The Service Charges (Consultation Requirements) (England) Regulations 2003 apply to residential service charges. However, their application will be of interest to those involved in the management of mixed-use properties, and to landlords who hold a headlease which is subject to separate underleases of individual flats.

Section 20 of the Landlord and Tenant Act 1985 provides that, subject to limited exceptions, a landlord may not recover costs under the service charge in respect of a "qualifying long term agreement" or "qualifying works" unless the landlord has gone through a consultation process with the tenants. Under the 2003 Regulations, section 20 applies to a qualifying long term agreement (broadly, an agreement for a term of more than 12 months) if any tenant may be required to contribute more than £100 in relation to costs incurred under the agreement in any accounting period. If the landlord fails to consult in accordance with the Regulations, the amount it can recover from a tenant in respect of those costs is capped at £100.

In Paddington Walk Management Ltd v Governors of Peabody Trust, the county court had to decide how this requirement affected a tenant of a headlease. The tenant was a registered social landlord (RSL) and held a long headlease which consisted of 79 affordable housing units. The tenant's share of the service charge under the headlease was about 25% of the total service charge for the development. Did the £100 limit apply to the RSL's total contribution under the headlease (which would equate to a contribution of approximately £1.27 per dwelling), or did it apply by reference to each individual unit within the RSL's demise?

It is clear that the provisions of the 1985 Act benefit a tenant under a headlease just as they benefit an owner occupier. This is because the Act applies to service charges payable by "a tenant of a dwelling". In Oakfern Properties Ltd v Ruddy (2006), the Court of Appeal ruled that the Act applies where a person is a tenant of "a" dwelling, whether or not he is also the tenant of other dwellings or other premises under the same lease.

The court in Paddington Walk examined the definition of "service charge", to which the £100 cap applies. Section 18 of the 1985 Act refers to "service charge" being (among other things) an amount payable by a tenant of "a dwelling". "Dwelling" is defined elsewhere to mean a building, or part of a building, occupied or intended to be occupied as a separate dwelling (emphasis added). Therefore, the judge ruled that a "service charge" means a charge in respect of a separate dwelling. In order to decide whether the consultation requirements applied, it was therefore necessary to look at the amount that the tenant was being required to pay in respect of an individual dwelling, and not its global contribution under the headlease, aggregated for all 79 dwellings.

Things to consider

The court thought that this result kept the consultation requirements at a sensible level. Were it to be otherwise, the effect of implementing the consultation process may increase the cost of the expenditure for an undertenant by more than the amount for which the process was being invoked in the first place.

The RSL had argued however that this construction required the court to make an assessment of the level of individual contributions among the underlying sub-tenants. The RSL had granted 15 shared ownership underleases and 64 assured periodic tenancies. The basis for the recovery of service charge from its undertenants differed depending on the kind of lease and the size of the property in question.

The court did not think that this was a good point, since a head tenant can invoke the protection of the Regulations on the basis of any contribution in respect of any unit which would exceed £100, even though it might not be the case that all units would be affected. In addition, the court said that it would be extraordinary if consultation for expenditure of £101 were required where there was an intervening headlease because the contribution of the head tenant would exceed £100, but not for the same expenditure on the same property where there was no intervening headlease, because the amount payable by each undertenant would then fall below the limit.

It does not follow from this that the relevant cap in the case would necessarily be £7,900, as the calculation may have to be done in relation to individual units according to their actual percentage contributions. However, the court thought that this figure was a good working guide.

Another interesting point to come out of the case is that it gives some guidance on the meaning of "qualifying long term agreement". As stated above, this is defined as an agreement for a term of more than 12 months. The term of many management and services contracts is often expressed to be for a fixed term, to continue on a "rolling" basis until determined by notice by either side. The term of the agreement in this case was described as:

"for an initial period of one year from 1 June 2006 and will continue on a year-to-year basis with the right to termination by either party on giving three months' notice at any time".

The court concluded that this did not create a qualifying long term agreement. The case is only county court, and so does not carry any weight as a precedent, but it is a useful indication of the view a higher court might take. Although the judge stated that she reached this conclusion "with a little hesitation", she pointed out that, were this not the case, an agreement for one month that was then continued month-to-month until terminated could also be caught on the basis that it could last longer than a year, and that this went too far.

Finally, the court ruled that a one-off window cleaning contract did not constitute "qualifying works" for the purposes of the consultation requirements, as it did not amount to "works on a building" within the meaning of that phrase.