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Francis v Phillips - A Victory for Common-sense?

About The Author

Amy Ling (Former Private Law Manager)

Amy graduated with a first in Philosophy from The University of Manchester in 2012. Following three years working within the social housing sector, Amy is currently studying for her LPC and will begin a training contract at a city firm in September 2016. Amy is an accomplished mooter, and was on the winning team in the 2015 JustCite International Mooting competition. Outside of the law, Amy is a keen runner.

After much anticipation, the Court of Appeal has finally passed judgement in the case of Francis v Phillips, overturning the controversial High Court decision and, for many, restoring a sensible and realistic approach to leasehold consultation. Will this now finally lay to rest concerns and puzzlement on requirements for Section 20 consultations?

Chalets, Service Charges and an Aggregating Approach

For those not yet familiar with the case (and for anyone interested in leasehold management, it had been hard to ignore), I will briefly re-cap. Phillips v Francis concerned a service charge dispute relating to improvements works on a chalet site in Cornwall.

“Section 20” consultations (so called after their source in Section 20 of the Landlord and Tenant Act 1985, as amended by Section 151 of the Commonhold and Leasehold Reform Act 2002), require formal consultations to take place between landlords and their leaseholders where the landlord wishes to recover directly the full costs of works or long-term agreements from those tenants.

Section 20ZA of the 1985 act defines works rather vaguely as ‘works on a building or any other premises’ and, as such, covers pretty much any type of work that can be done to the building (i.e. large scale refurbishments to minor repairs). Works that require consultation are known as ‘qualifying works’ and ‘qualifying works’ are those for which the ‘relevant contribution’ of any one tenant exceeds £250, as set out in Section 6 of the Service Charges (Consultation Requirements) (England) Regulations 2003.

Lacking explicit guidance from parliament on how exactly these terms should be defined, ‘relevant contribution’ has been interpreted by practitioners according to the judgement in Martin v Maryland Estates, which held that a ‘common-sense’ approach should be taken, and a ‘triviality threshold’ applied when determining which works qualify. This is taken to represent the following test:

  1. Do the works meet the definition under Section 20ZA?
  2. If yes, do the works represent a single set or multiple sets?
  3. Does each identified set of works exceed the threshold of £250, thereby qualifying for consultation?

It was this test that was challenged in Phillips v Francis. To summarise: the challenge to the eligibility to pay service charges arose from the leaseholders due to a substantial increase in service charge to pay for improvement works. The leaseholders argued that, as the owners had not followed the statutory requirements in consulting them on the works, the recoverable amount from them should be capped at the £250 limit. However, the owners of the site argued in defence that there was no requirement to consult on each of the works that been carried out, as each represented a distinct set of ‘qualifying works’ which had not breached the £250 limit (for more detail on the facts of the case please see my previous article on this topic).

At first instance, Griggs LJ found for the freeholders, following the judgement in Maryland that the works that had been carried out did not constitute a single set of works. However, this was overturned in 2012, where the Lord Chancellor took a literal approach to interpreting the statutory provisions: 

I see nothing in the present legislation which required the identification of one or more sets of qualifying works… [a]s the contributions are payable on an annual basis then the limit is applied to the proportion of the qualifying works carried out in that year. Under this legislation there is no ‘triviality threshold in relation to qualifying works; all qualifying works must be entered into the calculation unless the landlord is prepared to carry out any excess cost himself. [Emphasis Added]

The consequence of this ruling meant that the ‘relevant contribution’ per leaseholder should instead be calculated by considering all works aggregated over a financial year rather than discrete sets of works. ‘All works’ would have included planned works, emergency works and minor or ad hoc repairs.

Cue widespread bewilderment and head-scratching among practitioners: if the total spent on works reached £250 for each leaseholder by June of the financial year, would the expectation be that they would have to go through the process of sending a ‘notice of intention’ to each leaseholder for each replacement door or window from then until the end of the year? Or instead would they have to apply for dispensation on each item? How could this planned approach possibly apply to ad hoc and urgent repairs? As put by Nicola Muir of Tanfield Chambers back in December 2013, ‘[i]t seems that most landlords have dealt with the decision in Phillips v Francis by ignoring it. What else can they do?’

Thankfully, these questions now no longer need to be contemplated, as the Court of Appeal has confirmed that consultation is required only where a discrete set of works exceeds the £250 limit, and not based on an aggregation of all the works for a year.

Judgement at the Court of Appeal: Vindication of the Sets Approach

Following a delay from the original hearing date in May this year, the appeal was heard before the Master of the Rolls, the Chancellor of the High Court and Lord Justice Kitchin. 

Firstly, they held that the ‘aggregate approach’ of the High Court was to be rejected in favour of the ‘sets approach’. The difficulties arising from the aggregate approach were highlighted in the following example:

Imagine a residential block of flats with 4 tenants: the annual regulatory limit is 4 x £250: £1000. Three lots of minor works on a building each costing £75 are carried out in the first half of the year. The landlord has spend £225 on service charge items. There has been no consultation. Unexpectedly, in September the outer door of the block breaks and a new door frame is required which would cost £800. A storm in November causes window damage that would cost £400 to repair…

Using the ‘sets approach’, none of these works would need to be consulted on and in the case of the emergency the landlord could repair the door immediately. In contrast, application of the ‘aggregating approach’ would mean that the landlord would be obliged to consult on the broken door, or entail the time and cost of applying for dispensation. This would be a laborious process to the leaseholders, and all the while they are left unsafe with a broken door.

