Service Charges & Estate Management Update – January 2013
1st January 2013
Phillips v Francis  EWHC 3650 (Ch D)
This is an important case on the meaning of “qualifying works” in s.20 and s.20ZA of the 1985 Act. The case decides that the common approach since Martin v Maryland Estates  2 EGLR 53 of considering whether a particular set of works are “qualifying works” is wrong; there is no ‘triviality threshold’ in relation to qualifying works: all works that are “qualifying works” should be brought into the account for computing the lessee’s contribution. The lessee’s service charge contribution towards all qualifying works is capped at £250 unless the consultation requirements have been complied with in respect of all qualifying works.
The case relates to long leases of chalets on a holiday site. The chalets were held to be dwellings within the meaning of s.38 of the 1985 Act so that ss.18-30 applied. The freehold of the holiday site was purchased by the defendants (“the lessors”). In a letter sent to all lessees IN May 2008 the lessors indicated their intention to bring the site up to a first class standard and proceeded to carry out works without consulting in accordance with the Consultation Regulations. The lessees welcomed the plans for improvement but not the increase in service charge liability and sought declarations as to the true construction of the leases and injunctions preventing forfeiture.
(1) whether the lessors were entitled to recover both £95,000 as wages for the lessors and a management charge of 5% of the total costs of certain items of expenditure (which included the cost of the lessors’ wages); (2) which items amount individually or collectively as “qualifying works” for the purposes of s.20 and s.20ZA of the 1985 Act.
At first instance, the judge held that the lessors were entitled to recover both the lessors’ wages and a management charge of 5%. As regards the qualifying works, the judge applied the three stage test derived from the judgment of Walker LJ in Martin v Maryland Estates, namely:
- which of the works fell within the definition of ‘qualifying works’ contained in s.20ZA(2)?
- Did those works constitute one or more ‘sets of qualifying works’?
- Did any of those sets fall below the triviality threshold set by the limit on the cost of those works?
He rejected the lessees’ submission that that the works were one scheme planned in advance, instead finding that there were many disparate pieces of work. As such, no consultation was required.
On appeal, the lessors sought to uphold the judge’s construction of the lease on the first issue. As to the second issue, the lessors submitted that the mechanics for consultation set out in Part 2 of Schedule 4 to the Consultation Regulations necessarily required a pre-defined set of works. Counsel contended that whether there were one or more sets of qualifying works was a question of fact in respect of which the trial judge was in the best position to judge, having had the benefit of a site visit.
The appellant lessees argued that the judge’s construction of the lease allowed for double recovery and could not have been what the parties intended. On the second issue, it was submitted that the judge was wrong not to recognise all the qualifying works as being a single set originally designed by the lessors, as stated in the May 2008 letter to lessees. Those works generated individual service charges for lessees greatly in excess of the limit prescribed by the Regulations and, as there had been no compliance with the consultation requirements, the excess over £250 was irrecoverable.
(1) on a true construction of the lease, a provision allowing the recovery of the pay and expenses of “staff employed” and “fees paid” to agents did not extend to the non-professional management services provided by the Lessors personally; (2) it is wrong to identify one or more sets of qualifying works; there is no ‘triviality threshold’ in relation to qualifying works; all qualifying works should be brought into the account for computing the lessee’s contribution and then applying the statutory cap.
The Chancellor’s interpretation of the lease on the first issue requires a gloss to be put on the clear words of the provisions but this can be justified to prevent what appears on the face of it to be an otherwise unfair double recovery.
The second issue is of far greater general importance and significance. In many cases, a lessee’s contribution to the cost of qualifying works in an accounting period will exceed £250. Landlords have not been required to consult in order to recover the cost of a particular set of qualifying works where a lessee’s contribution to that set of qualifying works does not exceed £250, even if a lessee’s contribution to the total cost of qualifying works in an accounting period will exceed £250. This is now longer the position.
This decision is curious given that neither party argued that a landlord was required to consult on a distinct set of qualifying works if a lessee’s contribution to the cost of those particular works would not exceed £250: the lessees’ case was that the qualifying works were all part of the same set of works.
The Chancellor felt able to depart from the Court of Appeal’s decision in Martin v Maryland Estates on the basis that the 1985 Act has since been substantially amended. While this may be correct, the decision has serious and possibly unintended consequences for landlords.
As I interpret this decision, landlords now have to consult on all qualifying works (even if a lessee’s contribution to a distinct, identifiable set of works does not exceed £250) if a lessee’s contribution to the total cost of qualifying works in an accounting period exceeds £250. If the landlord does not consult on all qualifying works, however small the cost of a particular set of qualifying works, the lessee’s contribution to the total cost of qualifying works in the accounting period will be capped at £250.
By example, a landlord decorates the internal common parts. Such works are ‘qualifying works’ (within the meaning of s.20ZA(2)) but each tenant’s contribution is only £150. Later in the same accounting period, the landlord fixes a leak in the roof. Such works are again ‘qualifying works’ and each tenant’s contribution is £200. The tenant’s contribution to qualifying works in the accounting period is £350. Unless the landlord consults on both the decorating works and the roof work, the tenant’s contribution is capped at £250.
In many cases, a landlord may not intend to carry out qualifying works to such an extent that a lessee’s contribution to qualifying works in the accounting period will exceed £250. This being the case, the landlord may not consult on qualifying works undertaken early in the accounting period. If further (perhaps unforeseen) qualifying works are carried out later in the accounting period so that the tenant’s contribution to qualifying works in the accounting period exceeds £250, the landlord will not be able to recover more than £250 for the tenant. A prudent landlord must now consult on all qualifying works (even if a lessee’s contribution to a distinct, identifiable set of works does not exceed £250) in order to fully recover his expenditure through the service charge.
This will be an enormous burden on landlords and managing agents, both in terms of cost and time. If landlords are now required to consult on all qualifying works, however small, the cost of such consultation will ultimately be passed on to lessees. This is not in anybody’s interests. It cannot be what Parliament intended.
Johnson v County Bideford  UKUT 457 (LC)
Any invalidity in a service charge demand that arises by virtue of a failure to comply with s.47(1) of the LTA 1987 was capable of being corrected with retrospective effect so that the demands were valid demands for the purposes of s.20B(1).
The landlord served service charge demands dated between 1 October 2008 and 12 July 2010. It was accepted that these demands failed to comply with the requirement in section 47(1)(a) of the LTA 1987. The LVT determined that certain amounts for the three accounting years 2007/08 to 2009/10 were costs that were reasonable for the purposes of s.19 of the 1985 Act. It also held that the service charge demands had not complied with the requirements of s.47 of the LTA 1987, so that the amounts that it had found to be reasonable were not payable “pending service of valid service charge demands compliant in all respects with the law including section 47”.
Following the service on the lessees of demands on 8 June 2011, on the landlord’s application, the LVT determined that the service charge demands for the three years complied with s.47 and had been duly served.
The appellant lessees argued that, following Brent v Shulem  EWHC 1663 (Ch), the demands for the purpose of s.20B(1) must be a valid demand so that the original demands, being invalid by reason of their failure to meet the requirements of s.47(1) , could not constitute demands for this purpose.
The invalidity with which Brent v Shulem was concerned was a contractual invalidity and was not capable of retrospective correction. By contrast, an invalidity that arises by virtue of a failure to comply with the requirements of s.47(1) is one that can be corrected and can be corrected with retrospective effect. That is what subsection (2) provides.