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Should my housing association have been consulted before the developer entered into a 5 year agreement with an agent to manage the development?

Reader’s E-mail:

The development is a purpose built block of flats. A housing association bought off plan long before the development was completed. The association was a tenant of the block at that time. The landlord entered into a long term contract with the managing agent before any other flat were sold but AFTER the association become a tenant. That agreement lasted for five years before being renewed. In my opinion this should have been consulted with the association at the time as there was a tenant and the exclusion should not apply.

Reply from Service Charge Dispute Guide

1. The legal issues involved are complex, and the answer to your query is far from straight forward or obvious. We will be unable to provide you with a clear answer – indeed that answer will depend on the particular facts of your case – but what we will attempt to do is to talk you through these legal issues with a view to providing you with a clearer understanding of how the section 20 consultation rules are to applied in this situation.

2. From your e-mail we understand your situation to be that of a long leaseholder (a person with lease of over 21 years) whose landlord is a housing association holding a head lease over your property. This makes you what is termed an ‘under lessee’.

3. In your e-mail you do not state whether the housing association holds a single lease over the building or individual head leases on each flat. This may, as discussed below, be something you need to establish as it has a potential bearing on the legal position in this situation.

4. Under section 20 of the Landlord and Tenant Act 1985 a landlord must meet the ‘consultation requirements’ before entering into a ‘qualifying long term agreement’ or the amount they can charge as a service charge to the relevant tenant (which includes long leaseholders) is limited to £100 in a 12 month period.

5. Your query is whether this requirement to consult arose between your landlord and the ‘superior landlord’ (maybe the freeholder, maybe a management company) when they entered into a contract to provide management services in respect of your building and/or estate.

6. The only statutory definition of a qualifying long term agreement is given in section 20ZA of the Landlord and Tenant Act 1985. This states:

“qualifying long term agreement” means (subject to subsection (3)) an agreement entered into, by or on behalf of the landlord or a superior landlord, for a term of more than twelve months.

6. In the High Court case of Paddington Basin Developments Ltd and others v West End Quay Estate Management Ltd [2010] EWHC 833 (Ch) the Judge decided that there were three elements to this definition:

i. an agreement

ii. entered into, by or on behalf of the landlord or a superior landlord,

iii. for a term of more than twelve months

7. From the description in your e-mail, the contract entered into by the superior landlord appears to contain elements i. and iii.: the contract is likely to contain binding rights and responsibilities, and the term was for a defined 5 year period.

8. We shall come back to element ii. in a moment.

9. The next thing to consider is whether the contract might fall within the list of ‘excluded’ contracts given in regulation 3 of The Service Charges (Consultation Requirements) (England) Regulations 2003 in respect of which the requirement to consult does not apply. These exclusions are:

i. Employment contracts

ii. Contracts between a public authority and a tenant management organisation, and a body established under section 2 of the Local Government Act 2000.

iii. Contracts entered into before there were any tenants, so long as the contracts last no longer than 5 years.

iv. Contracts entered into before the regulations came into force.

10. Exclusion i. clearly does not apply.

11. Unless the superior landlord is a public authority and the managing agent is a TMO or ALMO, or similar body, then exclusion ii. also does not apply.

12. So long as the original contract with the managing agent was not entered into before the 31st October 2003 in England (or 31st March 2004 in Wales in respect of the near identical The Service Charges (Consultation Requirements) (Wales) Regulations 2004) then exclusion iv. does not apply either.

13. Exclusion iii. needs to be discussed at more length because in the case of BDW Trading Ltd & Ors v South Anglia Housing Ltd [2013] EWHC B10 (Ch) the High Court decided that this part of regulations contradicts the Landlord and Tenant Act 1985 and therefore has no application in law.

14. This point is closely connected to question of whether the agreement in question (between the superior landlord and the managing agent at your building) contained element ii. of the definition of a qualifying agreement given by the Judge in the Paddington Basin Developments Ltd case: namely the the contract be “entered into, by or on behalf of the landlord or a superior landlord”.

15. The reasoning of the Court in the BDW Trading Ltd case is in that order to be considered a ‘landlord’ or ‘superior landlord’ you must have a tenant. If there is no tenant then the party letting the contract is not a landlord and therefore, the High Court concluded, section 20 does not apply.

16. Exclusion iii. stated above is, on this reasoning, meaningless. If there were no tenants then no obligation to consult arose in the first place, and therefore the restriction of the contract to 5 years was a mistake on the part of whoever drafted the regulations. If there was no requirement to consult, the High Court decided, then whether the contract was more or less than 5 years did not matter.

17. The question of whether the superior landlord needed to consult your housing association is therefore simply a case of deciding whether:

i. The housing association was a tenant at the time the contract was let,

ii. and whether the relevant matters in the contract resulted in your housing association being charged more than £100 per year for relevant costs.

18. To deal with the second of these questions first, you need to determine whether your landlord receives a charge of £100 or more per year in relation to costs which are defined as being service chargeable costs in the head lease held by the housing association.

19. Very likely they do, and even more so if the landlord holds a single head lease over the building, rather over individual flats, because the total charge to the housing association is the aggregate value of all the contributions required in respect of the individual flats within the block.

20. If you have not already done so you need to obtain a copy of the head lease relating to your property in order to check these points.

21. The next thing to check, and this relates to whether the housing association was a tenant at the time the contract was let, is the date the head lease held by the housing association for your flat was granted.

22. In order to be a tenant under the definitions given in sections 30 and 36 of the Landlord and Tenant Act 1985 your Landlord needs to have held a lease. A contract to enter into a lease does not make the housing association a tenant; an actual lease needs to have been granted.

23. To establish whether this was the case is a matter of checking the date of the relevant head lease against the date upon which the superior landlord entered into the contract with the managing agent.

Click on the link to read more Reader’s Questions and Answers on Consultation (Section 20)