The conclusion therefore drawn by the Master of Rolls was that due to the ‘serious practical problems’ such as those in the example, the aggregating approach ‘cannot therefore have been intended by Parliament’.

Secondly, it was held that the suggestion that the costs should be aggregated for the financial year was inconsistent with Sections 18 to 30 of the 1985 Act, and it was argued that an annual limit would actually be contrary to the provision in section 18(3) that ‘costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period’ (emphasis added). It was also argued by the Chancellor of the High Court that if Parliament had intended that the relevant period for aggregation should be a year, this would have been clearly specified in the legislation, in order to aid the purpose of supporting leaseholders.

Thirdly, it was held that adopting the ‘sets approach’ would not disadvantage leaseholders as the ‘real protection’ provided by the 1985 Act is found in Section 19, whereby the amount payable shall be limited ‘only to the extent that they [relevant costs] are reasonably incurred’. Section 19 operates to mitigate the risk that works may be artificially divided into ‘sets’ simply in order to avoid the resource and scrutiny that consultation requires, as ultimately any charge levied under the service charge must remain reasonable.

Fourthly, finally, and helpfully, guidance was given by the Master of the Rolls to clarify what factors are likely to be relevant when determining what such a ‘set’ of qualifying works may look like:

[(i) W]here [in the building] the items of work are to be carried out… (ii) whether they are the subject of the same contract; (iii) whether they are to be done at more or less the same or at different times; and (iv) whether the items of work are different in character from, or have no connection with each other’.

This is not intended to be an exhaustive list, and, although an objective question of ‘fact and degree’, ‘qualifying works will often be significant or substantial as opposed to minor and insignificant’.

A Welcome Relief

To use a term that has characterised this ‘big consultation headache’, this ruling can certainly be considered a triumph for common sense. Many frankly unworkable consequences have been avoided such that the sigh of relief, particularly among my colleagues in housing, is audible. There are clear advantages too for leaseholders: a heavily bureaucratic and frankly unworkable regime that would have imposed higher costs has been avoided, whilst upholding the central right of lessees to avoid unreasonable charges.

The Association of Residential Managing Agents has welcomed the decision. Andrew Bulmer, UK Residential Director of the Royal Institution of Chartered Surveyors argues that ‘[t]here’s been a victory for common sense in the block management world’. Solicitors Winckworth Sherwood have argued ‘this is a welcome decision for landlords and leasehold managers. It brings the law on service charge consultation back in line with what the industry had previously understood it to be’ and Eversheds solicitors highlight the practical gains in their case brief: ‘[the judgement] will no-doubt avoid the need for countless retrospective applications for dispensation by residential landlords’. 

A Silver Bullet?

The outcome of this case has been waited for eagerly for many months, and given the result it may be easy to conclude that the judgement represents a panacea to the issues raised by Section 20 consultations.

Using a purposive approach on scant provisions has enabled the practical problems to be solved for the benefit of practitioners. And yet, importing a list of factors for determining qualifying works, detailed nowhere in the statute, cannot but raise the familiar questions regarding the role of the judiciary, and where the line on law making should be drawn. Perhaps it is too purist of me to suggest that in cases such as this where provisions are so unclear, the best way of determining the intention of parliament would be for parliament to take steps to make their intention clear. 

Further, I make two closing points. Firstly, although this judgement appears to resolve the issues of ‘qualifying sets’, threshold for those sets remains at £250. According to the inflation calculator on the Bank of England’s website, £250 in 2003 would be worth £344.90 in 2013. In effect, then, the threshold has in effect been gradually decreasing. Over time this risks drawing an increasing number of ‘trivial’ or ‘minor’ works that the ‘sets’ approach was intended to exclude from being draw under the umbrella of eligibility for consultation. To maintain a ‘common-sense’ approach, this arbitrary limit surely needs to be addressed.

Secondly, whilst there is no doubting the power and importance of the Section 19 provision, it must be remembered that its role is to ensure the reasonableness of charges, and does not protect the wider benefits of the Section 20 process. For example, consultation gives leaseholders an opportunity to nominate contractors, and to give observations on specifications and estimates which the freeholder must have ‘due regard’ to. These need not be restricted merely to matters of cost. Whilst a greater list of factors will surely improve the assessments of what counts as a set and what does not, and may help prevent some tactical avoidance of consultation, leaseholders should remain vigilant of being disenfranchised of their voice, as well as their money.

Further Reading

Francis v Phillips Court of Appeal Judgment

Thank you to Enigma Law for providing us with the judgment. Enigma Law are the solicitors for Mr and Mrs Francis.

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Tagged: Commercial Law, Housing Law, Property Law

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