26 November, 2014
On 31 October 2014, the Court of Appeal overturned the decision made by the High Court in Phillips v Francis about consulting leaseholders before commissioning work on a building. Following the High Court decision, landlords were left with impractical section 20 consultation requirements being imposed on them.
Background of the Case
In the case of Phillips v Francis, Mr and Mrs Francis purchased a 25 acre holiday site at St Merryn in Cornwall. The site consisted of 150 chalets which were all let on long leases. Shortly after buying the site, Mr and Mrs Francis notified the leaseholders that significant improvement works were required and began the improvement works, which spread across 2 service charge years. They did not undertake a formal section 20 consultation with leaseholders prior to commencing the work.
The improvement works saw the leaseholders' service charge bill double. The leaseholders then brought a claim and argued, amongst other things, that a section 20 consultation procedure should have been followed in respect of the improvement works. Section 20 of the Landlord and Tenant Act 1985 limits the recovery of the cost of qualifying works by a landlord from residential tenants by means of a service charge unless they carry out a prescribed consultation process or obtain dispensation from doing so from the appropriate tribunal. Therefore, where a tenant has to contribute more than £250 towards 'qualifying works', a tenant's contribution will be capped at £250 unless the landlord has carried out a section 20 consultation.
In defence of this argument, Mr and Mrs Francis argued that the improvement works were not undertaken as one set of works but were conducted on a casual basis with "one job leading to another". The trial judge sitting at Truro County Court accepted Mr and Mrs Francis' defence that none of the single items of improvement works amounted to more than £250 per leaseholder, and so it was not necessary to carry out a section 20 consultation.
The High Court Decision
The leaseholders appealed the decision of the trial judge and the case was then heard by the High Court. The High Court overturned the original decision and considered that the trial judge had applied the wrong test. The High Court held that the consultation requirements only refer to the cost of the works to the individual leaseholder, rather than the cost of the works generally and that the focus should be on what the leaseholder is required to pay on an annual basis, rather than having to identify individual 'sets of work'. Therefore, the High Court decided that all the improvement works were 'qualifying works'.
Following the High Court decision, landlords would have to consult on all works to a building after the £250 per leaseholder per year threshold had been met.
The High Court decision caused anxiety amongst landlords, management companies and leaseholders regarding the interpretation of the meaning of 'qualifying works'. Following this decision, an appeal was brought by Mr and Mrs Francis and the case was heard in the Court Appeal.
The Court of Appeal Decision
The Court of Appeal held that if a landlord was required to consult with the leaseholders on any service charge item, however small, once the limit for contributions had been reached this would mean that a landlord may have to consult on every item of maintenance and repair, some of which might be of an emergency nature. The Court of Appeal decided that this gave rise to serious practical and administrative problems and this could not have been intended by Parliament. In reaching this decision the Court of Appeal considered that the real protection afforded by the Landlord and Tenant Act 1985 was that all service charges had to be reasonable and had been reasonably incurred under section 19. The Court of Appeal considered that this was the sensible way to control routine works of repair and maintenance which were unlikely to be the subject of a detailed plan in advance.
The Court of Appeal decision provides clarity to landlords, management companies and leaseholders regarding the definition of the meaning of 'qualifying works'. The decision will be welcomed by landlords as they will be able to carry out routine maintenance work without facing the possibility of going through lengthy consultation processes, whilst tenants have the protection of the reasonableness test under section 19 of the Landlord and Tenant Act 1985.