Service charge consultation becomes an even larger elephant trap (The Chancellor’s valedictory hand grenade)

An abridged version of this article was published in Property Week on 25 January 2013.

On 21 December 2012, Sir Andrew Morritt, then Chancellor of the High Court, handed down judgment in Phillips & Goddard v Francis & Francis [2012] EWHC 3650 (Ch), a case which has dramatic ramifications for residential landlords and managing agents.  The state of the legislation and its most recent judicial interpretation will see landlords bogged down in consultations and applications for dispensation, and at risk of being unable to recover legitimate expenditure. 

Previously perceived practice

Most residential landlords appreciate that if they intend to carry out works for which they wish to recover more than £250 per tenant by way of service charge, the statutory consultation requirements must be complied with. 

Common thinking, and authority (Martin v Maryland Estates [1999] 2 EGLR 53), suggested that the cap was applied to identifiable sets of works.  If a landlord paints the ground floor entrance hall at a cost of £200 per tenant and, later in the same year, carries out repairs to the roof at a cost of £100 per tenant, there is no requirement to consult, despite the aggregate contribution exceeding £250.  If, rather than carrying out the roofing works, the landlord expends £100 painting the stairs from the entrance hall to the first floor, prior consultation is required.  In the words of Walker LJ in Martin, a degree of common sense is required.

The Chancellor’s interpretation

No longer.  As the Chancellor put it in Phillips:
 

“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… all the qualifying works must be entered into the calculation unless the landlord is prepared to carry any excess cost himself.”
…
“It may be that [the works] should be spread over more than one year thereby introducing another limit. With that exception, the provisions relating to this service charge do not require any identification of ‘sets of qualifying works’…”

The court is not concerned with the nature of the expenditure, but the total amount referable to any one service charge year. 

What is the reasoning for this change?

To appreciate the reasoning for this sea change it is necessary to examine the mechanics of the Landlord and Tenant Act 1985.

Service charge means an amount payable by a tenant of a dwelling for, inter alia, repairs and maintenance, which varies according to the relevant cost: s18(1).

The relevant costs are the costs or estimated costs incurred or to be incurred in connection with the matters for which the service charge is payable: s 18(2).
Costs are relevant costs whether or not they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period: s 18(3)(b).

The relevant contributions of tenants to qualifying works are limited to £250 unless the consultation requirements have been complied with in relation to the works or dispensed with by the LVT: ss 20(1), 20(5) & 20(6), & Reg 6 of The Service Charges (Consultation Requirements) (England) Regulations 2003 SI 1987/2003.

A relevant contribution is an amount required to be paid by a tenant in service charge as a contribution to the relevant costs of qualifying works: s 20(2).

Qualifying works means works on a building or any other premises.

The foregoing is a summary of the relevant provisions following their amendment by the Commonhold and Leasehold Reform Act 2002.  As pointed out by the Chancellor, the cap imposed by the unamended 1985 Act was to the costs of the works, not the contribution required from the tenant.  It is for this reason that he considered that he was not bound by Martin.  Rather, as a result of the amendments, the cap applied to the amount to be recovered in respect of costs incurred in any service charge year, regardless of the nature of the works.  This is surprising, as none of the parties appears to have contended for this construction of the amended Act.

This may be why the Chancellor does not consider the impact of s18(3)(b) of the Act.  S 20(2) defines the tenant’s contribution as being an amount payable towards relevant costs.  S 18(3)(b) makes clear that relevant costs need not have been incurred in the year for which the tenant’s contribution is recoverable.  The statutory cap applies, therefore, to the tenant’s contribution to the relevant costs of the qualifying works, regardless of the year in which the costs are incurred.  This cannot be reconciled with works being “spread over more than one year thereby introducing another limit”, which will encourage landlords to divide works between service charge years, so as to avoid the need to consult.

Ramifications

Whatever the anomalies, Phillips binds the County Courts and the LVT.  The ramifications are far reaching.

This is not new law: it is an interpretation of the law as it has been since 31 October 2003, when the amendments came into force.  There is no reason why the recoverability of historic service charges should not be challenged, subject to limitation, and them not having been admitted or determined.

The definition of qualifying works is so broad as to cover routine maintenance (the repair of a broken window pane, replacing a lock, etc.).  In some buildings, the £250 cap will be exceeded on an annual basis, requiring either constant consultation or repeated applications to the LVT for dispensation.  This cannot have been Parliament’s intention.

If landlords are required to consult in such circumstances, how can they consult on unforeseen expenditure? Although retrospective dispensation may be granted, the time and expense of applying for the same must be incurred.

The purpose of statutory consultation machinery is to protect tenants, not to provide them with windfalls from landlords’ inadvertent failure to comply with a statutory regime that is virtually incomprehensible to any but the legal expert.  The purpose of the £250 limit is to ensure that landlords do not have to consult on every single piece of minor expenditure.  To make them do so, as this interpretation of the statutory provisions would have it, will render the effective management of residential properties nigh impossible.  Regardless of whether the former Chancellor was correct in his interpretation of the statutory provision, a complete overhaul of the consultation regime is required, so as to provide clarity and certainty for landlords and tenants, alike.