This guide looks at the consultation obligations placed upon residential landlords under section 20 of the Landlord and Tenant Act 1985 ('LTA 1985') and the rights of residential long leaseholders to be consulted about significant expenses that they are liable to contribute to, under a service charge regime.
Landlords must consult with their residential tenants before carrying out works, or entering into long-term agreements, where the costs payable by any of those tenants (through the service charge) will be above a certain level.
The detailed consultation procedure and its triggers for properties in England are set out in the Service Charges (Consultation Requirements) (England) Regulations 2003 (SI 2003/1987) and the Service Charges (Consultation Requirements) (Wales) Regulations 2004 (SI 2004/684).
The following terms are used in the Landlord and Tenant Act 1985 and the consultation regulations in relation to the consultation requirements:
- Dwelling - a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, outhouses and appurtenances belonging to it or usually enjoyed with it.
- Landlord - any person with a right to enforce payment of a service charge, including, where applicable, a Right to Manage company.
- Qualifying long-term agreement – an agreement entered into by or on behalf of the landlord or a superior landlord for a term of more than 12 months.
- Qualifying works – are works on a building or any other premises.
- Recognised Tenants' Association – an association which comprises tenants who may be required by the terms of their leases to contribute by service charges to the same service costs and has been recognised by written notice from the landlord, to the secretary of the association, or by a certificate from the Tribunal.
- Relevant contribution – is the amount which the tenant may be required under the terms of its lease to contribute to relevant costs incurred in carrying out qualifying works or under a qualifying agreement.
- Relevant costs – are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord or a superior landlord in connection with the matters for which the service charge is payable.
- Relevant matters - are related to a proposed agreement, the goods or services to be provided, or the works to be carried out under the agreement.
- Relevant period – is the period of 30 days beginning on the date of the relevant notice.
- Service charge – is an amount payable by a tenant of a dwelling as part of or in addition to the rent for services, repairs, maintenance, improvements, insurance or the landlord's costs of management.
- Tenant - includes a statutory tenant and, where the dwelling (or part of the dwelling) is sublet, the subtenant.
Triggers for consultation under the consultation regulations
The section 20 consultation requirements are triggered if:
- The landlord plans to carry out qualifying works, which would result in any tenant's relevant contribution being more than £250.
- The landlord plans to enter into a qualifying long-term agreement which would result in the relevant contribution of any tenant being more than £100 in any 12 month accounting period.
Failure to comply with the consultation requirements limits the landlord's ability to recover the costs of the relevant works or qualifying long-term agreement. However, the Tribunal can grant a landlord dispensation from the consultation requirements where it is reasonable.
What are qualifying works?
"Qualifying works" are "works on a building or any other premises". They can range from day-to-day repairs and planned maintenance to major improvement works. Services such as window cleaning, gardening, or cleaning are not qualifying works.
What constitutes a single set of qualifying works is a matter of fact and degree. In many cases, which works are part of a single programme will be clear. Where there is doubt, factors such as the timing of the works and their character may be relevant. It may also be helpful to consider whether the works are being carried out under one or more contracts.
The issue of how to assess whether qualifying works will trigger the consultation requirements was the subject of Francis and another v Phillips and others [2014] EWCA Civ 1395.
The court held that an aggregated approach was inappropriate and that the correct approach was adopting a "sets" approach. Separate sets of work should be identified to establish whether the relevant costs exceeded the recoverable limit and triggered the consultation process. The £250 per tenant limit was intended to provide a "triviality threshold".
What is a qualifying long-term agreement (QLTA)?
A qualifying long-term agreement is entered into by or on behalf of the landlord or a superior landlord for a term of more than 12 months. "Certain types of agreements cannot be qualifying long-term agreements.
If the agreement is a rolling contract, the landlord should consider carefully the terms of the contract to ascertain whether the requirement to consult applies.
The following agreements are not QLTAs:
- Employment contracts.
- Certain management agreements entered into by a local housing authority.
- Agreements made between a holding company and one of its subsidiaries or two subsidiaries of the same holding company.
- Agreements entered into at a point when there are no tenants to which it relates, as long as the term of the agreement does not exceed five years.
- Agreements entered into before the relevant Consultation Regulations came into force.
Consultation requirements also bind a superior landlord
For the consultation requirements, where a superior landlord intends to carry out qualifying works or enter into a qualifying long-term agreement, the statutory obligation to consult is imposed on the superior landlord, not the intermediate landlord under the headlease. This is because the superior landlord is the only one with the relevant intention to do qualifying works. This requires the superior landlord to consult with the intermediate landlord and each subtenant of a dwelling who is liable to contribute towards the relevant costs.
