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Is it reasonable for my local authority to charge me for major works on the basis of rates agreed under a long term agreement when the work is subcontracted to a company which is charging a lot less?

Reader’s E-mail:

We are leaseholders of a 2 bed flat in a local authority owned and managed block. There are 9 units in the block, approximately half of which are leasehold. Our roof tiles have recently been replaced. The block was constructed in the mid 70’s and the original concrete tiles were beginning to fail. That the works were required is not in question, however, the tiles have not been replaced with a modern equivalent but rather a resin bonded sheet metal tile effect system. The main issue we have is that the council has a long term partnership with a maintenance firm who themselves sub contracted the work. It seems we have been quoted an arbitrary amount using some sort of national guidelines for the costing of these types of works. We are aware that the sub contractors quote for these works was substantially less than the figure presented to us and are fearful that we are about to be forced to pay an inflated amount which is neither a fair or accurate reflection of the true cost of these works. We can’t help feeling that the council and their maintenance partner are profiteering from their leaseholders. Many thanks in advance for any guidance you can give in this matter.

Reply from Service Charge Dispute Guide

1. Leaseholders are given protection from being overcharged by their landlord by Section 19 of the Landlord and Tenant Act 1985.

i. Section 19 (1) (a) states that a service charge is only payable to the extent that it is ‘reasonably incurred’.

ii. Section 19 (1) (b) states that a service charge is only payable to the extent that the works or services to which they relate are of a ‘reasonable’ standard’.

2. The legislation does not define what it means for a service to be ‘reasonably incurred’ or what constitutes a ‘reasonable standard’. However, there have been a number of decisions by the upper courts and tribunals which have provided guidance on how these terms should be understood. These decision set what lawyers call a ‘binding legal precedent’ to be followed by the more junior courts and tribunals, such as the First Tier Tribunal in relevantly similar circumstances.

3. One case worth considering in detail, because it deals with some points of law relevant to the situation you describe in your in e-mail, is the relatively recent case of London Borough Lewisham v Luis Rey-Ordieres [2014] UKUT 014 (LC). There is a link to the full text of the decision from the summary given in our website.

4. In the London Borough of Lewisham case, the Upper Tribunal of the Lands Chamber decided that there were two aspects to the issue of whether the amount of a service charge was ‘reasonably incurred’:

i. The works to which the costs relate must have been ‘reasonably necessary’.

ii. The costs incurred in carrying out the works must be ‘reasonable in amount’.

5. In your e-mail you state that the works definitely needed to be carried out. Your concerns therefore do not appear to be related to the first of the two requirements stated above that the costs must be related to works which were necessary. Although, and we shall come back to this point near the end of this e-mail, there may be still be an argument to be made that a different type of roofing material should have been used.

6. The second of the two requirements identified by the Upper Tribunal appears to be more relevant to your particular situation: you are concerned that the amount you may be charged will unreasonable because it is higher than that it needs to be.

7. When local authorities enter in long term partnerships with building contractors they tend to do after an extensive ‘tendering process’ as this is a requirement of Section 20 consultation regulations. For higher value contracts the law requires that local authorities conduct the tendering process at the EU level with an advert being placed in the Official Journal of the European Union inviting companies across the EU to bid for the work.

8. These long term agreements can last several years and are typically used as a means for procuring building works for a large number of properties. For this reason, unlike a building contract for a single defined set of works, the prices payable to the contractor under the agreement are normally set by a schedule of rates agreed in advance between the contracting parties. An annual uplift is normally agreed as part of the contract with a view to ensuring that the amounts paid to the contractor increase over time in line with inflation in cost of undertaking the relevant works.

9. Until fairly recently courts and tribunals tended to come to the conclusion that pricing achieved through extensive tendering processes, particularly those carried at the EU level, must automatically be considered as being ‘reasonable amount’. This limited the ability of the Leaseholders to challenge the amount charged by local authorities for the cost of major works service charges if the work was procured through a long term agreement.

10. However, this is no longer the case. In the London Borough of Lewisham case the Upper Tribunal decided that simply because works are priced on the basis of a schedule of rates agreed as the outcome of an extensive tendering process does not, in itself, mean the amount paid to a contractor is ‘reasonable’ in amount.

11. This is an important point because it established that Leaseholders have a legal right to challenge the reasonableness of the cost incurred irrespective of the nature of the contractual relationship between a landlord and their contractor.

12. This said, in practice leaseholders generally find it extremely challenging to demonstrate that building costs are not reasonable in amount, and particularly so in respect of works carried out under long term agreements.

13. The first problem is that the law does not require that a landlord chooses the cheapest possible provider of works and services: a service charge is still considered to be reasonably incurred so long as the price falls within a ‘reasonable range’ of what a contractor might be expected to charge in that location and at that point in time. For the technically minded of our readers, the legal authority on this point is Forcelux v Sweetman [2001] 2 EGLR 175.

