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Phillips v Francis appeal allowed - the £250 threshold applies ONLY to “sets” of qualifying works

Service Charge Consultation back on track

Phillips v Francis appeal allowed - the £250 threshold applies ONLY to "sets" of qualifying works

This morning, in a long-awaited judgment, [2014] EWCA Civ 1395, the Court of Appeal has overturned the much-criticised decision of the Chancellor in Phillips & Goddard v Francis [2012] EWHC 3650 (Ch).

The Court of Appeal has held that the statutory obligation on landlords to consult their tenants under Part 2 to Schedule 4 of the Service Charges (Consultation) (England) Regulations 2003 ("the Regulations") is limited to where they propose to carry out discrete sets of "qualifying works" under the Landlord and Tenant Act 1985 ("the Act"), which will result in any one tenant being liable to pay a service charge in excess of £250. It has termed this "the sets approach".

In so holding, the Court has held that the Chancellor was wrong in his approach (termed the "aggregating approach") which was to add together all the qualifying works undertaken in any one service charge year, without division into separate sets of qualifying works, and hold that there was an obligation to consult if the individual £250 threshold was overtopped in any such year.

The law is, therefore, what leasehold managers have long believed it to be. Martin & Seale- v -Maryland Estates Limited (1999) 32 HLR 116, a decision on section 20 of the Act in its pre-2003 form, remains good law.

The Facts

In Phillips, the landlord had carried out extensive works to a holiday park, over the course of two service charge years. No statutory consultation was entered into with tenants for any elements of those works. It was common ground that all the works were "qualifying works", defined by section 20ZA(2) as "works on a building or any other premises".

The tenants challenged their service charge liability, arguing that all the works had been designed or conceived as a single set, that there should have been consultation under Part 2 to Schedule 4 of the Regulations, and that the failure to consult meant that their individual liabilities were capped at £250 each: section 20(1) of the Act; Regulation 6.

The landlord's riposte was that the works had been carried out as several individual projects, piecemeal, as and when they had had the funds. As the costs of none of these individual projects had resulted in any tenant being liable for a service charge of more than £250, the landlord argued that the statutory obligation to consult had never arisen in relation to any project.

The argument was on traditional lines, it being common ground between the parties that the statutory obligation to consult was triggered where a landlord planned to undertake a set of works. This was in accordance with the Court of Appeal's judgment in Martin & Seale- v -Maryland Estates Limited (1999) 32 HLR 116, decided under the pre-2003 formulation of section 20.

The Trial Judge's Judgment

The trial judge rejected the tenants' arguments and found that the works did not comprise one single set. He went on to hold that there had been no requirement on the landlord to consult with the tenants upon any of the projects undertaken. The clear implication from his judgment was that the £250 threshold in Regulation 6 was not crossed in relation to any of the separate projects programmes of works undertaken.

His judgment accorded with the common understanding of, and approach to, the legislation by those acting in leasehold management.

The Appeal to the Chancellor

On appeal, the tenants argued that the trial judge had been wrong not to have recognised that all of the works were a "single set" [30], dating back to a meeting and subsequent letter in May 2008. The landlord sought to uphold the trial judge's conclusion by submitting that the mechanics for consultation set out in Part 2 of Schedule 4 to the Regulations necessarily required a "pre-defined set of works" and that whether there were one or more sets of qualifying works was a question of fact in every case [31]. The landlord relied on Maryland Estates.

The Chancellor distinguished Maryland Estates and did not follow it. Nor did he approach the matter by agreeing with counsel for the tenants that all the works were to be regarded as one "set". Rather, he adopted an entirely different approach, holding that the statutory obligation to consult arises if the landlord undertakes qualifying works in any one service charge year, which will result in any tenant being liable to pay a service charge of more than £250. He said as follows:

"35...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."

Accordingly, he held that the judge applied the wrong tests when seeking to apply the Act. All the works, being qualifying works, should be brought into the account for computing the contribution and then applying the £250 limit (possibly over 2 service charge years).

The Effect of the Chancellor' Decision

It is fair to say that the Chancellor's judgment caused considerable disquiet among leasehold managers, concerned at how they were expected to consult on every element of qualifying works, including reactive repairs of an unplanned and day-to-day nature which, by their very nature, could not be known about in advance. How was it conceivably possible to do this, before the start of each service charge year?

The judgment also threw up problems for landlords who had entered into qualifying long term agreements for reactive repairs, having complied with the Regulations. Were they then required to undertake a Schedule 3 consultation before the start of each service charge year, about as yet unknown qualifying works? How so?

Indeed, the sense from the last 18 months is that the Chancellor's decision has been more honoured in its breach, with landlords unable to comply with its logical consequences, and steeling themselves for applications for dispensation, following Daejan Investments Ltd v Benson [2013] UKSC 14.

Thankfully, they need steel themselves no more. The Court of Appeal has recognised the difficulties inherent in the Chancellor's approach.

The Judgment of the Court of Appeal

The Master of the Rolls recognises that the aggregating approach "is not a sensible approach an gives rise to serious practical problems. It cannot therefore have been intended by Parliament" [26]. He gives a number of examples of the unworkability that would result from such an approach [27-28].

In holding that the correct approach is the sets approach, the Master of the Rolls then gives guidance on what factors are to be taken into consideration in deciding what a single set of qualifying works comprises [36]. This is to be determined in a "common sense way". Relevant factors are likely to include (i) where 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 different times; and (iv) whether the items of work are different in character from, or have no connection with, each other [36]. In any given case, it will be a question of fact and degree.

The Chancellor delivered a concurring judgment and Kitchin LJ agreed with both judgments.

Consequences

After a 18 month frolic, the law is back where it should be. All those lawyers who confidently predicted the appeal would be allowed can now rest easy...until the next curious service charge decision rears its head...

Ranjit Bhose QC, 31 October 2014