It’s a feature of the relationship between a managing agent and their client that a management agreement exists between the parties. And one of the features of the management agreement will be the term. The agreement will (or at least should) set down how long it’s going to last.
And this is where there’s interplay between management agreements and section 20 of the Landlord and Tenant Act 1985.
What’s a qualifying long term agreement?
Section 20 is one of several statutory restrictions on the recovery of service charges. Many people think of section 20 in the context of major works only. Qualifying long term agreements (QLTAs) are often forgotten or ignored.
Section 20 limits the contributions of leaseholders where there’s a qualifying long term agreement unless the consultation requirements have either:
- been complied with in relation to the agreement; or
- been dispensed with in relation to the agreement by the tribunal.
Without consultation (or dispensation) the contribution per leaseholder is capped at £100 per financial period.
Section 20ZA(2) defines a qualifying long term agreement as:
“An agreement entered into, by or on behalf of the landlord…, for a term of more than 12 months”.
But what if the term of an agreement is for 12 months, with continuation thereafter until terminated? Is that a qualifying long term agreement?
This was the question for the court of appeal in Corvan (Properties) Limited v Abdel-Mahmoud  EWCA Civ 1102.
The agreement in Corvan
The management agreement between the landlord and managing agent included the following term:
“The contract period will be for a period of one year from the date of signature hereof and will continue thereafter until terminated upon three months’ notice by either party”.
The narrow question for the Court of Appeal was whether or not this term rendered the management agreement a qualifying long term agreement.
Both the first tier tribunal and upper tribunal found against the landlord, and concluded that the agreement was a qualifying long term agreement.
In reaching its decision, the upper tribunal had accepted that the contract period was expressly stated to be for a period of one year, but taken account of the fact the period is “to continue thereafter”. Accordingly, said the upper tribunal, the period of 12 months represents only the start of the contract period, and was an agreement for a period of at least a year and a day. This meant that it was a qualifying long term agreement.
What did the Court of Appeal decide?
It was argued on behalf of the landlord that the clause had two distinct elements. The first concerning the length of the term, and the second concerning termination. Essentially, the landlord argued that the clause should actually be read as follows:
“The contract period will be for a period of one year from the date of signature hereof and unless terminated will continue thereafter until terminated upon three months’ notice by either party” (proposed addition in bold).
The landlord also argued that in ascertaining what constitutes the “term” the pragmatic and correct answer must be the contract period as expressed. In Corvan, the contract specified the period to be one year.
In deciding what the clause in Corvan actually meant, the Court of Appeal looked at the guidance of the Supreme Court in Arnold v Britton about how written contacts are to be interpreted.
When interpreting a written contract, it’s the job of the court to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood and to be using the language in the contract to mean”. The court does this job by focusing on the meaning of the words in their documentary, factual and commercial context, and then assessing that meaning in light of:
- the natural and ordinary meaning of the clause;
- any other relevant provisions of the [contract];
- the overall purpose of the clause and the [contract];
- the facts and circumstances known or assumed by the parties at the time that the document was executed;
- commercial common sense; but
- disregarding subjective evidence of any party’s intentions.
Having regard to that approach, the Court of Appeal found that the use of the word “will” in Corvan’s management agreement introduced a mandatory requirement that the agreement would continue beyond the initial 12 months.
Although the wording of the clause didn’t prevent notice being given before the twelve months was up, any notice would have no effect until after the 12 month period had ended.
Accordingly, the Court of Appeal found that the term of the contract was for a period of one year plus an indefinite period which is subject to the three month termination right.
What does this mean?
Many managing agents will have looked very carefully at the terms of their management agreements following the decision of the upper tribunal in Corvan last summer, and will have amended those agreements where necessary.
However, it’s perhaps worth revisiting those management agreements to ensure there’s nothing in them that would render them a qualifying long term agreement.
In terms of the “things to avoid” language of automatic continuance or language that suggests an ongoing commitment should probably be avoided. As should indefinite terms.
On the flip side, agreements should have a term for twelve months or less, and end at the end of that term.
The other option of course is for consultation to be undertaken (or dispensation obtained from the tribunal) in relation to management agreements.