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Residential Service Charges – Consultation requirements and head landlords

Andrew Hindle, Associate at Boodle Hatfield LLP, considers the implications of a recent Upper Tribunal decision addressing how to approach Section 20 consultation when a headleasehold is present.

For almost 30 years landlords of leasehold flats or houses have had to consult leaseholders before incurring significant expenditure on works whose costs are recoverable through a service charge. In 2003 the existing provisions in the Landlord and Tenant Act 1985 were replaced by significantly more detailed ones involving a three-stage process, which apply in every case in which a tenant’s contribution to the works will exceed £250 in any one year. Failure to comply with the consultation requirements will limit the amount which a landlord can recover to £250 per dwelling, unless he can persuade the First-tier Tribunal to dispense with them.

Although detailed, the requirements (set out in the Service Charges (Consultation Requirements) (England) Regulations 2003) are relatively easy to follow, and where the service charge expenditure is incurred by the immediate landlord of the flats or houses, do not generally cause significant problems. In the 2013 case of Daejan Investments v Benson the Supreme Court decided that the purpose of the consultation requirements is to ensure tenants of flats are not required to pay for unnecessary services or services which are provided to a defective standard, or to pay more than they should for services which are necessary, and are provided to a reasonable standard. As long as these aims are achieved the Tribunal should be prepared to overlook technical breaches of the Regulations in deciding whether to dispense with the requirements.

Where problems can arise, however, is where the service charge expenditure is incurred by a superior landlord – for example, where there is a block of flats over a parade of shops, with a single headlease of the whole of the block of flats to an intermediate landlord, and an underlease of each flat. If the head landlord intends to carry out works to the building, who does he have to consult?

The consultation requirements apply to service charges payable by the tenant of a “dwelling”. In the 2006 case of Oakfern Properties v Ruddy the Court of Appeal decided that a tenant may be the tenant of a dwelling even though his lease includes more than one dwelling, or a dwelling and commercial premises. So in the situation above, the consultation requirements clearly apply to the head landlord, who equally clearly has to consult with his tenant, the intermediate landlord. But what about the owners of the individual flats?

It is clear that the owners of the flats ought to be consulted – after all, they are the ones who have to pay the service charge at the end of the day, and should have the opportunity to express a view on the works proposed, the tenders obtained for them, and so on. But which landlord is obliged to carry out the consultation? Can the head landlord simply consult with the intermediate landlord, and leave it to the intermediate landlord to consult with the flat owners? Or must the head landlord consult direct with the flat owners?

This issue arose for consideration in a recent decision of the Upper Tribunal (Lands Chamber), Leaseholders of Foundling Court and O’Donnell Court v London Borough of Camden and others [2016] UKUT 366 (LC). Although brought in the First-tier Tribunal the case was transferred to the Upper Tribunal because of its complexity and importance and was heard by Martin Rodger QC, the Deputy President of the Upper Tribunal.

In argument before the Tribunal each landlord emphasised the practical difficulties and anomalies which would be created if it were required to consult in respect of works carried out by the head landlord. The intermediate landlord said that if it were given the minimum 30 day notice for consultation by the head landlord it would not have sufficient time to carry out its own consultation with the flat owners, who also had to be given 30 days’ notice. The head landlord said that it had no way of knowing the names, addresses and other details of the individual flat owners and their leases (there were 408 flats in the particular development), with whom it had to consult. There are no provisions in the Regulations or the Act which allow the head landlord to obtain or compel intermediate landlords to disclose such information.

The Tribunal decided that the obligation to consult fell on the landlord which was intending to carry out the works which were to be the subject of the consultation. In this case it was the head landlord; the intermediate landlord did not intend to carry out the works, as the decision to carry them out was entirely that of the head landlord. The head tenant was obliged to consult with each tenant – and as the definition of “tenant” expressly includes sub-tenants, the obligation extended to the owners of the individual flats. The primary purpose of the consultation regime is to ensure that those who are ultimately responsible for paying for work or services are consulted; practical difficulties which might be encountered by landlords in complying with those obligations could not dominate their interpretation.

The Tribunal suggested that the practical difficulties of not knowing the identity of all the potential consultees could be overcome in a number of ways. The simplest and cheapest approach would be to deliver a consultation notice addressed to “the leaseholder” to each flat in the building or development. A better course might be for the superior landlord to obtain the necessary information by asking the intermediate landlord to provide it, on the basis that intermediate landlords might have a vested interest in cooperating to avoid the risk of recovering only £250 from each tenant. Finally, the superior landlord could apply for dispensation from the consultation requirements either before carrying out the work, or afterwards if a dispute arose. The Tribunal has power to dispense with the requirements on terms, so could impose terms as to the way in which notice should be given.

This is an important decision for freeholders, intermediate landlords and managing agents, as it makes it clear who has to consult with whom when works are proposed by a head landlord. It will impose extra burdens on head landlords, who will now have to consult further down the chain than just with their immediate tenant; but intermediate landlords and their managing agents would be well advised to cooperate willingly with requests for information about tenants to avoid the risk of significant shortfalls in service charge recovery. An additional management burden is likely to be more palatable than the possibility of insolvency.

Andrew Hindle is a solicitor who has practised in the field of landlord and tenant litigation for more than 30 years.

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