The recent High Court decision in Phillips and Goddard v Francis  EWHC 3650 (Ch) concerned the treatment of qualifying works when recovering the cost from residential tenants via a service charge. The decision is an important one for residential landlords. It holds that all qualifying works in the same accounting period should be taken into account when determining whether the tenant's service charge contribution exceeds £250 (the threshold above which consultation is required) i.e. all such works are added together for this purpose.
The facts of the case are not particularly significant, save that the case relates to chalets let in a holiday park. In brief, Mr and Mrs Francis, freeholders of the park, embarked on a substantial improvement scheme the effects of which were welcomed by the chalet tenants until the sizable increase in the service charge was noted. No statutory consultation regarding the works had taken place.
The tenants argued that the works formed one set of qualifying works that exceeded the statutory threshold. However, Mr and Mrs Francis argued that consultation was not necessary as the works should be treated as separate sets of qualifying works falling below the statutory threshold and that the "common-sense approach" previously applied in the case of Martin v Maryland Estates should be applied.
In the present case the "common-sense approach" was rejected on the basis that it was no longer appropriate as Martin v Maryland Estates was decided in 1999 when the trigger for consultation was by reference to the total cost of the qualifying works, rather than the amount of the contribution towards the qualifying works required from each tenant as is currently the case.
This decision will be unsatisfactory and unwelcome for landlords.
- For the reasons set out below the current practical statutory £250 limit under which the landlord is not required to comply with the detailed and time consuming statutory consultation procedure will, in effect, become obsolete.
- If a landlord fails to consult in respect of works (on the basis that the works do not exceed £250 per tenant) but then incurs further significant costs taking the total expenditure over the £250 statutory threshold within the same accounting year, the total sum recoverable from each tenant for the works as a whole will be £250. It will not be sufficient for the landlord to only consult at the time of the second set of works i.e. when the £250 threshold is actually exceeded.
By way of example of the potential consequences, where two sets of qualifying works are undertaken within the same accounting period, the first at a cost of £200 per tenant (i.e. below the current £250 threshold for consultation), the second £2,000 per tenant, the landlord must now ensure that it follows the statutory consultation procedure for both set of works or risk limiting its total recovery in this example to £250 rather than £2,200.
To conclude, those landlords not in possession of a crystal ball will be well advised to consult fully before all works, including those below the £250 threshold, unless absolutely certain that there will be no further expenditure for qualifying works within the service charge year. It remains to be seen whether the Leasehold Valuation Tribunal will take a sympathetic approach to applications for statutory dispensation where consultation has not taken place in scenarios such as that outlined above.
The judgment can be viewed in full at: http://www.bailii.org/ew/cases/EWHC/Ch/2012/3650.html