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Phillips v Francis: The Big Consultation Headache

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.

The Court of Appeal have now given judgment. See 'Francis v Phillips - A Victory for Common-sense?', which includes a copy of the judgment itself.

As so often is the case with common law precedent, what at first seems a fairly innocuous case can end up having wide ranging implications for a whole industry. Such is true in the case of Phillips v Francis, where a relatively minor service charge dispute regarding some chalets in Cornwall has turned the understanding of ‘qualifying works’ on its head and raised some interesting considerations about the role of the judiciary in statutory interpretation.

Requirements to Consult: Qualifying Works and Triviality Thresholds

“Section 20” consultations are so named after their original source - Section 20 of the Landlord and Tenant Act 1985 (as amended by Section 151 of the Commonhold and Leasehold Reform Act 2002). They are formal consultations that must be conducted when landlords or managing agents wish to recover the full costs of works or long-term agreements from their leaseholders without applying to tribunal for a dispensation.

For works, the consultation process involves formally notifying leaseholders of the intention to carry out works, of the tenders received from contractors and of the reasons why the contract has been awarded to a particular contractor if this was not the cheapest quote. Leaseholders have the opportunity to inspect specifications, to nominate contractors and to make observations on any of the notices, which the agent must give ‘due regard’ to.

Under Section 20ZA of the 1985 act, works are defined as “works on a building or any other premises”. This is a very broad definition, encompassing all planned works such as roof repairs and redecorations, but also any emergency works and ad hoc repairs. Those works which require consultation, known as ‘qualifying works’, are those for which the ‘relevant contribution’ of any one tenant exceeds £250 (as per Section 6 of The Service Charges (Consultation Requirements) (England) Regulations 2003).

Up until Phillips v Francis, the case of Martin v Maryland Estatesin 1999 provided the answer as to what such a ‘relevant contribution’ should be.This case, involving a dispute about liability for roof repair costs in a converted Victorian building, introduced the idea of a common-sense approach and “triviality threshold”. Walker LJ argued:

“…[S]ince Parliament has not attempted to spell out any precise test, a common-sense approach is necessary…[t]he legislative purpose of the limit is to provide a triviality threshold rather than to build into every contract a margin of error, which may in some cases, including this case, simply duplicate a contingency sum that has already been provided for” [Emphasis added]

As a result, the test that has been applied to determine whether consultation is required is as follows:

  1. Do the works meet the definition as under Section 20ZA?
  2. If yes, are the works planned single or multiple sets of works (e.g. decorations will be separate to roof repairs)?
  3. Does each set of works exceed the threshold of £250?

Having such a test is important for landlords and agents as, on the one hand, they want to be able to recover the costs of a project from leaseholders without recourse to the tribunal, but on the other hand they do not wish to go through the considerable time and expense entailed in the process if unnecessary.

However, it is this test above which has been challenged and set aside by the recent case of Phillips v Francis.

Phillips v Francis

Phillips v Francis concerns the recovery of service charge costs for improvement works on the chalet park located at Point Curlew, Cornwall. Upon purchasing the freehold of the chalets in 2008, new owners Mr and Mrs Francis informed the lessees of their intention to bring the site up to a “first class standard”. Their method for recovery of these costs was via the monthly charge for services levied against the chalet owners (“the service charge”).  

The improvement works were welcomed by the lessees. The hike in the service charge was not. The increase from the £1478 charged per month to the charge of £3117 per month from one year to the next was, somewhat unsurprisingly, challenged at first instance back in 2010. In court, the lessees argued that as the owners had not consulted them on the works, the recoverable amount should be capped at the £250 limit per tenant.  The owners argued that there was no requirement to consult on each of the works, as none had breached the £250 limit.

At first instance, Griggs LJ found for the freeholders, echoing the methodology in Maryland in arguing that the works did not amount to a single set of works and therefore there was no requirement to consult.

However, permission to appeal was considered and granted by Gloster LJ in 2012 in which she stated:

I see nothing in the present legislation which requires the identification of one or more sets of qualifying works. If the works are qualifying works it will be for the landlord to assess whether they will be on such a scale as to necessitate complying with the consultation requirements or face the consequence that he may not recoup the cost from the tenants' contributions. As 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 the qualifying works must be entered into the calculation unless the landlord is prepared to carry any excess cost himself [Emphasis added]

This approach recognised that the amended 2002 act had changed the emphasis of consultation since its initial inception in 1985. The ethos had shifted from identifying and costing works before they are carried out to notifying leaseholders of the intention to carry out the works, with a limit on individual contributions where necessary. Therefore, because this change (2002) had come after the Maryland approach (1999), Maryland was distinguished and a strict interpretation of the legislation upheld.

To the widespread dismay of landlords and agents, the ‘relevant contribution’ per leaseholder should now be calculated in consideration of all those works meeting the definition in S20ZA occurring within a financial year. That includes planned works, emergency works and ad-hoc repairs.

Practical Implications of the “All In” Approach

Pre Francis, two separate works projects occurring in a year costing £150 and £200 per leaseholder respectively would not have been consulted upon as each were below the £250 level, and the total £350 would still have been recoverable from the leaseholders. However, post Francis, where a first project at £150 per leaseholder has been completed, only £100 further costs from the leaseholders can then be recovered for further works before formal consultation will be required on all subsequent projects. Each project represents ‘qualifying works’ if they meet the definition in S20ZA.

There are two key concerns about the practicality of such an approach.

