One of the most daunting moments for a leasehold owner is receiving a service charge demand, knowing that there is a contractual cost contained within it which is generally outside of their control. There are, of course, the arguments available over reasonableness (careful not to make a section 27A admission!) – however, the unfortunate fact is that these types of dispute are often disproportionate and a commercial view must be taken.
But for those contractual obligations of a greater sum or term, there is a statutory protection in place which compels the demanding party to consult with the paying party, more commonly known as the Section 20 Consultation Process.
Key facts relating to this process:
- Relevant obligations are contained within sections 18 to 30 of the Landlord & Tenant Act 1985 (as amended) and the Service Charges (Consultation Requirements) (England) Regulations 2003 (“the Regulations”).
- Section 20 applies:
- When there is a Major Works contribution (when the cost to any lessee is in excess of £250.00);
- To Qualifying Long-Term Agreements (“QLTA” – a contract for a period of more than 12 months at a cost in excess of £100.00 per lessee); and
- To Qualifying Works under a long-term agreement (when the cost to any lessee is in excess of £250.00).
- Some exceptions to the above which may apply are contracts of employment, contracts between holding companies and wholly owned subsidiaries, or contracts for services such as gardening or window cleaning.
- Failure to comply with the Consultation Process may preclude the consulting party from recovering any more than the statutory thresholds (ie: £100 or £250 subject to which category applies).
Do I need to comply with the Consultation Process?
First question: where should a party start when they are entering into a consultation? Simply: the Lease, otherwise where is the certainty that the leaseholder is contractually obliged to pay the proposed sums?
For the avoidance of doubt, this should be the starting point for every interaction involving a leaseholder and no presumption should ever be made that any two leases are the same.
QLTA’s are relatively simple on their face to identify, but where there are Major Works taking place to differing areas of the building, or over a prolonged period there may be some question as to whether the Major Works are divisible so as to avoid the Consultation Process or whether they are not sufficiently divisible to have avoided it.
The Court of Appeal in Phillips v Francis  EWCA Civ 1935 considered whether a group of works were inside or outside of the scope of Section 20. The approach taken by the Court of Appeal has been for the most part warmly received, with Lord Dyson taking a common sense approach (although including the usual caveats of non-exhaustive lists and remaining a question of fact and degree) and suggesting (at paragraph 36) relevant factors are likely to include:
- Where items of work are to be carried out;
- Whether the works are subject to the same contract;
- Whether the works are done more or less at the same time; and
- Whether the items of work are different in character from, or have no connection with, each other.
How do I begin?
Now it has been established whether the works / contract fall within the scope of Section 20, and it is established that the sums are contractually payable under the Lease, how should the demanding party notify the leaseholder of the commencement of the process?
Again, check the Lease. One of the most common service clauses is the Section 196 (Law of Property Act 1925) clause, however, as Lord Hoffman said in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd  A.C. 749 at 776A:
“If the clause had said that the notice had to be on blue paper, it would have been no good serving the notice on pink paper…”
Therefore a primary element which both parties should consider (whether a consulting party needing to comply or a lessee attempting to avoid liability) is whether or not the consultation documents have been properly delivered.
The Consultation Process
Each charge has its own specific rules simply and concisely set out respectively in the Regulations, Schedules 1, 3 and 4 (Schedule 2 relates to QLTA’s where a public notice is required although that is outside of the scope of this commentary). Common key features are that:
- The timing of notices and responses must be complied with;
- The leaseholder / recognised tenants’ association must be given an opportunity to respond and be aware of their rights;
- Regard must be had for written observations; and
- If required, notification of the final decision, and reasons for the same, must be provided to all parties involved.
Failure to comply with any element of the Consultation Process may render the entire procedure defective and the demanding party subject to the statutory restrictions on recoverability. Particular regard should be paid to rules on nominating a more expensive option, or if there is any ‘connection’ between the appointing party and contractor.
What if there is not time to comply?
There are occasions when it is simply impossible to comply with the strict time requirements, which can take a number of months to conclude, because say the premises are dangerous or to delay would be unreasonable in the circumstances.
Section 20ZA of the Landlord & Tenant Act 1985 enables a party to apply to the appropriate Tribunal for a determination that the Consultation Process may be dispensed with. It should be noted however that there may still be scope for a later challenge to reasonableness, so simply because a Tribunal has awarded dispensation does not mean the appointing party has a carte blanche right to charge the leaseholder however much they should choose.
The Section 20ZA dispensation may also be sought to avoid failures in complying with the Consultation Process after the works have commenced / concluded, therefore simply because one stage may not have been complied with fully or properly does not mean there is any real certainty for any party to the Consultation Process whilst the Tribunal retain an unfettered and subjective discretion.
What do I need to remember?
Key points to always remember when a service charge may invoke Section 20:
- Check the Lease;
- Comply with the Regulations; and
- If you cannot comply with the Regulations, should you be applying for dispensation?
Both complacency with this process and a lack of proper understanding can lead to costly mistakes on the part of the consulting party, therefore if there is ever an item you are unclear upon, seek appropriate advice which in the long-term may save you more than it costs.
Charles Jamieson is a Legal Executive in the Litigation & Dispute Resolution team at Bishop & Sewell LLP specialising in property and commercial disputes.
Email email@example.com or telephone 020 7631 4141 for more information.