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The service charge demand I have received for major works is 70% more than the amount quoted on the section 20 notice. Is this a breach of the section 20 consultation requirements?

Reader’s E-mail:

My landlord followed correct procedures under section 20 regarding informing us of major works, a consultation period, quotes for the work etc. The problem occurred when we received the final bill which was massively over budget. At no time were we informed of the rising costs. Is there anything in section 20 which stipulates protection for a leaseholder regarding this?

Reply from Service Charge Dispute Guide

1. We understand your situation to be that of a leaseholder who has received an estimate of the cost of proposed work at the section 20 consultation stage. However, on completion on the works you received a service charge demand for the finalised cost which was approximately 70% greater than the amount quoted to you during the consultation process.

2. There are a number of grounds upon which you might, in theory, challenge your liability:

i. Under Section 19 (1) (a) of the Landlord and Tenant Act 1985 you might, depending on the facts of your case, argue that costs had not been ‘reasonably incurred’.

ii. If the quality of the works were substandard then the amount which you could be charged would be limited by Section 19 (1) (b) of the Landlord and Tenant Act 1985.

iii. You should also check whether the works undertaken fell within the list of rechargeable costs given within the service charge covenants of your lease.

3. However, given that your question relates to section 20 we shall focus our reply on this issue.

4. Before we give our substantive response we should make you aware that there is, amongst some leaseholders and industry professionals, a belief that there is a ‘rule of thumb’ (variously 15% or 20%) which is used by First Tier Tribunals to assess whether there has been a breach of the consultation requirements in the type of situation you describe.

5. We cannot tell with you with any certainty whether this rule, or something like it, is applied by First Tier Tribunals in practice. However, what we can tell you is that such a rule would, as a point of law, be incorrect.

6. There are, in theory, circumstances when a large price increase might not be a breach of the consultation requirements, and others in which a very small price increase of (say 5%) would be a breach of what is required by section 20 of the Landlord and Tenant Act 1985.

7. In drafting our response to you we are, in larger part, following the guidance given in the Upper Tribunal case of Southern Land Securities v Hodge [2013] UKUT 0480 (LC). The decision in this case sets binding legal precedent to be followed by the County Court and the First Tier Tribunal in terms of the way they should assess relevantly similar situations, of which we believe yours is one.

8. The detail of how landlords should consult leaseholders under Section 20 of the Landlord and Tenant Act 1985 is given in a item of secondary legislation, a ‘statutory instrument’, called the Service Charges (Consultation requirements) (England) Regulations 2003.

i. This statutory instrument, in its ‘schedules’, describes not one consultation process but five, each to be used in different circumstances depending upon what is being consulted upon and how those services or works are being procured.

ii. Fortunately, in respect of your specific query we do not need to identify precisely which process your landlord should have followed, as all three of the processes (schedule 3, schedule 4 part 1 and schedule 4 part 2) to be used in respect of major works all include the same requirement, which is the one which your landlord may have breached as a consequence of the 70% price increase:

“(2) The notice shall—
(a) describe, in general terms, the works proposed to be carried out or specify the place and hours at which a description of the proposed works may be inspected;”

9. In the Southern Land Securities case (a case in which a landlord was found to be in breach of the section 20 requirements) the question which the Upper Tribunal was required (on appeal from the LVT) to determine was whether the landlord was permitted to charge for additional works, which the LVT had decided were not referred to in the description given in the section 20 notice.

10. One point to notice about this case from the outset is that what concerned the Upper Tribunal in respect of section 20 was not the level of the final bill in relation to what was quote during the consultation period (indeed it appears the overall amount in fact went down), but rather whether the works which were actually carried out where those which were described in “general terms” in the notice.

11. The use of the phrase “general terms” in the regulations has, in practice, caused uncertainty for leaseholders, landlords and lawyers alike.

12. The legislation does not go onto define precisely what is meant by the term, nor how in practice to assess whether the works carried out were those described in “general terms” by the relevant section 20 notice.

13. Guidance on this point is given in the Southern Land Securities case. At paragraph 17 of the decision the Upper Tribunal tells us that:

“Whether a notice sufficiently describes in general terms the works proposed to be carried out is a question of fact and degree to be determined in the circumstances of each case.”

14. Further guidance is given in the discussion regarding the particular facts of the Southern Land Securities case. At paragraph 18 of the decision the Upper Tribunal observes that:

“Sometimes in these sorts of cases a problem is revealed which has to be done in order for the other work to be completed. Sometimes there are provisional sums and the work turns out to be more extensive or more expensive than was envisaged. But this case does not fall within those situations”

15. The point which the Upper Tribunal is making here is that in practice when repair works take place they can end up being expensive than expected because a landlord finds, on commencing the works, that more works than were originally thought need to be carried out in order to achieve that which the landlord set out to do.

16. As a general point (not discussed by the Upper Tribunal in the Southern Land Securities case) it is worth considering the practical aspects of undertaking repair works to an existing structure.

i. When a new structure is built it is possible to predict with some certainty what works will be required to complete that new structure. This is because the works start from ‘scratch’.

ii. However, such predictability does not exist in respect of the process of repairing an existing building. Once works start unknown facts about the condition of the existing structure may become apparent.

iii. For example, a landlord may decide to replace a door.

a) Once the door has been removed the builders may discover that the door frame has rotted and the brickwork underneath has degraded to the the point that it will not hold the weight of the replacement door.

b) Indeed, the process of removing the old door might have damaged the frame and underlying brickwork, through no fault on the part of the builders.

c) In such circumstances, replacing this brickwork and the old door frame would be necessary as part of the process of installing the new door and therefore these additional works are likely to fall within the description (in general terms) which the landlord might have given for the intended works as being the ‘replacement of the existing door’.

17. The Upper Tribunal penalised the landlord in the Southern Land Securities case in part because the additional works which were carried out did not appear to be relevant in this way to the actual works described in the section 20 notice.

18. The Upper Tribunal was also concerned that the additional works which were undertaken were predictable and that the landlord had no reason not to include them in the description of planned works given in the notice.

19. In determining whether the works your landlord undertook fell within the description (“in general terms“) given in the section 20 notice, and therefore whether or not there was a breach of the section 20 consultation requirements, the Southern Land Securities case suggests that you need to look at two connected issues:

i. Whether the additional costs were related to additional works which were, in a practical sense, required in order to successfully complete the works described in general terms in the section 20 notice?

ii. Whether the landlord could have been reasonably expected to have been able to identify the need to carry out these extra works, to which the additional costs related, at the pre-consultation stage, and therefore would have been able to have included a description of those works in the section 20 notice?

20. These types of case are rarely clear cut.

i. However, there are occasions when a landlord sets out to do one thing (such as to repair a roof), but decides to also another thing (such as repair windows), at the same time because of convenience or practical cost savings (for instance utilising scaffolding which was there anyway).

ii. In such circumstances the law requires a landlord to undertake further consultation on these additional works, and if they do not then they run the risk of being financially penalised in respect of the amount they can recharge to leaseholders on the basis of non-compliance with the section 20 requirements.

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