Firstly, as the example above demonstrates, the number of consultations required is likely to increase. An increase in number of consultations is likely to be both onerous and costly for landlords and managing agents. This is because the formal consultation requires notices to be sent out to all leaseholders, entailing administration, posting and printing costs. The first key notices, the ‘notice of intention’ and statement of estimates both require a span of 30 days in which observations can be made by leaseholders. The result is that it is usually in excess of three months before an order can be raised for the works.

Secondly, whereas before the majority of ad hoc repair work would not have breached the £250 limit per project, as works are now in calculated cumulatively, the need to consult on such works is likely to depend largely on when these fall during the financial year. This leads to the rather bizarre and unappealing result that either a formal consultation process designed for major works will be required for a one-off lift or lighting repair; alternatively, landlords and agents will need to begin swallowing these costs themselves.

Jonathan Upton at Tanfield Chambers  has expressed agreement with this line of thought:

This will be an enormous burden on landlords and managing agents, both in terms of cost and time. If landlords are now required to consult on all qualifying works, however small, the cost of such consultation will ultimately be passed on to lessees. This is not in anyone’s interests.

Utilising Dispensation: Daejan v Benson

One factor mitigating the impact on landlords and managing agents is the possibility that they can now be more confident in applying for dispensation, utilising the recent judgement in Daejan Investments v Benson.

A dispensation is a determination made, usually by the First Tier Tribunal (Property Chamber), which declares that the consultation requirements can be disposed of. The powers for this lie in Section 20ZA(i) of the 1985 act and depends upon the tribunal being satisfied that “it is reasonable to dispense with the requirements”. A common example is where serious structural damage has been caused by weather; a landlord will often apply for dispensation either prospectively or retrospectively so that they can get onsite and make the urgent repairs needed straight away.

Daejan Investments v Benson concerned an application to dispense with consultation requirements. Although Daejan had notified the leaseholders of its intention to carry out the £270,000 worth of works, it had not followed through with requirements regarding tenders and estimates. It attempted to dispense with the requirements with an application for dispensation, which was challenged.

At the Supreme Court, it was made clear that the impact of the prejudice on the tenants should be the crucial factor in deciding whether to deny a dispensation, not simply the extent of the breach. As Lord Neuberger argued: “there is no justification for treating consultation or transparency as appropriate ends in themselves”.

So now the seriousness of a breach or failure to consult will not automatically mean that a determination will be refused. The tribunals will also have the power to award costs and set the recoverable limit themselves, irrespective of the £250 limit, for example in acknowledgement of any prejudice that may have occurred.

This means that landlords and managing agents could take a more pro-active approach by applying for dispensation where it would be difficult or onerous to carry out the process, as long as there is no prejudice created for the leaseholders. As Amanda Gourlay argues in her analysis of Daejan:

Whilst Daejan is on a different point to Phillips, it seems to me that it does swing the pendulum back towards the centre ground… [f]irst, in all but the most urgent works, the landlord can make a pre-emptive application for dispensation… [s]econd, for truly minor works, or inadvertently incurred costs exceeding the consultation threshold, it seems to be arguable that a landlord now has a better prospect of recovering unconsulted-for expenditure. 

Considering the Impact on Leaseholders

Taking into account the additional costs of additional consultation and of tribunal fees, it is important to also consider of the potential knock-on effect for leaseholders. Where management costs to landlords and agents increase, either due to increased legal action or additional management time for consultations, landlords and agents are likely to seek to recover these from leaseholders through the service charge. The effect would be to pass the costs, and the hardship, onto the very people that the consultation process is intended to benefit.

However, this disadvantage should be balanced against the argument that Francis actually boosts the rights of leaseholders by ensuring that what they can be charged for without consultation is capped. They will now have greater protection against the unnecessary breaking up of projects into ‘sets’ which each fall under the £250 limit and to preclude any right to consultation, the very situation which occurred in Francis.

Anticipating the Way Forward: Understanding Parliament’s Intention

Following the permission to appeal, a hearing date was set for May 2014, however on the 14th May this was adjourned until October 2014. Given the potential costly impact of this change, there is a degree of uncertainty and reluctance to implement the new procedure, in the hope that the ruling will be overturned to restore the status quo.

Running deeper than the practical consequences of the decision is the question of what role the judiciary has in interpreting statute. Is it right for the judiciary to read in additional regulations and requirements to fill in a practicality ‘gap’, and how far does this match the intention of Parliament? On the one hand, the apparent purpose is to create a workable system for landlords and agents, yet on the other hand it is to afford leaseholders with protection against paying for inappropriate works, or inappropriate costs for appropriate works. It seems that Maryland focusses to a greater degree on the advantage of practicality for those running the consultations, whilst Francis arguably focusses more on the central purpose of protection from unfair imposition of costs for leaseholders.

Francis, however, has the further advantage of being less judicially creative in that it does not introduce any new elements, unlike the creation of ‘sets’ of works in Maryland. If the 1985 and 2002 Acts can be interpreted functionally without introducing the idea of ‘sets’ (i.e. as has been seen in Francis), it is difficult to argue that the Maryland interpretation needs to be kept in order to enact the regulations.

If keeping closer to the letter of the legislation creates ramifications counter to Parliament’s intention, then perhaps the best solution is for the matter to be referred back to Parliament for further amendments, rather than the courts working to paper over the cracks.

Further Reading

An excellent introduction to Section 20 Consultations for works and long-term agreements can be found here:

S. 20 Consultation Paper



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Tagged: Housing Law, Property Law, Rule of Law

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