Major Works and 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. However, 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) which must generally contain the following:
- A description of the proposed works;
- The reasons such works are being considered;
- The address to where observations should be sent.
Within 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) because they can prepare the specification that can be sent to tender. This will ensure 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. A Notice to Accompany the Statement of Estimates must also be served at the same time which will contain the hours and place where details of the estimates may be inspected, an invitation to 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 freeholder/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, such an estimate could be tested for reasonableness by the First Tier Tribunal (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 was a cost threshold below which landlords did not need to consult on qualifying works. It was an important case on the meaning of “qualifying works” in s20 and s20ZA of the 1985 Act because 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 were “qualifying works” was wrong; there was no ‘triviality threshold’ in relation to qualifying works so all works that were “qualifying works” should be brought into the account for computing the lessee’s contribution.
As a result landlords were required to consult on all qualifying works if a lessee’s contribution to the total cost in an accounting period exceeded £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 so if for example, 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” i.e s20 consultation was re-established and should now be applied to individual sets of qualifying works without reference to time periods or service charge years.
So how is a single set of works identified?
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.
BREACHES OF CONSULTATION REQUIREMENT
In 2013 the UK Supreme Court gave definitive guidance on the issue of breaches of consultation requirements in the case of Daejan Investments Ltd v Benson & Ors  UKSC 14. In short, their thinking was that the requirement to consult is not an ‘end in itself’, and that it does not matter whether Landlords consult with residents as long as there is no financial loss to them as a result of not being consulted. Simply because there had been a breach of the consultation requirements it did not mean that a Leasehold Valuation Tribunal should refuse dispensation and it should always be granted if the landlord applies for it. If a landlord wants to dispense with any or all of the consultation procedures, the leaseholders must be able to prove that such dispensation has had a prejudicial effect on them and to what extent, such as whether the financial outcome would be have been different and better if they had been consulted. They can’t successfully claim to have experienced prejudice simply on the basis that they were not consulted, or that they were not provided with the right information, rather they must convince a court or tribunal that had they been consulted properly they would have had a realistic prospect of altering some aspect of the way in which the landlord provided works or services at the building.
The First-tier Tribunal (Property Chamber) in England can dispense with s20 rules before or after works
have been carried out but only if a good case can be made and s20za of the Landlord and Tenant Act 1985 says that the FTT may grant a Dispensation to a Landlord “if satisfied that it is reasonable to dispense with the requirements”. It is down to the Courts and Tribunals to decide when a dispensation should be granted but they are not permitted by law to assume that prejudice inevitably occurs whenever a landlord fails to meet the consultation requirements.
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).