Service charges can be expensive. Their recoverability is of vital importance for landlords and tenants
While commercial tenants must rely on the wording of their lease to limit a landlord's claim for service charges, residential tenants have significantly greater protection available to them as follows:
- a statutory limit on service charges for residential tenants, which must be reasonable, in terms of
- both the work carried out and the cost of that work;
- an inexpensive route to challenge service charges through the Leasehold Valuation Tribunal (LVT);
- the right to be consulted on major works and long term agreements; and
- landlords cannot recover disputed service charges until they have been determined as reasonable.
The focus of this article is on the issue of consultation.
The regulations setting out the consultation requirements are complex. In summary, they require a landlord to do the following:
- give tenants notice of intention to carry out works, specify why the works are necessary and inviting
- comments and the nomination of potential contractors;
- obtain a number of competitive quotes. This must include approaching any contractors nominated
- by the tenants, as well as control over parties connected to the landlord;
- consultation on estimates obtained; and
- notification of decision and reasons.
The regulations do not require a landlord to accept a tenant's representations regarding either the scope of works or the contractor whose quote is to be accepted.
In practice, well advised landlords will listen to representations from tenants, mindful of the fact that the works done are not reasonable in extent or cost; they are likely to be challenged by tenants when the landlord attempts recovery. Therefore, these consultation procedures do provide an opportunity for significant negotiation and discussion as to both the scope of works and cost issues.
There is an important sting in the tail of the regulation, which has been emphasised by recent litigation. If a landlord does not follow the correct consultation procedure, then the recovery of the service charge concerned is limited to £250 per leaseholder, unless they obtain dispensation from the LVT.
The issue went to the Court of Appeal in January 2011. There had been significant tenant involvement and the landlord had accepted the lowest tender.
The landlords served the correct forms. However the tenants demonstrated that the landlord had made up its mind to award the contract significantly before the end of the consultation process and so the tenants had lost their right to a proper consultation and the opportunity to influence the outcome of that process.
The Court of Appeal held that:
- the fact that the tenants could not point to any particular benefit that they would have secured from full consultation, was not material; and
- the fact that works were reasonable both in extent and cost, and that the tenants would, in effect, gain a windfall benefit, was not material.
The key issue was the tenants' right to consultation. If there have been minor breaches of the consultation rules, but the tenants had in substance a proper opportunity to make their views known, dispensation is likely to be given.
However, if a key stage in the process has been omitted, or if the landlord has shown they have closed their mind to the consultation process, then dispensation will not be given.
The lesson from this litigation is that there is no substitute for checking and rechecking that the consultation process has been properly complied with. The regulations are complex. Our property litigation practice would be happy to advise either landlords or tenants on the requirements of the regulations.