Consultation process for qualifying works
The procedure for consulting tenants before carrying out qualifying works depends on whether a public notice is required, whether the works are the subject of a qualifying long-term agreement, or whether the works are being carried out under agreements that were made or publicly advertised before the consultation regulations came into force.
This note will concentrate on circumstances where none of the above apply and it is simply a private landlord carrying out generic works.
Like the consultation process for qualifying long-term agreements, consulting on qualifying works involves two principal stages. The landlord must consult with the tenants on the following:
- Firstly, their intention to carry out qualifying works.
- Secondly, the landlord's estimates for the works are also included.
Once the consultation process is complete and the landlord enters into a contract for the qualifying works, the landlord must usually serve further notice on the tenants and any recognised tenants' association (a notice of Award of Contract and reasons).
The consultation regulations prescribe what information each notice should contain, and landlords should ensure that their notices contain all the required information.
The first stage of the consultation process consists of the following steps:
- The landlord gives each tenant and, where applicable, the recognised tenants' association written notice of the landlord's intention to carry out qualifying works.
- The tenants and the recognised tenants' association can make written observations on the proposed works during the relevant period. If they wish, they can also supply the name of another person from whom the landlord should try to obtain an estimate.
- The landlord must have regard to any observations made during the relevant period.
After consulting on the proposal to carry out the works, the landlord should start obtaining estimates. If any of the tenants or the recognised tenants' association has nominated a person, the landlord is required to obtain estimates from that person (in addition to estimates the landlord may decide to obtain from any other contractors).
The landlord must obtain at least one estimate from someone who is wholly unconnected with the landlord.
The procedure for consulting on the estimates is as follows:
- The landlord must give each tenant and, where applicable, the recognised tenants' association a statement to include, for at least two of the estimates, the amount specified in the estimate as the estimated cost of the proposed works and a summary of the observations on the landlord's notice of intention and the landlord's responses to those observations.
- If the landlord received estimates from any nominated person, the cost given in those estimates should feature in the landlord's statement. The landlord must also make all estimates available for inspection.
The tenants and the recognised tenants' association can make written observations on the estimates within the relevant period. The landlord must consider any observations made during that period.
Sometimes, the nature of the proposed works changes after the consultation process has been completed. In these circumstances, the landlord may need to repeat this second stage of the consultation process to provide the tenants with updated estimates and seek their observations on them. However, the consultation regulations do not give any guidance as to when this is required.
This point was considered by the Court of Appeal in Reedbase Limited and another v Fattal and others [2018] EWCA Civ 840. The court identified that, in the absence of any explicit statutory guidance as to when a fresh set of estimates must be obtained, the relevant test is whether the first set of estimates gave the tenants sufficient information. It is also necessary to consider whether the protection afforded to the tenants by the consultation process is likely to be materially assisted by obtaining fresh estimates.
Finally, within 21 days of entering into a contract for the qualifying works, the landlord must (in most cases) give each tenant and the recognised tenants' association a written notice, which explains the landlord's reasons for awarding the contract, summarises any observations made in respect of the estimates and sets out the landlord's response to any observations made.
This notice is optional if the landlord awarded the contract to a nominated person or the person who submitted the lowest estimate and no observations were received during the relevant period.
Consultation process for qualifying long-term agreements
The process for consulting tenants before entering into a qualifying long-term agreement depends on whether public notice is required. Private landlords are not required to give public notice and should follow the procedure in Schedule 1 of the consultation regulations. In certain circumstances, landlords that are public bodies are required to provide public notice before entering into an agreement; in those circumstances, they must follow the procedure set out in Schedule 2 to the consultation regulations.
This note will focus on private landlords with no public notice requirement.
The landlord must consult with the tenants on:
- The intention to enter into a qualifying long-term agreement.
- Detailed proposals relating to the qualifying long-term agreement.
Once the consultation process is complete and the landlord enters the qualifying long-term agreement, the landlord must usually serve further notice on the tenants and any recognised tenant association.
The consultation regulations prescribe what information each notice should contain, and landlords should ensure that their notices contain all required information.
The first stage consists of the following steps:
- The landlord gives each tenant and, where applicable, the recognised tenant association written notice of the landlord's intention to enter into a qualifying long-term agreement.
- The tenants and the recognised tenant association can make observations on the proposed qualifying long-term agreement during the relevant period. If they wish, they can also supply the name of another person from whom the landlord should try to obtain an estimate.
- The landlord must have regard to any observations made during the relevant period.
After the initial consultation, the landlord starts obtaining estimates. If any of the tenants or the recognised tenant association has nominated a person, the landlord is required to obtain estimates from that person (in addition to estimates the landlord may decide to obtain from any other contractors).
