the amendments were made to the 1985 Act by the Commonhold and Leasehold Reform Act 2002. In Francis, the Chancellor Sir Andrew Morritt found that Martin was no longer of any relevance. Under the old regime the limit (of what could be claimed without consulting) was determined by reference to the cost of the works whereas the new regime determines the limit by reference to the amount of the tenant’s contribution.
The Chancellor looked at the Act afresh and found that there was no need to identify whether there is one or more sets of qualifying works. If the works are qualifying works, he said, it will be for the landlord to assess whether they will be on such a scale as to necessitate complying with the consultation requirements or face the consequences. He concluded:
“As the contributions are payable on an annual basis then the limit is applied to the proportion of the qualifying works carried out in that year. Under the legislation there is no “triviality threshold” in relation to qualifying works; all the qualifying works must be entered into the calculation unless the landlord is prepared to carry any excess cost himself”.
On this basis, The Chancellor found that all the costs incurred in a single financial year in respect of qualifying works should be brought into account for computing the contribution and then applying a single limit.
This is all sounds simple enough. If the works are “qualifying works” a £250 limit applies for all the qualifying works in the relevant year. The difficulty is, however, that it involves the landlord gazing into a crystal ball and predicting with accuracy exactly what works he is going to carry out in any given year and what they are going to cost. If he miscalculates, he will be unable to recoup his expenditure without a dispensation.
For example, take the case where there are four flats and each lessee is liable for 25% of the service charge. The financial year begins on 1st January. In February the landlord paints the hall at a cost of £900. No lessee is required to contribute more than £250 so there is no need to consult. But if the landlord then spends £800 on patching up the roof in April, the total expenditure for the year will have increased to £1,700 and the £250 threshold will have been crossed. The landlord may have had no way of knowing that the roof would need patching at the beginning of the year, but he will be limited to recovering £250 for the year.
It seems that most landlords have dealt with the decision in Phillips v Francis by ignoring it. What else can they do? However, while the decision stands, the landlord faces the risk of an argument that multiple maintenance jobs over the financial year are “qualifying works” and should have been subject to consultation.
16th December 2013
Published in Estates Gazette