Section 20 of the Landlord and Tenant Act 1985 imposes a limit on the service charges that can be demanded from lessees in respect of “qualifying works” unless the landlord undertakes a consultation process, or obtains dispensation from consultation.

The Service Charges (Consultation Requirements) (England) Regulations 2003 set out the relevant consultation requirements.

As summarised by the Supreme Court in Daejan Investments Limited v Benson they are:

Stage 1: Notice of intention to do the works

Notice must be given to each lessee and any tenants’ association describing the works, stating the reasons for the works, and specifying where and when observations and nominations for possible contractors should be sent (allowing at least 30 days).  The landlord must have regard to those observations.

Stage 2: Estimates

The landlord must seek estimates for the works, including from any nominee identified by the lessees or the association.

Stage 3: Notice about estimates

The landlord must issue a statement to the lessees and the association, with two or more estimates, a summary of the observations, and its responses.  Any nominee’s estimate must be included.  The statement must say where and when estimates may be inspected, and where and by when observations can be sent (allowing at least 30 days).  The landlord must have regard to such observations.

Stage 4: Notification of reasons

Unless the chosen contractor is a nominee or submitted the lowest estimate, the landlord must (within 21 days of contracting) give a statement to each lessee and the association of its reasons.

In Collingwood and ors v Carillion House Eastbourne Limited [2021] UKUT 0246 (LC), the Upper Tribunal (Lands Chambers) considered whether:

  1. In view of any failure of compliance with the statutory consultation requirements, the lessees’ liability should be restricted to £250.
  2. Whether, in the absence of an application for dispensation, the FTT was entitled when determining what was payable by way of service charges to regard whether prejudice had been caused to the lessees by any failures of consultation.

What happened in Collingwood v Carillion House?

On 13th November 2017, a notice of intention to carry out external redecoration and repairs was sent to all lessees.  This invited observations on the proposals and nominations of contractors from whom an estimate should be obtained.

All parties agreed that this complied with the Consultation Regulations.

On 21st November 2017, Mr Naish replied nominating Affordable Roofing Eastbourne Limited (“AREL”).  Incidentally, Mr Naish was the sole director of AREL.

On 19th June 2018, a notice of estimates was sent to all lessees, in intended compliance with the Consultation Regulations.  It listed two estimates; one from CRB Contractors Limited (£31,015) and one from Ellis Buildings (£48,277.92).

On 20th June 2018, Mr Naish wrote to the landlord’s agent, asking why AREL had not been given the opportunity to quote.  During the consultation process, it appears there had been a change of managing agent, and the new agent replied indicating that they were unaware of the nomination of AREL.

On 20th July 2018, AREL were invited to quote for the work, and quoted £18,900.  The quote did not include a breakdown of the charge, and therefore AREL were asked to complete a “form of tender” and a costed schedule of works.

On 14th August 2018, the landlord’s agent wrote to the lessees explaining that their surveyor had recommended CRB Contractors Limited.  This correspondence went on to explain that the lower quote from AREL was not recommended because AREL had not supplied the “price specification and other paperwork”.

There followed some further correspondence with all lessees, which resulted in a further quote being obtained and the contract finally being awarded to MR Roberts at a cost of £36,517.61.

The work was done by MR Roberts, and the lessees were each required to pay £5,342.53.

In May 2020, three of the lessees made an application to the First Tier Tribunal (Property Chamber) for a determination of the reasonableness and payability of service charges.  In dispute were the sums demanded in relation to the external works, together with sums demanded in relation to costs incurred in managing the landlord itself as a limited company.

Proceedings before the FTT

The application to the FTT set out a list of breaches in respect of the consultation procedure.  The significant points were:

  1. That the landlord failed to obtain a quotation from Mr Naish’s nominee; and
  2. Accordingly, that the landlord failed to give a correct notice of estimates.

The FTT made its decision on 30th November 2020.  The FTT’s decision records that there had been “some issues” regarding the consultation process and the timescales over which it was conducted, but that nevertheless the landlord had “endeavoured to carry out some consultation and evidently when some resistance was expressed by the lessees regarding the amount of the estimates, the landlord did obtain further quotes”.

The decision of the FTT goes on to record that they found “no evidence that the interests of the [lessees] may have been materially prejudiced by any shortcomings which may have occurred through the Section 20 consultation process”.

