Section 20 service charge consultation

Most residential landlords are familiar with the statutory need to comply with the statutory consultation regime in Section 20 of the Landlord and Tenant Act 1985 before undertaking 'qualifying works' or entering into a 'qualifying long term agreement'. The rationale behind the need to consult is simple. If tenants will ultimately be paying for the works or services that are to be commissioned by the landlord, surely they should have a say at the outset on how this is done.

In the context of 'qualifying works', anyone who has undertaken building works will know that all too often the scope of the project - and the cost - increases as the job progresses. For Section 20 purposes, however, there has until now been a complete lack of clarity over whether and when it is necessary for a landlord to re-run and update the consultation process when the scope of works expands beyond the original scope. In such a situation, does a landlord have to re-consult with tenants in order to ensure its ability to recover the costs in full is protected, and if so, when is re-consultation necessary and when is it not?

The recent Court of Appeal case of Reedbase v Fattal [2018] EWCA 840 gave us an answer to these questions – of sorts.

The facts

The facts were not particularly unusual. The landlord of a residential building needed to undertake works to repair the failed asphalt roof terrace of a penthouse flat that overlooked Regent's Park. The original plan was to lift the tiles, put down a membrane called Decothane then re-lay the tiles onto the membrane and this was what the tenants were consulted on.

It became clear that doing the works this way would invalidate the Decothane warranty. A new solution was devised which involved suspending the relaid tiles on pedestals, so that the integrity of the Decothane was preserved. This would add around £30,000 of cost to a total works cost in excess of £300,000. Notwithstanding the change in scope of the work, the landlords pressed ahead without re-consulting on the more expensive solution, and subsequently sought recovery of the costs incurred through the service charge. One tenant refused to pay and argued that the failure to re-consult meant that a valid Section 20 consultation hadn't taken place (in which case, the statutory £250 cap would apply).

The decision

The landlord sued for the money due as a debt and the Court found in favour of the landlord, agreeing that there had been no need to re-consult. The unhappy tenant appealed to the Court of Appeal. The appeal judges upheld the original decision and allowed recovery of the increase in cost. In doing so, the Court of Appeal decided that there was no need to re-consult on the facts of this case for the following reasons:

1. The tenants knew about the change in the scope of the work and approved it, without arguing at that time that there should be a re-tender
2. The change in cost (6%) was relatively small as a percentage of the overall cost
3. It was unrealistic to expect contractors who had not succeeded in the first tender would be willing to re-tender
4. The re-tendering process would have resulted in lost time and would have prejudiced the other tenants and
5. As the sums claimed by the landlord were service charges, the tenants would always have had their statutory right to challenge the costs incurred on grounds of unreasonableness, whether a re-consultation occurred or not.

Judicial guidance

For those reasons, the landlord's claim was upheld. The Court of Appeal issued the following guidance which is of general application for residential landlords for the future:

"It is sometimes necessary for a landlord to repeat stage 2 of the process required by the Consultation Regulations but neither the Landlord and Tenant Act 1985 nor the Consultation Regulations give guidance as to when this should be done. In my judgment, the relevant test, in the absence of any explicit statutory guidance, as to when a fresh set of estimates must be obtained, must be whether, in all the circumstances, the [tenants] have been given sufficient information by the first set of estimates. That involves….comparing the information provided about the old and the new proposals (and that comparison should be made on an objective basis).

In my judgment… it must also be considered whether, in all the circumstances, and taking account of the position of the other tenants who did not object to the changes, the protection to be accorded to the tenants by the consultation process was likely to be materially assisted by obtaining the fresh estimates." (my emphasis)

In other words, we now know that when the scope of works changes markedly from that originally communicated to tenants at the second stage of the Section 20 process (presentation of estimates), it will always be necessary for the landlord to pause for breath and consider whether there may be a need to re-run the second stage. We also know that when deciding whether to re-consult, there is a two-stage test to be applied.

First, in the light of the change in scope, were the tenants given sufficient information by the first set of estimates to make a re-consultation unnecessary.

Secondly, will a re-consultation at that stage in the process further the aim of protecting the tenants in the way that the statutory consultation process is intended to. In some cases, it may do and in others it may be of more benefit to the tenants for the landlord to press ahead with the appointed contractor rather than to re-consult and to incur additional cost and delay.

Conclusion

Ultimately, therefore, the case is a reminder of the need for landlords to manage the consultation process by putting their own interests to one side, stepping into the shoes of their tenants and considering whether, taking everything into account, a re-consultation would benefit the tenants or not. Such decisions should be taken carefully, and if the decision is taken not to re-consult then this should be carefully documented in writing, applying the Reedbase two-stage test. It may also be sensible to write to tenants at that stage to explain the decision that has been taken and the reasons for it, and to allow a short period of time for tenants to approve or object to the proposed course of action, though the wisdom of doing so will need to be considered based on the specific facts of the particular case.

If you would like any further assistance in relation to these issues, or in relation to the Section 20 process generally, please contact steven.eccles@bevanbrittan.com.