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Service charge consultation requirements with residential tenants: as you were 3 November 2014

Francis v Phillips is a strange case.  It concerns a holiday camp in Cornwall.  New owners spent loads of money improving it (according to their evidence). and then sought to recover their expenditure from the lessees (under 999 year leases) of the chalets (over 150 of them).

The lessees claimed that their landlords had not consulted with them, as required by the Landlord and Tenant Act 1985.  As a result, the maximum amount that the landlords could recover was £250 per lessee.

The matter came to court.  At first instance, in December 2012, the then Chancellor (Sir Andrew Morritt) held that the consultation requirements operated in a way that took people by surprise.  He said that it is necessary to aggregate all the works being carried out by the landlord in the relevant service charge year, and then decide whether consultation is necessary – ie where the amount payable by each tenant exceeds £250 in that service charge year.

The difficulty with this approach is, of course, that one cannot know whether consultation is necessary until one knows the amount of service charge payable by each tenant – by which time, if consultation is required, it is too late to consult, as the works have been carried out.

There was consternation within the residential landlord world, as it was generally agreed that this new approach was (a) unworkable and (b) simply wrong.  This is not what the Landlord and Tenant Act 1985 requires.

In an excellent article on the first instance decision, Nicola Muir of Tanfield Chambers commented:

“It seems that most landlords have dealt with the [first instance] decision in Phillips v Francis by ignoring it.  What else can they do?  However, while the decision stands, the landlord faces the risk of an argument that multiple maintenance jobs over the financial year are “qualifying works” and should have been subject to consultation.”

Court of Appeal to the rescue

Fortunately the Court of Appeal last Friday ([2014] EWCA Civ 1395) overturned this part of Sir Andrew Morritt’s decision.  The consultation requirements apply to discrete sets of works, as we had always understood.

This decision does not solve all the difficulties, of course.  A landlord still has to work out what constitutes a set of works, so that it knows when to consult with the tenants.  That could be particularly difficult in a case where the facts are similar to this case, where the landlords’ evidence suggested that there was no “set of works” in mind at the outset.  One bit of work just led to another, but nothing was pre-planned.  In practice, said the Master of the Rolls (Lord Dyson) in this case –

… the answer … should be determined in a common sense way taking into account all relevant circumstances.  Relevant factors are likely to include (i) where the items of work are to be carried out (whether they are contiguous to or physically far removed from each other); (ii) whether they are the subject of the same contract; (iii) whether they are to be done at more or less the same time or at different times; and (iv) whether the items of work are different in character from, or have no connection with, each other.  I emphasise that this is not intended to be an exhaustive list of factors which are likely to be relevant.  Ultimately, it will be a question of fact and degree.”

One curiosity of this case is that since the first instance decision, Sir Andrew Morritt has been replaced as Chancellor by Sir Terence Etherton.  Sir Terence was one of the judges in the Court of Appeal in this case, so one has the Chancellor reversing a decision of the Chancellor, in so many words:

Management charges

The Court of Appeal also reversed the first-instance decision in relation to the question of whether, on a construction of the lease, the landlord could charge the tenants in the service charge both a management fee and the wages of the landlord’s staff.  At first instance this had been allowed.  The Court of Appeal held that the wages of the landlord’s staff could not be charged to the tenants. This would be double recovery by the landlords .  But Sir Terence had the following warning for residential landlord and tenant lawyers (which in my view applies equally to commercial transactions) –

“Finally, it must be said that this litigation and so many of the cases show how predictable it is that there will be disagreement and often litigation when service charge provisions in a lease fail to make absolutely clear (1) whether the lessor can recover by way of service charge, and if so how much, for (a) specific activities carried out personally by the lessor bearing in mind that during the currency of the lease the reversion may be or become vested in either an individual or a company, (b) general management by the lessor, including estate strategy, and (c) management advice and activities by an agent appointed by the lessor, and if so whether limited to specific activities or including general management oversight and strategy; and (2) whether there is any restriction on the lessor recovering the entirety of the cost of all of (1)(a)(b) and (c).  Lack of clarity on these common issues is capable of affecting huge numbers of lessors and tenants across the country and involving them in expense and disharmony.  The reported cases show that many of the disputes turn on similar or nearly similar provisions.  Those who draw up or approve residential leases for their clients are plainly under a duty to take care that there is clarity and certainty in relation to those matters.”   (Emphasis added)

In conclusion

This is a strange case.  The Court of Appeal disagreed with virtually all of the first instance decision, and where the result was unchanged, disagreed with the reasoning.  Yet no new law has been created, particularly in relation to the consultation provisions in the Landlord and Tenant Act 1985.  Granted, we now have helpful guidance from the Court of Appeal as to how the provisions operate in practice – but we knew that already.  At least we did until Sir Andrew Morritt’s first instance decision in December 2012.



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