The decision in Phillips v Francis CH/2012/0515 has forced landlords and managing agents to re-think how they are to comply with the obligation to consult leaseholders, not just for major works but on all works including day-to-day repairs and maintenance imposed on them by Section 20 of the Landlord & Tenant Act 1985 (as amended).

Prior to Phillips, the position was that landlords had to consult leaseholders in advance if they proposed to undertake any qualifying works which would cost over £250 for any one leaseholder.  If a proper consultation was not undertaken, the landlord’s ability to recover the costs for these qualifying works might be capped at no more than £250 per leaseholder. This is a severe penalty given the average cost of major works.

In Phillips, the main issue in dispute was whether the landlord should have complied with the Section 20 consultation requirements for what the leaseholders considered to be one set of works even though individually the items fell under the threshold.

Over 150 holiday chalets were purchased by a new landlord who decided to undertake a programme of works to renovate and bring the site 'up to a first class standard'.  This resulted in a large increase in the service charges demanded by the landlord.  The landlord argued that each part of the works was below the £250 per leaseholder limit and therefore no Section 20 consultation was necessary.  However, the total works were far more than £250 per leaseholder and they argued that a consultation should have taken place.

In the first instance, the county court agreed with the landlord and decided that the works carried out were not one set of works for the purposes of Section 20 and so no consultation was required.  On appeal, the Chancellor of the High Court agreed with the leaseholders and decided that, if the total amount of the qualifying works in one year would cost more than £250 per leaseholder, then the Section 20 consultation must be complied with, otherwise the landlord will have to bear the excess.  It did not matter that there were separate contracts involved.

As a result of this decision, there appear to be no ‘winners’ and the landscape of Section 20 consultation has completely changed.  Landlords and managing agents may now adopt a ‘safety first’ approach and issue Section 20 consultations for day-to-day repairs and maintenance which may result in delays to works being carried out which, in turn, will likely lead to an increase in managing agents’ fees (which will ultimately be passed onto leaseholders in any event).  There is also the possibility that leaseholders might challenge previous years’ expenditure following Phillips.

As this case was decided in the High Court, only the Court of Appeal can overturn the judgment and so residential landlords and leaseholders could be left with the consequences for years to come.