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Game set and match for a sensible approach to residential service charge recovery?

13 Nov 2014

In a decision which has been welcomed by the Association of Residential Managing Agents, the Court of Appeal has overturned the earlier decision in Phillips v Francis which we reported in May 2013 regarding recovery of residential service charge costs. The case has reinstated the "sets" approach to identifying the works in relation to which the landlord should consult tenants. Tenants may also have cause to welcome the decision as it will reduce the frequency with which administration and procedural costs will be passed on to them via the service charge and also remove disincentives to the carrying out of emergency repairs.

Section 20 of the Landlord and Tenant Act 1985 states that as far as "qualifying works" are concerned, the current maximum residential service charge contribution that may be recovered without either first going through a statutory consultation procedure or obtaining a dispensation after the fact, is £250 per tenant.

In the case, the new owners of a Cornwall holiday park carried out an extensive programme of refurbishment without first consulting the tenants. If the works could be broken down into sets of qualifying works the landlords would at least be able to recover the minimum £250 per tenant for each set of works.

Last year's High Court decision held that the correct approach to identifying the qualifying works was to aggregate all works in a particular year. Where the works straddled a year end, the £250 per tenant limit would apply in each year.

Fortunately for landlords, the Court of Appeal decided that the "aggregated" approach of the High Court was not a practical one, and was not one which Parliament could have intended. The aggregated approach would have meant that, as soon as the £250 per tenant limit had been reached, all further works would need to be consulted upon however minor they might be. Furthermore, because dispensation is discretionary, if emergency works costing less than the statutory threshold were required after the threshold had been reached, the landlord would risk not being able to recover the cost of carrying out emergency work without first consulting with the tenants.

The Court of Appeal held that the correct approach is to identify the appropriate "set" of qualifying works in relation to which the landlord must consult. The £250 per tenant limit acts as a "triviality threshold" below which the landlord is able to carry out works without prior consultation, and still recover the costs under the service charge. The fact that works took place in more than one year was not a relevant factor in identifying the qualifying works.

The protection for the tenant in every case is that section 19 of the Landlord and Tenant Act 1985 requires all costs to be reasonable and reasonably incurred.

The Court of Appeal decision is an endorsement of the practice adopted by reputable, well advised landlords and managing agents prior to the High Court decision. Helpfully the court also gave some guidance as to the process of identifying the relevant set of qualifying works. In a non-exhaustive list, the Court of Appeal identified several potentially relevant factors:

1. the location where the items of work are to be carried out (i.e. whether they are physically at   distance from one another or not);
2. whether there is one contract for all of the works;
3. whether the works are to be carried out at more or less the same time;
4. whether the works are different from or have no connection with each other.

That being said, the courts are likely to look through any artificial structuring of works of repair and refurbishment which is designed to circumvent the statutory consultation requirements. Rather than focussing on the structuring and timing of works, landlords will be well advised to pay close attention to the actual terms of the lease in order to establish whether the costs of works can be recovered from tenants and consult accordingly.

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