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Philips v Francis: To Consult or not to Consult?

The background

Landlords should be aware that in a recent landmark High Court decision, it was held that there is nothing in the Landlord and Tenant Act 1985 which requires a landlord to identify one or more sets of qualifying works. Further, if those works are to a building or to a parcel of land and the total costs of those works exceed £250 per leaseholder, the consultation provisions in Section 20 of the Landlord and Tenant Act 1985 will apply. The Chancellor of the High Court also held that the landlord was unable to recover management costs from the leaseholders for non-professional management services unless a lease makes specific provision for this.

In Philips v Francis [2012] EWHC 3650 (Ch), the Respondents, Martin and Rebekah Francis, who own the freehold of a 25 acre holiday site at St Merryn, Cornwall, informed chalet owners in 2008 of their intention to bring the site up to a better standard from which they would all benefit.

Whilst the plans for the improvement of the site may have been welcomed by the chalet owners, the increase in the service charge payable under their leases, as a consequence of the redevelopment plans, were not. Indeed, the first service charges demanded by Mr and Mrs Francis in December 2008 amounted to more than a 100% increase for each chalet owner.

The chalet owners then commenced proceedings in the High Court seeking injunctions to restrain Mr and Mrs Francis from forfeiting any of the chalet leases for non-payment of service charges, and also challenging them on the construction of the service charge provisions contained within the leases.

The claim came before a High Court Judge who determined (in our view incorrectly) that the residential service charge legislation applies to holiday parks. He then transferred the case to Truro County Court for a determination of the other issues.

Truro County Court

Truro County Court had to consider two questions:

  1. Whether Mr and Mrs Francis were entitled to charge and recover the costs of non-professional services from the chalet owners under the lease;
  2. Whether the site improvement works proposed by Mr and Mrs Francis were ‘qualifying works’ and if so, what consultation requirements, if any, were applicable?

Truro County Court, in October 2011, held that Mr and Mrs Francis were entitled, under the leases, to charge a management fee recoverable on all of the items of expenditure properly recoverable, including expenditure in relation to non-professional fees relating to, for example, the maintenance of notice boards and the cutting and mowing of grass on the site.

In relation to the question of whether the works proposed by Mr and Mrs Francis were qualifying works, the court took the view that they were. The court noted that it was common ground that the contribution sought from each lessee in respect of the site improvement works proposed exceeded £250 per leaseholder and that the lessees had sought to restrict their contributions to that amount. The court held that the question of whether works were qualifying works, and so therefore may require the landlord to consult with the chalet owners in order to be able to pass on all the costs of those works on, was a question of fact having regard to the nature and extent of the works in question.

The court accordingly held, following evidence given by Mr and Mrs Francis, that the improvement works were not a single set of works and that in effect ‘one job created another’. The court also held that some of the works proposed by Mr and Mrs Francis were qualifying works and proceeded to identify certain works as qualifying works, leaving other works to fall under the costs threshold.

The leaseholders appealed the county court’s decision.

The chalet owners contended that the county court had wrongly interpreted the leases in respect of what maintenance works attracted a management charge. They argued that the county court was wrong in law not to have recognised all of the qualifying works as being a single set originally designed by Mr and Mrs Francis and that the works described generated individual service charges for lessees greatly in excess of the limits prescribed by the 2003 regulations. The chalet owners argued that as there had been no compliance with the consultation requirements, the excess over £250 per leaseholder was irrecoverable by Mr and Mrs Francis.

The decision of the Chancellor of the High Court

The Chancellor in respect of the first issue noted that Mr and Mrs Francis were entitled to reimbursement in respect of both the pay and expenses of ‘staff employed’ and ‘fees paid’ to ‘architects, agents, surveyors and solicitors’ employed in regard to the management of the estate. Therefore, the Chancellor held that the power to recover management charges did not extend to non-professional management charges provided by Mr and Mrs Francis either personally, or through their management company. Accordingly, the Chancellor held that the appropriate recovery of management fees by Mr and Mrs Francis were limited to those charged to them by professional agents. As such, wages paid to Mr and Mrs Francis would not be recovered because they could not employ themselves. Nor could they include payment for work of a non-professional nature charged by any agents such as mowing the front lawn of the site.

In respect of the nature of the improvement works proposed by Mr and Mrs Francis, the Chancellor stated that in his view, he saw nothing in the present consultation legislation which required the identification of one or more sets of qualifying works. It would be for the landlord to assess whether qualifying works would be on such a scale as to necessitate complying with the consultation requirements or face the consequences that the landlord may not be able to recoup the costs from the tenants above £250 per tenant. The judge noted that as contributions are payable on an annual basis, then the limit is applied to the proportion of the qualifying works carried out in that year. Therefore, all the qualifying works must be entered in to the calculation for that year in determining whether the consultation threshold had been reached, unless the landlord was prepared to meet any excess costs himself. The judge went further and stated that all the works referred to by Mr and Mrs Francis should be taken into account when computing the contribution and then applying the limit. It may be that they should be spread over more than one year thereby introducing another limit.

Implications for landlords

Non-professional Services

Landlords, or indeed their managing agents, who carry out “non-professional services” for the purposes of managing the property will potentially, depending on the wording of the lease, be unable to recoup the costs of these from lessees. This should be carefully checked before “non-professional” fees are incurred.

Qualifying Works and Consultation

Landlords must now effectively calculate the total cost for all qualifying works per annum. Should the amount to be recovered exceed the limit of £250 per leaseholder, leaseholders will need to be consulted. Should landlords fail to consult they could well end up footing the bill for works. In our view, landlords should consider pushing non-urgent expenditure into a different year if this would enable them to keep under the £250 per leaseholder limit. Difficulties will arise when urgent or unplanned repair works are needed which takes the cost of the overall works over the limit.

In our view, there is likely to be an increase in applications for dispensation for urgent works and landlords should consider making an application in circumstances where those urgent works would take the overall annual costs over the £250 per leaseholder limit. In an attempt to reduce consultation, landlords should also consider entering into more long-term agreements to provide qualifying works (for which consultation will be required for entering into such an agreement).

It is unfortunate that Mr and Mrs Francis are not seeking to appeal this decision. This means that unless or until this decision is challenged and overturned in a future case, landlords would be well advised to ensure that they consult on all qualifying works, regardless of each lessee’s contribution. This decision will ultimately increase costs for leaseholders which is surely not what was intended.

For further information please contact Senga Howells