Major Works and Qualifying Long Term Agreements
Major works under s20 of the Landlord and Tenant Act 1985 (limitation of service charges: consultation requirements) and as amended by s51 of 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 and need consultation with all leaseholders if any works are to exceed £250 per leaseholder.
Long term qualifying agreements are those entered into by the landlord with a wholly independent organisation or contractor for more than 12 months and if they will cost leaseholders more than £100 in one financial year (although agreements before 31st October 2003 are exempt), all leasholders must be consulted.
Whilst the 2002 Act doesn’t clearly state it, it is considered ‘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.
Consultation will also be required where properties don’t have equal service charge contributions so all the leaseholders must be consulted if any of them would have to pay more than £250.
Note: When calculating the estimated cost, VAT on works must be included.
THREE-STAGE CONSULTATION PROCEDURE
The legislation sets out the three-stage consultation procedure with which to follow when carrying out qualifying work:
Stage 1: Section 20 Notice of Intention
The process starts with the freeholder serving a s20 Notice of Intention To Carry out Works 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 give the name of an alternative contractor (person or persons) that the freeholder/RMC can get 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 make sure that all the quotations will be on the same basis.
Note: 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.
The importance of the Notice of Intention is that it offers leaseholders the opportunity to offer the name of a contractor from whom the Landlord/RMC should try to get an estimate for the proposed works.
Stage 2: Statement of Estimates & Notice to Accompany the Statement of Estimates
At the end 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.
The Landlord/RMC must then give 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 will contain a) the times and place where details of the estimates may be inspected and where leaseholders can make to make written observations on the estimates within 30 days and b) the address to which those observations should be sent.
Stage 3: Notice of Reasons
At the end of the consultation period, if the contractor chosen by the leaseholders did not give 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, that 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.
QUALIFYING LONG TERM AGREEMENTS
For long-term agreements, the procedure is essentially the same, apart from Stage 2 being referred to as a Notice of Proposals. For example, an agreement to install an intercom system not only concerns the installation costs but the ongoing maintenance in terms of visits, number of staff attending, and any inclusions (or exclusions).
If the consultation rules 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 such as 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).
Contributions will also be limited to aforementioned amounts if work is carried out without the First-tier Tribunal (Property Chamber (rather than a County Court) determining that consultation is not required. It can dispense with any or all of the consultation requirements if it deems it reasonable to do so, (both before and after works) but only if a good case can be made. With s20za of the Landlord and Tenant Act 1985 (consultation requirements: supplementary) saying th a dispensation can be made 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. The are not permitted by law to assume that prejudice inevitably occurs when a landlord fails to meet the consultation requirements. The FTT can also dispense with the process in certain specified circumstances, such as when urgent repair work is required. If any or all of the consultation requirements are dispensed with they will notify all service charge payers of the proposal. The FTT can also exempt specified types of contract. which can be done either in advance of, or after the contract has been entered into
Note: If a landlord has known about a problem for months or years the FTT is less likely to dispense with the procedure.
In 2012 a case in the High Court, that of Phillips and others v Francis, cast serious doubts on the meaning of “qualifying works” in s20 and s20ZA of the 1985 Act because the Court deemed that the interpretation of the legislation had been incorrect for nearly 30 years! The case centered on whether there was a cost threshold below which landlords did not need to consult on qualifying works.
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 establishing 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 the decision in the Maryland case was overturned by the Court of Appeal because it 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. A common sense approach had to be applied and so the Chancellor Sir Andrew Morritt found that Martin was now irrelevant. So the ‘sets approach’ of the consultation was re-established and determined to be applied to single sets of qualifying works without reference to time periods or service charge years.
The Court of Appeal 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 roughly 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  UKSC14. In short they thought that the need to consult is not an ‘end in itself’, and that it does not matter whether landlords consult with residents as long as no financial loss to them has occurred 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 rules, the leaseholders must be able to prove that such dispensation has had a prejudicial effect on them and to what extent. For example, would the financial outcome have been different and better if they had been consulted. Leaseholders 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. Instead they must convince a court or tribunal that if they been consulted properly they would have had a realistic prospect of altering some aspect of how the landlord provided works or services at the building.