The consultation requirements in respect of qualifying long-term agreements do not apply where agreements are signed before flats are constructed or let.
Sections 19 and 20 of the Landlord and Tenant Act 1985 limit residential service charges to amounts that are reasonably incurred and cap the sums that landlords can charge, unless they consult with tenants first or the court agrees to dispense with the consultation requirements. In particular, landlords must consult before contracting for work that will cost more than £250 per leaseholder or entering into long-term agreements for the provision of services.
The requirement to consult before entering into qualifying long-term agreements came into force on 31 October 2003, following the enactment of the Commonhold and Leasehold Reform Act 2002. The legislation applies to agreements for terms of more than 12 months and the Service Charges (Consultation Requirements (England)) Regulations 2003 set the statutory cap at £100 per leaseholder where landlords fail to consult.
BDW Trading Ltd v South Anglia Housing Ltd [2013] PLSCS 167 deals with a significant and ground-breaking point of law. The issue for the High Court was whether the consultation requirements applied to an agreement for the provision of electricity and hot water, which was signed before any of the flats in a development were let and was for a term of 25 years. Did the term “landlord” mean “anyone who is, or who at any later time becomes, a landlord”? The tenants argued that there was no requirement for an identifiable tenant when an agreement is made and that it would be all too easy to avoid the consultation requirements, unless the provisions were interpreted so as to apply to potential future landlords.
The court disagreed. The judge noted that the 2003 regulations exempt agreements for terms of up to five years from the consultation requirements if there are no tenants of a building when the agreement is made. He accepted that this suggested that the draftsman believed that the Act did apply to agreements entered into where there are no tenants, but thought that the draftsman had misunderstood the primary legislation.
The original statutory provisions applied to the costs of work carried out on a building. The term “landlord” enjoyed its usual meaning in the legislation in its original form, in that it denoted a landlord in relation to an existing tenancy, and Parliament had not altered the definition when it brought service agreements within the scope of the statute.
It would be absurd to interpret the legislation as imposing an obligation to consult with non–existent consultees. In the absence of tenants, consultation was impossible and it was unrealistic to suggest that developers could overcome this difficulty, and recover more than £100 per tenant per annum, by obtaining dispensation from the consultation requirements from a tribunal that normally hears adversarial disputes.
The judge dismissed suggestions that the tribunal could require prospective landlords applying for dispensation to demonstrate that they had obtained competitive bids, that the rates being charged were within the market range and that the tribunal could grant dispensation on condition that prospective tenants were informed of its decision in advance of any letting. The judge suggested that prospective tenants should instead enquire about the level of charges before entering into leases, and reminded the parties that tenants would still have the protection of section 19 if costs are unreasonable.
Allyson Colby is a property law consultant