Section 20 consultation: unsigned contracts and qualifying long-term agreements (QLTAs)

In the recent case of Ghosh v Hanover Gate Mansions Limited and Hanover Gate Mansions (Park Road) Limited, the Upper Tribunal (Lands Chamber) was asked when exactly an unsigned contract came into effect in a dispute concerning whether a landlord needed to undertake Section 20 consultation.

The Facts

Mr Ghosh held a long lease of a flat.  Hanover Gate Mansions Limited (“Hanover Gate”) was his landlord.  Hanover Gate procured management services under a management contract with Faraday Property Management Limited (“Faraday”). The management contract was drafted on Faraday’s standard terms, stating Faraday would “perform the services from 12 June 2017 to 11 June 2018. After this period, the Agreement shall continue on the terms set out, subject to termination under Clause 7”.

Hanover Gate’s solicitor made minor amendments.  However, the draft contract (which stated it started on 12 June 2017) was never signed or dated before Faraday commenced providing services on 12 June 2017.

Section 20 Consultation

Section 20 of the Landlord and Tenant Act 1985 (“Section 20”) provides that before a landlord enters into a QLTA for works or services, it must consult with residents paying a variable service charge following a process set out in Regulations.  A QLTA is an agreement for more than 12 months, where the cost to each resident is more than £100 per accounting year.  If a landlord fails to consult correctly, the amount it can recover is capped to £100 per year (unless dispensation is obtained).

The Issues

Both parties agreed that if the management contract between Hanover Gate and Faraday started on 12 June 2017, it was a QLTA: this is because the earliest it could terminate was 12 June 2018.  The issue was when it started.

Mr Ghosh argued it commenced on 12 June 2017 and was, therefore, a QLTA. Since the landlord did not consult him about the management contract in accordance with Section 20, Mr Ghosh argued his service charge contribution should be capped at £100.

Hanover Gate argued 12 June 2017 was just a periodic trial basis, and there was no formal contract, so no QLTA, meaning the full amount could be recovered.

The Decision

In the first instance, the First-tier Tribunal agreed with the landlord that the management contract was not a QLTA, as it did not commence until Hanover Gate made payment to Faraday at a later date after 12 June 2017.

The Upper Tribunal overturned the original decision.  It held there is no general rule on contract formation that performance of a contract only takes place when goods or services are paid for. Applying authority from the 19^th century, the Upper Tribunal preferred Mr Ghosh’s argument that the management contract took effect by performance when management services commenced on 12 June 2017. Therefore, it was held the contract was a QLTA, and as Section 20 consultation was not carried out, Mr Ghosh’s contribution was capped to £100 per year.

Lesson Learnt

The case provides a useful reminder to be cautious and check whether agreements your organisation is entering into meet the QLTA definition and trigger Section 20 consultation.  Although not substantial in this case (recovery was capped at £100 instead of the £218.73 claimed by Hanover Gate), failure to consult properly can have significant financial consequences for landlords.

The ruling in Ghosh was based on established principles of contract formation and has wider implications beyond the context of Section 20 consultation. In the language of Ghosh, it is not unimaginable that some contracts may be negotiated but left in a desk drawer, during which time goods or services may be exchanged on uncertain terms, leading to a potential dispute. In our view, Ghosh serves an important lesson to landlords for seeking clear legal guidance and following best practice when drafting and completing agreements.

For more information

For more information about this case and service charges generally, please contact Emma Hardman.