Francis -v- Phillips – The Court of Appeal Decision
“As you were and use common sense.”
The Court of Appeal has found in the case of Francis -v- Phillips that:
- The requirement to consult with tenants concerning Major or “Qualifying Works” will only take effect when the landlord wishes to carry out a major building project or a discrete set of Qualifying Works, which will require any one leaseholder to pay service charges in excess of £250.00.
- The landlord does not have to consult for every piece of Qualifying Work if the total costs over a full financial year will cause any individual leaseholder to pay more than £250.00 towards the cost of the annual maintenance works.
This overturns the decision of Sir Andrew Morritt sitting as the Chancellor of the High Court – and the Court of Appeal emphasised the use of common sense in establishing whether a set or sets of works were being carried out.
This decision will be a major relief to all freeholders and managing agents dealing with service charge calculation and collection. It also reflects the views of the original Trial Judge. The decision of Sir Andrew Morritt was widely criticised by commentators and the Court of Appeal said that Sir Andrew Morritt’s, “Aggregating approach was wrong and gave rise to serious practical problems, which Parliament could not have intended”.
The Court of Appeal also found on a secondary point that a landlord could charge both a general management fee by using a managing agent and charge directly for his or her employment.
The issue that had caused most concern was the definition of “Qualifying Works”. In this case Mr and Mrs Francis had carried out substantial works to a chalet park in Truro, which had resulted in very substantial service charges being demanded from the chalet owners without any consultation with them. The work was generally carried out in a haphazard manner, and Mr and Mrs Francis claimed that each single element of maintenance did not produce a likely contribution of more than £250.00 by any one chalet owner so no consultation was required.
His Honour Judge Cotter at the trial hearing took the view that a common sense approach to construction needed to be taken and that if the threshold for consultation was too low, and if all minor and non permanent works required consultation, the result would be commercially unmanageable to the detriment of both lessor and lessee. Whether works are indeed Qualifying Works would be a question of fact as to the nature and extent of the works in question.
The Chancellor of the High Court took a different view. He said the legislative changes under the Commonhold and Leasehold Reform Act 2002 and regulations meant that there is no longer reference to the cost of works but to the amount of the contribution. There is nothing in the 2002 legislation which required the identification of one or more sets of Qualifying Works, and this meant all the Qualifying Works during the financial year must be entered into the calculation of the £250.00 limit – unless the landlord is prepared to carry out any excess costs themselves. The issue therefore of whether or not there were sets of works was not appropriate. The £250.00 limit applied to the total value of the Qualifying Works carried out in the relevant year – this was referred to by the Court of Appeal as the “aggregating approach”
In the Court of Appeal hearing the leaseholders – and also the Secretary of State for Communities and Local Government who had intervened – argued that there should be a “sets approach”. In other words the intended works are examined and if any one piece of work or a set of works meets the £250.00 threshold then there will have to be consultation. This would allow the isolated cost of, for example, replacing a damaged door as a distinct repair would not mean the landlord had to go through the consultation procedure.
The Court examined examples of the respective effects of an “aggregate” and a “sets” approach on works and concluded that to adopt the aggregating approach would produce serious practical problems not intended by Parliament. It was unworkable and would create an additional administrative burden for landlords and costs of consultation for the leaseholders. If every piece of minor repair work that a landlord wished to carry out was subject to consultation there would be perpetual consultation, which would make the running of a site very difficult. The real protection afforded by the 1985 Act to residential tenants was that service charges – including the cost of Qualifying Works – had to be reasonable and reasonably incurred under Section 19, which was a sensible way to control routine works of repair and maintenance.
The Court rejected the Chancellor’s Judgment that there was no triviality threshold but in considering sets of works a common sense approach should be adopted.
With regard to Mr and Mrs Francis’s works, it was accepted that Mr and Mrs Francis did generally want to improve the site but did not plan or in any way tie all the various pieces of work together and, although it became more co-ordinated in time, there was no single scheme.
The elements and factors in considering in what a single set of Qualifying Works comprises of was a matter of fact and – although this is not an exhaustive list – would include:
- Where the items of work are to be carried out.
- Whether they are the subject of the same contract.
- Whether they are to be done at more or less the same time.
- Whether the items of work are different in character or have any connection with each other.
This decision has returned welcome certainty to the issue of consultation for major works and echoes what was understood generally by practitioners – and will bring considerable relief to them notwithstanding that it appears Sir Andrew Morritt’s decision was honoured more of the breach than the observance.
The judgement will re-emphasise that those managing properties will have to examine carefully the extent to which different items are separate or a continuation of the same works and whether the duty to consult arises accordingly.
It is also worth nothing that:
- The penalty for failing to carry out this exercise effectively will remain in that sums over £250.00 from each leaseholder will not be collectable.
- Tenants still enjoy the protection of any service charges being reasonable and reasonably incurred through Section 19.
- Full care and consideration of major works, with supporting justification for the carrying out and costs of those works and how they are organised, will still be essential.
If you have any queries concerning the matters raised please contact
Jeremy Teall – Partner and Housing Management Team Leader – on
020 8567 3477 or e-mail at email@example.com