Section 20 leaseholder consultation - not to be overlooked in the procurement process

Financial pressures are causing authorities across the country to review the way they procure and deliver repairs and maintenance works to their housing stock. This article focuses on the consultation regime that will apply when an authority intends to enter into a Qualifying Long Term Agreement for discharging its repair and maintenance obligations.

Recent case law has brought into sharp relief the importance for local authorities of complying with the leaseholder consultation process in Section 20 of the Landlord and Tenant Act 1985 (“the Section 20 process”). The Court of Appeal decision in Daejan Investments Ltd v Benson [2011] EWCA Civ 38 is a stark reminder that a failure to comply strictly with the Section 20 process can have disastrous financial consequences for landlords. In Daejan, the tenants of a block of flats relied on their landlord’s failure to comply with the Section 20 process to prevent him from passing on £270,000 of expenditure to them through their service charge. As a result, Daejan is a timely reminder that, where it applies, the Section 20 process must not be overlooked. Where contracts are to be re-procured, the process will have an impact on how a procurement process is undertaken and needs to be factored in from Day 1.

The Section 20 process – how it applies to local authorities

The Section 20 process has been on the statute book since 1985 when the Landlord and Tenant Act was introduced. The basic principle underpinning the process is that tenants who pay service charge and have a significant interest in their property should be consulted with by the landlord before the landlord embarks on major works or enters into any long term contracts for goods and services. For local authorities, the good news is that the process does not apply to secure tenancies and only applies to “long tenancies”. This definition covers leases of more than 21 years, and right to buy leases granted under Part V of the Housing Act 1985.

Consequences of a failure to comply

The sanctions for failing to consult properly are that statutory caps are imposed on how much a landlord can recover through service charge. These are:

• £250 per flat/unit in relation to qualifying works
• £100 per flat/unit where works are done (and/or goods and services are supplied) under a “qualifying long term agreement” or “QLTA” (basically a contract lasting longer than 12 months).

Where the amount to be recovered from all properties affected will be less than these figures, no leaseholder consultation is required. However, if costs could be higher for any affected property, statutory consultation must be undertaken otherwise the statutory caps will limit the amount which can be recovered.

In Daejan, these caps were applied by the Leasehold Valuation Tribunal (and on appeal, the Lands Tribunal) and this was why the landlord was unable to recover £270,000 of expense on works which fell within the tenants’ service charge provisions in their tenancies. It is clear therefore that the stakes are high.

The consultation process

Section 20 is the statutory provision which imposes the obligation to consult, although all of the detail is set out in the Service Charges (Consultation Requirements) (England) Regulations 2003 (or the equivalent Welsh regulations).

The Regulations are detailed and impose different consultation regimes depending on whether the proposed costs relate to expenditure on “qualifying works” (i.e. works which will lead to a service charge liability of more than £250 per unit), or the entering  into of a QLTA.

 How the process works

The consultation requirements vary depending on the value of the proposed contract and whether or not the procurement will be subject to the EU procurement rules.

Stage One: the consultation process for a proposed QLTA starts with the service of a “notice of intention” by the landlord. The purpose of the notice is to provide  leaseholders with basic information about the proposed contract and to invite their observations on it within 30 days.

If the OJEU process does not apply, the notice should invite nominations for the contractor from the leaseholders and any tenants’ association. Nominations do not have to be requested if the procurement will be subject to the OJEU process, but the “notice of intention” needs to be sent out before the OJEU advert is placed to enable leaseholders to encourage their favourite contractor to reply to the OJEU advert.

Stage Two: once the procurement process has been undertaken and a preferred contractor has been identified, a further consultation phase must take place. This involves the service of a second “notice of intention” on leaseholders, but this time providing much more detail about the terms of the proposed QLTA. The notice needs  to provide leaseholders with:

• the identity of the contractor;
• any connections between the contractor and the council;
• the term of the contract;
• a summary of observations received from leaseholders to the first notice of intention and the council’s formal response to each of them; and
• the best available costs information to allow leaseholders to understand the likely financial impact of the contract upon them (and if this is not available at the time, the council must say when it will become available).

Leaseholders need to be given a further 30 days to comment on the proposals and the QLTA cannot be entered into until the 30 day consultation period has expired and the authority has had proper regard to all comments received.

So, is that all that is required?

Not necessarily. Once a QLTA has been signed up, if specific works are to be carried out under the contract that would expose leaseholders to a service charge liability of more than £250, further consultation is required. However, as the contractor for those works will already be in place the consultation will relate to the nature and extent of the works and why they are required.

Dispensation

It is possible for a council to apply to the Leasehold Valuation Tribunal for dispensation from some or all of the consultation requirements in the Regulations. Applications for dispensation are becoming more common in respect of large or complicated procurements, and/or procurements designed to put in place framework arrangements (which do not sit well with the Section 20 process).

Dispensation can be applied for before or after the works have been carried out or the QLTA has been entered into. However, authorities are advised against reliance on retrospective applications for dispensation. This is what the landlord sought to do in Daejan, and he failed. The starting point for the LVT will be that the consultation process should be gone through unless there are good reasons to dispense with all or part of it. Mere inconvenience will not be enough.

If time permits, any application for dispensation should be made sufficiently early in the process to allow the authority to undertake the consultation process if dispensation is refused. However, taking upfront legal advice on the merits of a dispensation application is likely to be a prudent step, as this may enable an authority to avoid both the wasted time and effort on an unsuccessful application and the resultant delays to the procurement process.

Concluding remarks

Given the work involved in undertaking a re-procurement of contracts for goods and services which will affect service charge payments made by leaseholders, it is all too easy to overlook the Section 20 process. However, a failure to comply with the process could lead to significant restrictions on the amounts which can be recovered through the service charge. For an authority with anything more than a minimal number of “long tenancies”, the adverse financial consequences of noncompliance with the Section 20 process could significantly eat into the targeted cost savings - which will no doubt be one of the main drivers for the procurement in the first place.

This article also appears in our local authority newsletter Authority View Spring 11.