A recent High Court decision is expected to have significant implications for managing agents, landlords and lessees of residential property, potentially limiting landlords’ ability to recover the full cost of qualifying works through service charges.
The decision in Phillips v Francis [2012] relates to a landlord undertaking qualifying works to a residential property and consulting lessees’ on contributions towards such works through service charges. The case involved a dispute between the landlords and lessees of holiday chalets on a site in Cornwall, but the decision passed down has far reaching consequences for all landlords and lessees of residential leasehold property.
It was decided at a preliminary court that the chalets fell within the definition of ‘dwellings’, causing the restrictions on the recovery of service charges as set out in ss18-30 of the Landlord & Tenant Act 1985 (the Act) to apply to the leases of the chalets as they do to leases of flats.
Prior to the decision in Phillips v Francis, s20 of the Act only commonly applied to qualifying works where a contribution of more than £250 was sought from each lessee through service charges. Where this was the case landlords were required to undergo the formal consultation process, as set out in s20 of the Act, in order to recover the full cost of the works from lessees.
The effect of the decision of the High Court in this case however, is to require that the service charge contributions (of each lessee) towards all qualifying works carried out in a single accounting year be added together and the £250 limit be applied to the cumulative total, as opposed to the £250 cap being applied to the cost of each individual aspect of qualifying work.
To use an illustrative example let us say a landlord were to undertake qualifying works but did not consult lessees on the works due to the fact the contribution of each lessee to this individual element of work was only £200. However, later on in the same accounting year the landlord undertook further qualifying works at a cost of a further £200 service charge contribution per lessee, amounting to a cumulative total of £400 for the year. Unless the landlord had followed the consultation process as set out in s20 of the Act in relation to both separate sets of qualifying works the maximum amount recoverable from each lessee would be £250. In the illustrative case the landlord would be required to pay the balance of £150 per lessee.
Prudent landlords and managing agents will therefore be wise to consult lessees in relation to all qualifying works, regardless of the level of contribution to be sought through service charges. Failure to do so could significantly limit the level of contributions which can be recovered for further qualifying works undertaken in the same accounting year, leaving landlords to cover the outstanding balance of the works.
Given that consultations will now be undertaken more frequently and understanding that the consultation process is not without cost, whilst it may seem that this decision is good news for lessees, it is likely that increased management costs will be passed on to lessees in service charge provisions included in leases.
David Dixey provides legal advice for landlords from Holmes & Hills Solicitors in Braintree but also see his landlord clients at the firm's offices in Sudbury, Halstead, Tiptree and Coggeshall.
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