Service Charges: Major Works & Qualifying Long Term Agreements
Major works under the Commonhold and Leasehold Reform Act 2002 are split into two parts: qualifying work and long-term qualifying agreements. The former are defined as ‘works on a building or any other premises’ which means works of repair, maintenance or improvement. It is important to note that the inclusion of ‘improvement’ does not allow a landlord to recover costs for such works unless a liability for costs of improvements is included in the lease.
Landlords must consult if these works will cost over £250 for any one leaseholder. So, in a property with unequal service charge contributions, the landlord must consult all leaseholders if any one of them would have to pay more than £250. If consultation is not undertaken, the landlord may not be able to recover costs over £250 per leaseholder.
Note: When calculating the estimated cost, VAT on works must be included.
PHASE 1: Section 20 Notice of Intention
The process starts with the freeholder serving a s20 Notice of Intention on all leaseholders and Recognised Tenant’s Associations (RTA’s). This must be served on all leaseholders. The Notice must generally contain a description of the proposed works, the reasons such works are being considered and an address to where observations should be sent. Within those 30 days, leaseholders can make their observations and provide the name of an alternative contractor (person or persons) that the freeholder/RMC can obtain another estimate from. If a contract manager for works requiring consultation is going to be used then it will normally be a surveyor, and ideally should be a member of the Royal Institution of Chartered Surveyors (RICS) as they can prepare the specification that can be sent to tender, therefore ensuring that all the quotations will be on the same basis. Free building contracts can be downloaded from the Federation of Master Builders (FMB) web site but for any job worth £20,000 or more, a formal contract such as a Joint Contracts Tribunal (JCT) standard form should ideally be used.
At the expiration of the 30 day consultation period, at least two estimates should be obtained with one required to be completely independent of the Landlord/RMC. If nominations were made within the consultation period, then estimates should have already been obtained from at least one of these nominations.
PHASE 2: Statement of Estimates & Notice to Accompany the Statement of Estimates
The Landlord/RMC must then provide a Statement of Estimates which sets out the details of estimates that have been obtained and a summary of observations received within the consultation period. Any estimates that have been obtained must be available for inspection by the lessees, including estimates obtained from nominated contractors. A Notice to Accompany the Statement of Estimates must also be served at the same time which sets out the hours and place where details of the estimates may be inspected, inviting lessees to make written observations on the estimates within 30 days, and again, specifying the address to which those observations should be sent.
PHASE 3: Notice of Reasons
At the end of the consultation period, if the contractor chosen by the leaseholders did not provide the lowest estimate, a Notice of Reasons must be served on all leaseholders, stating the feeholder/RMC’s reasons for awarding the contract elsewhere. A particular important note is that if the contractor actually chosen to carry out the works didn’t provide the lowest estimate, the estimate could be tested for reasonableness by the FTT under s19 of the Landlord and Tenant Act 1985 even though the s20 requirements have been met.
A case in the High Court in 2012 (Phillips and others v Francis) cast doubt on whether there is a cost threshold below which landlords do not need to consult on qualifying works and was an important case on the meaning of “qualifying works” in s.20 and s.20ZA of the 1985 Act since it deemed that the interpretation of the legislation had been incorrect for nearly 30 years! The case decided that the common approach since Martin v Maryland Estates  2 EGLR 53 of considering whether a particular set of works are “qualifying works” was wrong; there is no ‘triviality threshold’ in relation to qualifying works so all works that are “qualifying works” should be brought into the account for computing the lessee’s contribution.
As a result landlords were require to consult on all qualifying works if a lessee’s contribution to the total cost of qualifying works in an accounting period exceeds £250. Even if a lessee’s contribution to a distinct, identifiable set of works did not exceed £250 and the landlord did not consult on all qualifying works, the lessee’s contribution to the total cost of qualifying works in the accounting period would be capped at £250.
Decision Overturned By Court of Appeal
However, in October 2014 this decision was overturned by the Court of Appeal because the Martin v Maryland Estates Ltd  2 EGLR 53 case concerned additional works that had been added to the project with no further consultation. 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 this case the Chancellor Sir Andrew Morritt found that Martin was no longer of any relevance. So the “sets approach” ie section 20 consultation was re-established and should be applied to individual sets of qualifying works without reference to time periods or service charge years.
Identifying A Single Set Of Qualifying Works
The Court of Appeal in the case of Phillips and others v Francis also gave guidance on what factors are to be taken into consideration in identifying a single set of qualifying works. The following list is not exhaustive but relevant factors are likely to include:
- Where the items of work are to be carried out;
- Whether they are the subject of the same contract;
- Whether they are to be done at more or less the same time or at different times;
- Whether the items of work are different in character from, or have no connection with, each other
- Whether all the works are the subject of one contract and;
- The way in which works are planned and the lessor’s reasons for the way they are implemented are also of relevance.
QUALIFYING LONG TERM AGREEMENTS
These are agreements entered into by the landlord with a wholly independent organisation or contractor for a period of more than 12 months although agreements before 31st October 2003 are exempt. Whilst the 2002 Act doesn’t spell this out it is thought safest to assume that this would include ongoing contracts with no specific termination date such as:
- Agreements affecting the building generally (e.g. lifts, entry-phone systems, waste management or maintenance contracts);
- Cleaning and gardening;
- Management agency agreements.
Exclusions from Consultation
If the consultation procedures are not adhered to for either works then leaseholders will only be required to pay £100 for long-term qualifying agreements although the following areas are not included:
- Contracts of employment;
- Management agreements made by a local housing authority and a tenant management organisation, (TMO), or a body established under s2 of the Local Government Act 2000;
- An agreement between a holding company and its subsidiary, or between subsidiaries of the same holding company (the definitions following those in the Companies Act 1985);
- An agreement for less than five years which was entered into at a point when there were no tenants or leaseholders at the property (for example, on a new development);
- An agreement exceeding twelve months which was entered into before 31st October 2003 (even if there are more than twelve months of the contractual term to go).
Breach of Consultation Requirements
The case of Daejan v Benson concerned a breach of the consultation requirements. It reached the Supreme Court where it was decided that simply because there had been a breach of the consultation requirements it did not mean that a Leasehold Valuation Tribunal should refuse dispensation. What this means in effect is that if a landlord wants to dispense with any or all of the consultation procedures, the leaseholders must be able to prove that it has had a predjudicial effect on them and to what extent.