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This decision may have significant implications for landlords undertaking improvement projects. Click here to see the facts of the case.
This case concerns 97 holiday chalets at Point Curlew, a holiday site consisting of chalets, lodges and a number of other buildings including an amenity centre. Mr and Mrs Francis purchased the freehold of the site in April 2008 and soon after informed occupants of their intention to carry out substantial improvements to the site. Whilst the improvements were welcomed, the resulting service charges were not. Mr Phillips and Ms Goddard issued proceedings on behalf of the majority of residents requesting a number of declarations.
The High Court decision considered an application for permission to appeal and the subsequent appeal on two aspects of the County Court Judge's decision:
- 'Double' recovery of management costs; and
- Whether the various elements of work should be considered as one set of 'qualifying works' triggering section 20 consultation requirements, or separate elements of works which would not trigger the obligation to consult.
The amount that the landlords sought to recover from the leaseholders through the service charge was £585k, which included £95k as wages for Mr and Mrs Francis and, nearly £28k as a 5% management charge. The landlord argued these both these elements were payable because:
- the lease contained an obligation on the leaseholders to pay the service charge to include the cost of the matters referred to in Schedule 3 of the lease and an corresponding obligation on Mr and Mrs Francis to provide the services set out in paragraphs 1-7 of Schedule 3;
- paragraph 6 of Schedule 3 entitled Mr and Mrs Francis to reimbursement of the pay and expenses of "staff employed" and "fees paid" to "architects agents surveyors and solicitors" employed in the management of the estate; and
- paragraph 8 provided for a management charge of 5% of the total cost of the items referred to in the Schedule.
The County Court Judge agreed with the landlord on the basis that paragraphs 6 and 8 set out two separate bases for charging.
On appeal, the High Court Judge, took a different view concluding that to avoid 'double recovery' of management costs, reference to "fees paid" in paragraph 6 of Schedule 3 of the lease should be limited to those charged to Mr and Mrs Francis by professional agents, so did not include the wages paid to Mr and Mrs Francis.
Mr and Mrs Francis treated the different phases of the improvement project as separate elements of works. This meant that no element of the works fell over the £250 per resident threshold, so the works would not be "qualifying works" and section 20 consultation was not undertaken, although general informal consultation was. The County Court Judge agreed with that approach, having taken into account the way the works were planned and undertaken.
The High Court Judge again took a different approach saying that in this particular case the works were one whole redevelopment plan: he said this decision was based on a 'common-sense' interpretation of the works. When all the different elements of the works were considered together, the cost for each resident exceeded the £250 limit and so consultation should have been undertaken. As it was not, the landlords could only recover £250 per resident each year.
Implications for You
This case again highlights the importance of getting section 20 consultation right and the Judge's decision adds a new interpretation, one we suspect may be appealed by the landlords particularly given the financial detriment suffered as a result. So if you are undertaking improvement works and considering whether section 20 consultation is necessary, you will need to consider how the works should be classified (i.e. one set of works or separate elements): this will vary between schemes but will be influenced by how they are interconnected (which of course in an RP context may take into account EU procurement) and maybe the number of contracts entered. This may mean undertaking consultation where perhaps previously you would have treated the works separately.
On the plus side, the Judge did:
- Recognise the difference between responsive works and 'project' works; and
- Refer to spreading works over different financial years, so that separate limits could be taken into account. This may of course not work in practice when scheduling improvement works over a number of schemes.
It also illustrates the importance of charging management costs in accordance with lease provisions and in a fair way.
For more information
For any queries in relation to this case, recoverability of service charges and "qualifying works" or leases/service charges generally, contact Emma Duke on 0121 214 3617 or email@example.com.
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