Qualifying Long Term Agreements
What is a qualifying Long Term Agreement?
A ‘Qualifying Long Term Agreement’ is a contract between a landlord and a company or individual to supply goods, services, or works to a building or estate for:
1. A period of 12 months or more.
2. Any affected leaseholders will be required pay a Service Charge of £100 or more per 12 month period towards the costs of these goods, services or works.
Consulting with Leaseholders before entering into a Qualifying Long Term Agreement
The Commonhold and Leasehold Reform Act 2002 made it a legal requirement for landlords is consult by Leaseholder by issuing a Section 20 Notice before entering into a Qualifying Long Term Agreement. If they don’t, then the amount that a landlord can charge a leaseholder each year for the costs of carrying out the works and services is limited to £100 per year.
For more information about consultation notices see our guide to Section 20 of the Landlord and Tenant Act 1985.
There are some exceptions to the rule, for instance employment contracts which are not included. However, for pretty much every other type of contract over 12 months, including contracts with managing agents, the law requires a landlord to first consult leaseholders in writing before entering into the contract
The Procedure for Consulting with Leaseholders
The law sets out a very specific set of requirements to follow in the preparation of section 20 notices. For those of you who are really interested in this you should read the 2003 government regulations which are still in force today.
There is a two-step process which must be followed by all landlords. This process is different depending on whether European public procurement law applies.
For smaller contracts the process involves sending out two notices. The first of which sets out the nature of the proposed contract in terms of what services are involved, how long the contract will be and the landlord’s reasons for wanting to enter into the contract. This first notice will also invite leaseholders to propose a company or person from whom a quote should be sought. Leaseholders should also be given an opportunity to comment on the proposals in writing. The second notice will include at least two estimates from companies or people to provide the services under the proposed contract. Leaseholders should then be given an opportunity to comment on which quote they think the landlord should accept.
For contracts of a higher value procured by publicly funded Landlords (such as Local Authorities and Housing Associations) European law says that the contracts must be advertised in the Official Journal of the European Union so that companies or individuals across the EU have the opportunity to bid for them. The consultation process is nearly the same except that leaseholders do not have a legal right to propose their choice of contractor.
Problems with the Consultation Process
Partly because the regulations are very complicated, partly because some landlords are not aware of them, and partly because the regulations can be restrictive to landlords who want to enter into some types of contract, landlords often get the consultation procedure wrong for qualifying long term agreements.
The most common error is not sending a section 20 notice at all. Sometimes landlords aren’t aware of the requirement, sometimes they forget, frequently though short contracts are allowed to run on beyond their initial period in effect turning them into qualifying long term agreements. This happens a lot with cleaning contracts and ground maintenance contracts.
There are also are a whole range of other mistakes landlords make. For instance, seeking estimates before the first stage of the consultation process (rather than after it) or failing to describe the true nature of the proposed agreements in the notices. You can’t be said to have consulted someone if you didn’t tell them what you were actually planning to do.
Are Qualifying Long Term Agreements a Good Idea?
A leaseholder also needs to consider whether a qualifying long term agreement is a really good way to manage their building or estate. Just because the law permits the use of long term agreements it doesn’t necessarily mean that they are a good idea.
There are a number of arguments which can be made in support for using qualifying long term agreement, and just as many against. Below are examples of arguments for and against.
Some arguments for using long term agreements:
- The quality of the service may improve as landlord and service provider develop a good working relation over the term of the contract. In short term contracts it is difficult to develop relationships.
- Service providers may offer lower prices in return for guaranteed work
- The process of finding good contractors is expensive in terms of advertising contracts and evaluating bids etc. By doing this less frequently, a landlord cuts down on administration costs which they need to charge back to leaseholders.
Some arguments against using long term agreements:
- The prices in the contract may start out good, but end up either being very expensive or too cheap for the contractor to continue with the contract. Whilst prices are set competitively at the outset of the contract, the contract will normally state a formula for how prices will go up during the term of the contract. A normal provision is to say that prices will increase by inflation. The problem with this, and other any other formula, is that in practice prices (particularly for building work) go down as well as up. They don’t always move in line with inflation or other measures and this inevitably means either the landlord ends up paying too much or the service provider ends up getting paid too little.
- There is a higher risk of service interruption. Landlords become reliant on a single provider in long term agreements, and may find it more difficult to replace a service provider who fails than a Landlord which has not developed this kind of reliance on a single provider
- It can be more difficult to enforce standards of service. A Landlord may simply have to ‘put up’ with poor standards because of the difficulties, and costs, involved in terminating a long term agreement.
- No matter how extensive the contract, it may not specify a fixed amount for a particular service or type of work. Where no price has been agreed in advance, there is a danger that the contract allows service providers to charge very high uncompetitive costs which a landlord may, in practice, be unable to challenge.
Leaseholders need to consider the pros and cons of long term agreements according to the circumstances. How long they are, what they are for, how prices will rise and similar issues. If leaseholders have concerns then they should state these to a landlord in a written ‘observation’ within 30 days of the date of the first of the two section 20 notices.
Are Qualifying Long Term Agreements the only way of improving services?
Leaseholders should also be aware that entering into a long term agreement is only one of a number of ways that a Landlord might attempt to improve the provision of services and works. For this reason, when a landlord proposes a long term agreement it would be wise for a leaseholder to ask them what problems they are seeking to address?, or how they believe the long term agreement will improve the provision of services/works? Depending on the answer, it may well be that the same problem could be addressed or aim achieved better by another method, such as improving the on-site supervision of service providers. It is not always the type of contract which is at fault, sometimes it is the way the landlord manages it. A change in the type of contract may not address the situation if the landlord is still mismanaging the new type of contract.
Want to know more about Qualifying Long Term Agreements?
Long term agreements are a complex subject and we have by no means covered all the relevant issues. If there is something else you would like to find out do please get in touch with us by Submitting a Question.
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