The Court of Appeal decision in Francis v Phillips [2014] EWCA Civ 1395; [2014] PLSCS 300 will go down in legal textbooks as one of the leading cases on the effect of the consultation obligations in section 20ZA(1) of the Landlord and Tenant Act 1985. It confirms that landlords must consider the cost of work to be done in any particular project, as opposed to aggregating costs throughout the service charge year, when calculating whether the contributions required from leaseholders will be high enough to trigger requirements to consult with them beforehand.
However, the decision is notable for other reasons. The court was also asked to interpret provisions in the parties’ leases dealing with management charges. The service charge clauses listed the costs of estate management (which were to include amounts paid to architects, agents, surveyors and solicitors), together with a management charge of 5% of the total cost of providing the services, among the items of expenditure that could be included in the service charge.
The landlords claimed that the service charge should include £95,000 to cover wages paid to them by the company that managed the site (which was wholly owned and controlled by them), as well as levying a management fee amounting to 5% of the costs of all the services provided to the tenants. They argued that the service charge clauses listed two different items of expenditure relating to the costs of management in order to distinguish between management work done by professional agents and third parties, and their own management work. They believed that they were entitled to be remunerated for tasks that they were unable to delegate; for example, for time spent selecting and supervising the managing agent, for ensuring that the services that they were obliged to provide had actually been provided, and for making strategic decisions that no one else could take.
The Court of Appeal decided that there was nothing in the leases to support this and that the distinction would be extremely difficult, if not impossible, to apply. It was far from clear that the parties had intended landlords who were individuals to be entitled to recover wages paid to them by a company that was wholly owned and controlled by them in addition to a management fee. Consequently, the court decided that the landlords were entitled to the 5% management fee, but that their wages should be excluded from the service charge.
The court expressed concern about the number of leases that fail to make it clear whether landlords are entitled to charge for specific activities that they undertake personally, given that the reversion may be or become vested in an individual or a company. It suggested that draftsmen should address this, as well as dealing with the cost of general management and strategy, and that leases should state which of these costs (if any) are recoverable through the service charge.
To quote the Chancellor: “Lack of clarity on these common issues is capable of affecting huge numbers of lessors and tenants across the country and involving them in expense and disharmony. The reported cases show that many of the disputes turn on similar or nearly similar provisions. Those who draw up or approve residential leases for their clients are plainly under a duty to take care that there is clarity and certainty in relation to those matters.”
Allyson Colby is a property law consultant