Residential service charge recovery – some welcome news for landlords!

In these challenging economic times, the Upper Tribunal and the Court of Appeal have made some new law which will, in different ways, make life easier for local authorities and housing associations when seeking to ensure service charge recovery is maximised.

14/08/2015

Steven Eccles

Steven Eccles

Partner

In these challenging economic times, the Upper Tribunal and the Court of Appeal have made some new law which will, in different ways, make life easier for local authorities and housing associations when seeking to ensure service charge recovery is maximised.

The first case clears up some long-standing uncertainty about how to comply with the statutory leaseholder consultation process when entering into a framework agreement. The second deals with a landlord's ability to recover legal costs from a leaseholder under the terms of the lease when those costs were incurred in a small claims case (where the court cannot generally award costs). Here, we take a look at each case in turn.

Framework agreements and s20 consultation – Royal Borough of Kensington and Chelsea v Lessees of 1-124 Pond House and others

All public sector landlords will be aware of the provisions in Section 20 of the Landlord and Tenant Act 1985, which require landlords to consult properly with their tenants in advance of entering into a "qualifying long term agreement" or "QLTA" (i.e. a contract for more than one year pursuant to which any tenant might be required to pay service charges of more than £100 in any accounting period). Depending on the scale and value of the contract, the financial cost of a failure to comply can be huge as in such circumstances the law limits the landlord to recovering £100 per tenant per accounting period, no matter what the true cost of the work was during that period – the excess is simply irrecoverable.

For obvious reasons, the Section 20 process is a serious risk area for public sector landlords. This is particularly so bearing in mind that the consultation requirements are rigid and procurement methods are becoming ever more sophisticated as the methods by which landlords (in their contracting capacity) achieve value for money and efficiency of service delivery evolve.

Since the 2007 Leasehold Valuation Tribunal decision in London Area Procurement Network v All Right to Buy Lessees, it has been widely understood that where a landlord plans to enter into a "framework agreement" arrangement with one or more contractors, it is not possible to carry out a valid leaseholder consultation by consulting with tenants before entering into the framework agreement. The rationale for this was that the law requires the landlord to consult on the specific contract under which the costs that will be passed down to tenants will be incurred. In the LAPN case, the LVT decided that under a framework, costs are not incurred under the framework agreement but under the individual works contracts let under the framework.

As a result, whilst framework agreements are a popular and common procurement method for local authorities and housing associations, they have been vexed as to how best to comply with their s20 obligations in such situations.

Landlords should therefore welcome the recent decision in Royal Borough of Kensington and Chelsea v Lessees of 1-124 Pond House and others with open arms. RBKC sought a determination from the Tribunal that the consultation process it had undertaken with its tenants in relation to the over-arching framework agreements (as opposed to the individual call off contracts) it planned to enter into, amounted to a valid consultation process under the 1985 Act. The application was made to ensure the Council did not fall foul of s20 and inadvertently limit itself to recovering £100 per tenant. This was a worthwhile exercise because the contracts in question related to anticipated works of up to £130million over the next four to six years.

The application was made to the First Tier Tribunal but because of the importance of the question, it was escalated to the Upper Tribunal. The Upper Tribunal determined that the proposed framework agreements were QLTAs and that as a result the Council had discharged its consultation obligations. In the Tribunal's view, the costs that would ultimately be passed down to tenants as service charges would be "incurred under" the framework agreements.

It reached this decision for the following reasons:-

  1. There was a clear link between the terms of the framework agreements and the works that would ultimately be undertaken;
  2. The framework agreements identified the proposed works with "sufficient particularity" to be treated as contracts under which the cost of those works would be "incurred";
  3. It was not right to regard the framework agreements and the subsequent contracts for individual works in isolation from each other;
  4. It was relevant that Regulation 19(4) of the Public Contracts 2006 provides that when awarding a specific contract under a framework agreement, the contracting authority is not able to include terms that substantially differ from the terms of the framework;
  5. The statutory consultation Regulations make reference in places to works that are "the subject of" a QLTA and it was clear that the proposed works that RKBC planned to undertake would be the subject of the framework agreement;
  6. It was relevant that the current s20 regime was introduced in 2003, at a time when framework agreements were in common use in the public sector and so it was appropriate to interpret the legislation on the basis that it would have been intended to apply to frameworks.

Although each contract will need to be looked at in its own right, this decision should mean that local authorities and housing associations will now be able to plan their investment in their housing stock safe in the knowledge that the anomaly that previously applied to framework agreements has been resolved. As a result, running a valid consultation process for works or services via a framework should now be much more straightforward for those bodies.

Recovery of enforcement costs as service charges – Chaplair Ltd v Kumari

Virtually every residential landlord will, at some point or other, have to incur legal costs in pursuing arrears from a tenant. In view of the risk of throwing good money after bad, it is common for residential leases to include a clause which obliges the tenant to reimburse the landlord for any costs incurred in taking action as a result of the tenant's breach of lease.

In Chaplair v Kumari, the Court of Appeal had to answer the question of whether a landlord could rely on contractual lease terms to recover legal costs that had been incurred in pursuing a County Court rent arrears action that was dealt with under the "small claims track" (where the default position under the court rules is that each party bears their own costs of contesting the claim). Issuing proceedings to obtain a judgment in these types of situation is a common tactic, as it results in the landlord obtaining a determined debt which then enables the landlord to take forfeiture action (which, where a leaseholder has a mortgage, very often results in the lender clearing the arrears).

The facts of the case are not unusual. The landlord (Chaplain) sued the tenant (Kumari) in the County Court for unpaid rent and service charges. The rent claim proceeded in the County Court and was allocated to the small claims track. The service charge claim was transferred to the Leasehold Valuation Tribunal. Both were resolved in the landlord's favour but without the landlord recovering costs.

Chaplair subsequently brought a further claim to recover the costs incurred in the County Court and the LVT, relying on the contractual costs recovery clause in the lease. The Court of Appeal found in favour of the landlord, and established the principle that where a lease has a costs recovery clause, the court can and should allow recovery of costs incurred in a small claims action notwithstanding the small claims costs rules. In essence, the contract overrides the court rules in this scenario and the landlord benefits as a result.

This decision is welcome news for landlords, bearing in mind that a very high proportion of rent arrears actions will be allocated to the small claims track. The decision should also act as a deterrent for tenants to run spurious defences to small claims actions as they will no longer be able to hide behind the small claims court rules that limit the winner from recovering costs from the loser.


 

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