Accordingly, the Tribunal found that the costs of £36,517.61 for the major works were reasonably incurred and payable by the lessees.

Appeal to the Upper Tribunal

Permission was granted to appeal on the following issues:

  1. Whether the FTT’s decision dealt adequately with the question of compliance with the Consultation Regulations and whether in view of any failure of compliance found to have occurred, the lessees’ liability should have been restricted to £250.
  2. Whether, in the absence of an application for dispensation, the FTT was entitled when determining what was payable, to have regard to whether prejudice had been caused to the lessees by any failures.
  3. Whether any fees charged by the managing agents in connection with the running of the company were properly included in the service charge.

The lessees argued that consultation was a sequential process.  It was argued that it is obviously the intention of the Consultation Regulations that the landlord must try and get an estimate from any contractor nominated by the lessee before giving its notice of estimates.  It would not otherwise be possible for the estimate to be included within the notice of estimates.

The lessees argued that although the landlord did (in June 2018) request an estimate from AREL, this did not mend the process because by then it was too late.  The landlord’s notice of estimates that purported to comply with the Consultation Regulations did not do so because the notice was sent without the landlord having asked AREL for a quotation.

The lessees also argued that the Consultation Regulations say nothing about the form that an estimate must take, and do not give the landlord the option to refuse to pass on an estimate because it does not provide an acceptable breakdown or for any other reason.

So far as the FTT’s reasoning was concerned, the lessees argued that prejudice is relevant to the question whether dispensation could be granted.  But in this case, there had been no application for dispensation.

The landlord, in response, argued that the consultation process had been carried out.

It argued that the process set out by the Consultation Regulations is “woolly”, requiring the lessees to be given a “rough idea” about the works, and requiring 30 days’ consultation.

The landlord argued that the Consultation Regulations do not say that if a landlord has missed a nomination, it has to go back and start again.  It was pointed out to the Tribunal by the landlord that AREL had no assets, did not appear to have been trading, and have now in fact been dissolved.

Decision of the Upper Tribunal

The Tribunal agreed with the lessees that the requirements of the Consultation Regulations are both “strict and sequential”, commenting

“There is no room in the clear wording of the provisions for flexibility in their interpretation, and no legal precedent for a flexible interpretation.  They are anything but woolly”.

The Tribunal agreed that a notice of estimates cannot be given until the landlord has tried to obtain a quote from any nominated contractor.  Accordingly, in this case, the notice of estimates did not comply with the Consultation Regulations because the landlord had failed to obtain a quote from AREL.

Moreover,

“The landlord did obtain an estimate from AREL; it was therefore obliged (whatever its own view about the shortcomings of that estimate) to include the quote in a notice of estimates.  It was not, of course, obliged to accept the quote, and its reasons for refusing to do so might well have included AREL’s assets and its trading record, and the lack of detail in its estimate; but none of those factors entitled the landlord to disregard the consultation process”.

The FTT’s decision that there had been no breach of the Consultation Requirements was wrong.  As the Tribunal put it,

“The FTT appears to have taken the view that the landlord did its best and that its efforts were good enough; but that finding was not open to it in the context of clear rules which leave no scope for any doctrine of substantial compliance.

The Tribunal’s decision, therefore, was that the Consultation Requirements were not complied with and, in the absence of an application for dispensation, the lessees were liable to pay £250 each in respect of the external works, instead of the £5,342.53 they were each charged.

The appeal also dealt with the “company management charges” which were the managing agent’s fees for running the landlord company, filing its accounts and annual return and so on.

The leases contained covenants to pay

  1. All other proper expenses (if any) incurred by the landlord in and about the maintenance and proper and convenient management and running of the property.
  2. The fees and disbursements paid to any managing agents, accountants and auditors appointed by the landlord in respect of the property.

The lessees argued that the charge for running the landlord company does not fall within either of those clauses.  They took the view that as they are not members of the company, they should not have to pay for its management.

The Tribunal agreed, stating:

[The clause] is a covenant to pay fees and disbursements incurred in the management of the property, and not in the management of the landlord company”.

Commentary

This demonstrates that strict compliance with the Consultation Regulations is necessary, in order that a landlord might avoid falling foul of the £250 cap.  Prejudice to lessees is irrelevant for such purposes.

It is not open to the FTT to find that a landlord has complied with the Consultation Regulations by describing non-compliance as “shortcomings” and as a landlord’s efforts as being “good enough”.