Housing: new law on dealing with sub-tenants when undertaking Section 20 consultation

Section 20 of the Landlord and Tenant Act 1985 is a potential hazard for landlords of residential developments

31/08/2016

The wider context

Section 20 of the Landlord and Tenant Act 1985 is a potential hazard for landlords of residential developments as:

  • it limits to £250 the amount residential leaseholders can be required to pay for "qualifying works" through variable service charge provisions in their leases, unless either (i) the leaseholders have been properly consulted under the strict s.20 consultation regulations, or (ii) the landlord has obtained a 'dispensation' from the First Tier Tribunal permitting non-compliance with some or all of those regulations;
  • similarly, Section 20 also limits to £100 the amount leaseholders have to pay in respect of costs incurred by the landlord under a "qualifying long term agreement" for works or services entered into between the landlord and a contractor.

The above limits apply no matter what the total costs of the works in question. Therefore, a landlord who fails to comply with the consultation regulations is at serious risk of having to fund works out of his own pocket even though his tenants' leases would otherwise permit the landlord to recover the costs in full.

The particular problem of sub-tenants

Even for a landlord who sets out to do his duty and comply fully with the consultation regulations, doing so is not always straightforward. For many years, there has been uncertainty over how the consultation regime works when, as if often the case, the landlord's tenant has a sub-tenant.

Many developments are set up on a head-lease/sub-lease structure, where the superior landlord funds the up-front cost of works and services, with those works then being passed down the chain to the immediate tenant, who in turn passes the costs down the chain to the occupying sub-tenants.

Despite this being a very common arrangement, however, until now the following issues have been unclear:

  • When a landlord plans to undertake works that will ultimately result in his tenant passing some or all of the cost of those works down to one or more sub-tenants, is there any requirement under Section 20 to consult the sub-tenant?
  • If there is, is it the head landlord or the tenant that should undertake the consultation (bearing in mind it is the head landlord that will be incurring the costs, but it is only the tenant that has the contractual relationship with the sub-tenant)?

Thankfully, the Upper Tribunal has brought much-needed clarity to this issue in the case of Leaseholders of Foundling Court and O'Donnell Court v London Borough of Camden [2016] UKUT 366 (LC).

Foundling Court and O'Donnell Court

The case involved a common set of facts relating to the Brunswick Centre, a listed multi-use site of shops, flats, offices, car parks and other premises. Major works were to be carried out by the superior landlord, Allied London. Allied London charged the works to its tenant, the London Borough of Camden, which in turn sought to pass the costs on to the occupying sub-tenants, who were liable under the terms of their leases to contribute to Camden for the works.

The Tribunal decided that in order to comply with the Section 20 requirements, it was incumbent on Allied London as the superior landlord to consult both Camden and Camden's sub-tenants. In the Tribunal's view, the primary purpose of the consultation regime is to ensure that those who are ultimately responsible for paying for work or services are consulted. The Tribunal was not prepared to let any practical difficulties which might be encountered by landlords in complying with those obligations get in the way of that purpose.

Consequences of the new law

The decision gives rise to a number of practical difficulties for a head landlord:

  • establishing whether there are any sub-tenants who are liable to contribute towards the cost of works;
  • if there are, working out which ones are liable;
  • obtaining details of the identity and contact details for the sub-tenant; the head landlord is likely to have no legal relationship with the sub-tenant or copies of the relevant sub-leases.

The Tribunal acknowledged that these issues exposed a "lacuna in the statutory scheme", but suggested that the landlord could consider approaching the issue in a number of different ways:

  • by delivering a consultation notice addressed to "The Leaseholder" to each dwelling in the building or development; or
  • by obtaining the necessary information from the head tenant; or
  • by seeking a dispensation from the consultation requirements from the First Tier Tribunal.

Our thoughts

The effect of this decision is considerable and its impact across the country will be widespread. In view of the additional administrative burden it imposes the decision will not be popular amongst landlords of sub-tenanted stock, though at least we now have clarity over what the law requires.

Bearing in mind the Tribunal's comments about not allowing practical inconveniences to justify a departure from the overriding purpose of the consultation regime, it seems unlikely that dispensation applications will be met favourably. Instead, the expectation will be for landlords to plan ahead to allow the time to undertake the wider consultation exercise advocated by the Tribunal.

It may in certain cases be necessary for a head landlord to issue 'blanket' consultation notices to sub-tenants addressed simply to 'The Leaseholder', without the certainty of knowing whether the sub-tenants are entitled to be consulted or not. This has the potential to create a messy consultation process, with consultation responses being received by sub-tenants who may not be affected.

In the drafting of lease documents for new developments, it will be prudent for head landlords to impose a contractual obligation on the tenant to provide full details of all sub-tenancies to the landlord within a certain period following a written request by the landlord.

Overall, there will be a solution in every case though in many cases the consultation process may need to be more extensive and will take a little longer to co-ordinate. Given what is at stake, if a landlord is in any doubt over the extent of his obligations he should take specialist legal advice to navigate the process and protect the ability to recover the costs.

If you would like to speak to one of our team about this please contact Steven Eccles or Mark Robertson.

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