Having obtained estimates, the landlord must then draw up at least two alternative proposals based on the estimates so that the second stage of consultation can take place. At least one proposal must be with a contractor wholly unconnected with the landlord. The landlord must also include proposals for any nominated person from whom they obtained an estimate.
Each proposal must contain:
- A statement of the relevant matters and provide the name and address of the other party (and their connection to the landlord).
- Where reasonably practicable, an estimate of how much each tenant will have to contribute under each proposal. If that is not possible, the total expenditure under that proposal should be indicated for the premises to which the agreement relates. If that fails, the proposal should set out the unit cost or daily or hourly rate.
- Where the relevant matters involve appointing a managing agent, confirmation of whether the person being proposed is a member of a professional body or trade association and whether they subscribe to any code of practice or voluntary accreditation scheme relating to the functions of managing agents.
- The intended duration of the agreement and any provision(s) for variation of sums due under it.
- A statement summarising any observations received in relation to the notice of intention and the landlord's response to them.
The landlord must then give each tenant and, where applicable, the recognised tenant association written notice of the proposals.
During the relevant period, the tenants and the recognised tenant association can make written observations on the proposals. The landlord must consider any observations made during that period.
Finally, Within 21 days of entering into the qualifying long-term agreement, the landlord must (in most cases) give each tenant and the recognised tenant association a written notice, which states the landlord's reasons for entering into the agreement and summarises any observations made in respect of the proposals. It must then set out the landlord's response to any observations. This notice is not necessary if the landlord enters into a qualifying long-term agreement with a nominated person or with the person who submitted the lowest estimate.
Qualifying works carried out under a qualifying long-term agreement
Where a qualifying long-term agreement is in place, the consultation process for any qualifying works that the landlord proposes to carry out under that agreement is set out in Schedule 3 of the consultation regulations. The process is not as extensive as the procedure described above. In broad terms, the second stage of the procedure is omitted, and the landlord is instead required to respond to any observations received following the notice of intention within 21 days.
Practical issues relating to the consultation process
As the consultation process involves serving various notices, the landlord (or managing agent) must comply strictly with the notice requirements contained in the lease. If a tenant disputes service, it is up to the landlord to prove that the notice was served correctly.
There is no prescribed form for notices that are required by Section 20 of the Landlord and Tenant Act 1985. However, the notices must meet the detailed requirements of the consultation regulations.
The consultation process is reasonably complicated and can take several months, as the landlord must allow the tenants time to respond to each consultation notice. When planning the timing of the works, the landlord should also factor in the additional time that the landlord might need to gather the information needed for each of the consultation notices, consider and formulate a response to any observations, and wait for contractors to respond to requests for estimates.
The consultation regulations or the Landlord and Tenant Act 1985 do not set a deadline for implementing the proposals, carrying out the works, or entering into the qualifying long-term agreement. However, the landlord should not allow too much time to elapse between the consultation process and the works or qualifying long-term agreement.
In practical terms, the contractors' estimates for the works are likely to only be valid for a certain period of time. If the estimates are revised, the wisest course of action would be for the landlord to start the consultation process again.
If the landlord has identified work that needs to be carried out, a delay in progressing that work could result in the landlord breaching its covenants under the lease.
The landlord should also consider how the works will be funded and how quickly it can access those funds. The leases may require the tenants to pay the service charge in advance in instalments or permit the landlord to include, as service charge expenditure, the costs of borrowing money to pay for the services. Alternatively, the landlord may be able to use a reserve fund or sinking fund.
Failure to comply with consultation requirements
If the landlord does not comply with the consultation requirements, its ability to pass on its costs to tenants is limited. Unless the Tribunal agrees that the landlord may dispense with the consultation requirements, the maximum that the landlord can recover is:
- For qualifying long-term agreements, £100 per tenant in any 12 months.
- For qualifying works, £250 per tenant.
Obtaining a dispensation from consultation requirements
The Tribunal. has the power to dispense with the consultation requirements in a particular case "if satisfied that it is reasonable" to do so. The leading authority on dispensation from the consultation requirements is Daejan Investments Ltd v Benson and others [2013] UKSC 14.
The Supreme Court confirmed the correct question is whether the tenants will suffer any relevant prejudice if dispensation from the requirements is granted. Note that the question of prejudice must still be considered even when the work is urgent. The purpose of the consultation requirements is to protect the tenants in relation to service charges. The right to be consulted is not a free-standing right.
The Tribunal has the power to grant dispensation on appropriate terms. In particular, the Tribunal can impose conditions when exercising its power of dispensation. This achieves a fair balance between ensuring that tenants do not receive a windfall because the power is exercised too sparingly and ensuring that landlords are consistent in adhering to the requirements.
