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Court of appeal provides essential guidance on residential service charges

The service charge battle continues at the former World War II airbase in Cornwall which is currently home to the 150 or so chalets making up the Point Curlew holiday site. After a High Court decision which sent shock waves through the property management industry, the Court of Appeal has stepped in to provide clear guidance to landlords seeking to recover the cost of works from their tenants.

The tenants were resisting a claim by the landlord for costs relating to improvement works carried out over a number of years. It was accepted that the statutory consultation requirements had not been followed, but the landlord argued that it had not been necessary to carry out a consultation as the improvement works were made up of a number of smaller projects, each of which did not exceed the limit which could be recovered from individual leaseholders without consultation.

The High Court decision of the former Chancellor, Sir Andrew Morritt controversially decided that the definition of “qualifying works” to which the consultation requirements apply included all works, no matter how minor, for which the landlord incurred costs during any given service charge period. He stated that as the contributions were payable by tenants on an annual basis, the limit should be applied to all qualifying works carried out in that year.

Therefore, the landlord was limited to recovering £250 from each tenant for each service charge year in respect of all of the improvement works.  This left a shortfall of several hundred thousand pounds.

This decision left landlords in an almost impossible position. The cautious landlord would have to carry out a consultation for all works to be carried out once the annual limit of £250 per tenant for each year had been exceeded, no matter how small. The former Chancellor was clear that there was no triviality threshold, which would mean that strictly speaking, consultation would have to be carried out for relatively minor works such as replacing a window.

This would cause an administrative burden for the landlord and delays and additional costs for tenants. Alternatively, a landlord could opt not to follow the consultation procedures and risk not being able to recover those costs which would have particularly disastrous consequences for Right to Manage Companies and Residential Management Companies with limited reserves.

The decision was of such importance that industry bodies such as RICS and ARMA supported the landlords’ appeal and the Secretary of State intervened on the grounds that the decision had wide ranging implications for landlords and tenants throughout the country.

The Court of Appeal fundamentally disagreed with the High Court’s approach and commented that Parliament simply could not have intended for landlords and tenants to be encumbered in this way. They held that the correct approach to determining what constitutes qualifying works for the purposes of consultation is to identify individual sets of qualifying works.

The Master of the Rolls provided some helpful guidance to determine what a single set of qualifying works comprises. He described this as a multi-factorial question, the answer to which should be determined in a common-sense way, taking into account the relevant circumstances.

The relevant (but non-exhaustive) list of factors includes:

  • where the items of works are carried out (whether they are contiguous or physically removed from each other)
  • whether they are the subject of the same contract
  • whether they are done at more or less the same time or different times, and
  • whether the items of work are different in character from, or have no connection with, each other.

The Court of Appeal stressed that the policy of the Act is to protect tenants from unexpected costs from major works. It was made clear that the “sets” approach should not put tenants in a more vulnerable position, as they were still entitled to the separate protection in the Act which provides that a landlord can only recover costs where the works carried out are reasonably incurred and of a reasonable standard.

This decision will come as a welcome relief to the property management industry and provides a practical framework for landlords and tenants alike. The 1985 Act doesn’t provide a definition of “qualifying works” but this decision puts flesh on the bones and gives a clear structure within which landlords will be able to approach works with a degree of certainty.

This article was written by Lauren Fraser. For more information, please contact Lauren on +44 (0)20 7427 6418 or lauren.fraser@crsblaw.com