14. The implication of this principle is that in order for a leaseholder to win a reduction they must demonstrate that the price they have been charged is substantially more than the price a landlord might have achieved if they used a different contractor.

15. The second problem for leaseholders is that it can be very difficult to find convincing evidence of what the normal price might be.

16. There are two main ways a leaseholder might go about this task:

i. Obtaining quotes of their own for the work.

ii. By referring to another schedule of rates, such as ones produced by professional organisations such as the Royal Institute of Chartered Surveyors.

17. Both approaches are problematic for leaseholders especially in respect of works procured by local authorities through long term agreements.

18. At this point it is useful to refer to more case law, in particular the case of A2 Airways Housing Group v Taylor and others LRX/36/2006.

19. The A2 Airways Housing Group case is relevant because it established, as a point of law, that any comparative pricing information (such as a quote) must be made on a like-for-like basis before it can be considered as useful evidence in determining the reasonableness of a service charge.

20. It is important to note that there are many relevant aspects involved in determining whether a quote is made on a like-for-like basis.

21. The first and most obvious of these is whether the quote was obtaining using the same specification of the relevant works as the one which the landlord used. A different specification would result in different quotes.

22. There are also other less obvious aspects to determining whether a quote was made on a like-for-like basis. For example:

i. Does the company giving the quote meet the same standards in respect of health and safety on site?

ii. Can the company show the required level of financial stability required by the landlord of it contractors?

iii. Does the company have a track record which indicates their capability to carry out the works?

23. The list of factors which can be considered in determining whether a quote is made on a like-for-like basis tends to expand the more complex and larger the overall scheme of works is.

24. Faced with a challenge by a leaseholder with a comparable quote, a local authority using a wide scale long term agreement might even be able to successfully argue that a comparable quote must be obtained in respect of the entire bundle of works for which the contractor has been employed. The argument would be that pricing achieved though a quote for works to a single building cannot be considered as like-for-like when the prices they achieved where the result of tendering for contractors to carry out multiple building contracts over a number of years.

25. The same problem applies to using an established schedule of rates as a point of comparison. The argument on the part of a local authority might (again) be that the prices in the schedule of rates were not derived specifically in relation to the tendering of a large bundle of works on multiple buildings.

26. To be clear on the point we are making here: it is not a point of law that a quote received in respect of a building works in isolation, or a schedule rates, cannot be considered as useful evidence that pricing in a long term agreement is unreasonable. A court or tribunal will need to consider the precise facts of each case in order to come a decision. Our point is a practical one: it is formidably difficult for a leaseholder to challenge the pricing achieved through a properly tendered long term agreement to carry out multiple building works.

27. A second strand to this issue is the reasonableness of the approach which a landlord takes in terms of addressing disrepair issues.

28. In most situations there are number of different strategies (and materials) which might be used to maintain a building. The different strategies will often cost different amounts.

29. In terms of the principles of law involved in determining whether a landlord has selected a reasonable strategy for the repair of a building, it is useful to consider the case of Regent Management Ltd v Jones [2010] UKUT 369 (LC).

30. The relevance of the Regent Management case is that the Upper Tribunal decided, as a point of law, that a landlord was not required to pick the ‘best’ possible strategy; in order for a service charge to be reasonably incurred all that a landlord is required to do is to select one of the many possible reasonable approaches to the management of a property.

31. In order to demonstrate that the choice of building materials makes the service charge unreasonable, a Leaseholder therefore needs to show that the option selected is much worse than the other options. This might be because either the cost is much greater initially, or because the materials were much less durable and therefore would require replacement (or maintenance) much earlier and in this way cost a lot more over the course of, say, a 20 or 30 year period.

32. As a final point, there is an interesting aspect to the situation you describe in your e-mail in that the works have been sub-contracted and it appears that the sub-contractor will charge a lot less than the final cost charged to your landlord. There is some uncertainty as to how a court or tribunal would assess this situation were the matter to be the subject of formal legal action. We are not aware of any case law or specific item of legislation which would provide clear guidance on this point. It is very likely that the specific facts of the situation would be closely scrutinised as a means of reaching a decision.

33. Your argument would be that had your local authority chosen to simply approach the sub-contractor directly, rather than procure the work through a long term agreement, then the costs would be a lot cheaper – meaning that your service charge for the works was not ‘reasonable’ in amount.

34. One counter argument would be that, for a variety of reasons, the local authority could not have approached the sub-contractor directly because they did not meet their criteria as a suitable contractor for the works. Another might be that the main contractor had some kind of useful input into the management, or execution, of the work which justified an uplift on the price for which the subcontractor offered to undertake the work.

35. The validity, and strength, of such counter arguments depend entirely on the facts of the situation and we suggest that you make a written enquiry to your landlord with a view to eliciting a response which might allow you to gauge whether your landlord has plausible reasons for undertaking the works in the manner they are proposing.

Click on the link to read more Reader’s Questions and Answers on Major Works

Click on the link to read more Reader’s Questions and Answers on Disputing a Service Charge