Jonathan Seitler QC explains why the Court of Appeal’s reversal of the decision in Phillips v Francis is good news for both landlords and tenants
Phillips v Francis at a glance
- The decision provides clarity on the crucial question of what the £250 per tenant threshold relates to for the purposes of consultation with residential tenants under the Landlord and Tenant Act 1985
- It is a “per-set of works” threshold
- That means that consultation with tenants of residential premises is only required when the cost of any one particular “set” of qualifying works renders any one tenant liable to pay service charges in excess of £250
- That is NOT £250 per annum: it is £250 per set of works, whenever that set of works is done
- Guidance is provided on how to define the scope of one “set of works”
The decision in December 2012 of the former Chancellor, Sir Andrew Morritt in Phillips v Francis [2012] EWHC 3650 (Ch); [2013] 1 EGLR 47 was one of the most surprising property law decisions for many years (especially as neither side before him had contended for the decision he made).
Last Friday, the Court of Appeal (Dyson MR, Etherton C and Kitchin LJ at [2014] EWCA Civ 1395; [2014] PLSCS 300) reversed that decision.
Is it now a case of “as you were” for those professionals who need to work out whether the need for residential service charge consultation is triggered by the £250 per tenant threshold for qualifying works under section 20 of the Landlord and Tenant Act 1985 (the “1985 Act”)?
The answer is “no”. It is better than ever it was, from the point of view both of landlords and (sensible) tenants, because the Court of Appeal has fleshed out the previous test and provided valuable practical guidance.
To understand the nature of this, four things should be understood: (A) the position before the decision of Morritt C in the first Phillips appeal; (B) how Morritt C changed the law; (C) the precise way in which Morritt C has been overruled on the second appeal; and (D) what new guidance has now been issued.
Existing consultation requirements
(A) The position before the first appeal was based on an assumption made by the parties and the court in Martin v Maryland Estates [1999] 2 EGLR 53. Although in that case it was not fully argued, everyone seemed to agree with the landlord’s barrister Kim Lewison QC (as he then was), that a common-sense approach needed to be taken to distinct “batches” of qualifying works, so that the consultation threshold (then £1,000 in total as the cost of the works) would only bite in respect of any particular batch of works when the cost of that batch exceeded that sum.
(B) All was well with that understanding until the decision of Morritt C in the first Phillips appeal. Morritt C held that the Commonhold and Leasehold Reform Act 2002 (the “2002 Act”), which introduced the £250 per tenant limit instead of the £1,000 per works limit to qualifying works, scrapped the “batches” approach and imposed instead an “annual” approach, such that all qualifying works in any year that would involve the tenant paying more than £250 over the whole year, would require consultation, irrespective of whether the works that went to exceed that £250-plus a year were related to one another or not.
The decision of Morritt C caused panic and outcry. It meant, for one thing, that if the landlord had already exposed the tenant to £250 worth of service charge in any one year, it would have to consult on all works to a building or premises, even emergency work. That is impractical and expensive given the time and cost that must be allowed for consultation.
The real problem with Morritt C’s decision was illustrated with an example: imagine a residential block of flats with four tenants: the annual regulatory limit is 4 x £250 = £1,000. Assume the service charge year runs in accordance with a calendar year.
Three lots of minor works on a building each costing £75 take place in the first half of the year. The landlord has spent £225 on service charge items. There is no consultation because of the minimal nature of the works.
Unexpectedly, in September, the outer door on the flat breaks and a new door and frame is required. This would cost £800. A storm in November then causes window damage that would cost £400 to replace.
Under the sets approach, the landlord would not need to consult on any of these. No given set of works costs more than £1,000. He could respond immediately to the damage to the door and window. The tenants are still protected because they have the after-the-event protection of section 19 of the 1985 Act that costs were reasonable and reasonably incurred.
On Morritt C’s annual approach, the annual limit is exceeded by the broken door. The landlord is obliged to consult on it. This process requires at least two months. If he instead fixes the door straight away, he has no right to recover the full amount without dispensation. Seeking dispensation has attendant unrecoverable legal and administrative costs, the risk of non-recovery and delay. But, if he does not fix the door, the flats are unsafe and he is likely to have irate tenants.
The window exacerbates the problem. Given the door, the cost of the window is fully outside the annual limit. So the landlord has to consult or risk bearing the full cost himself, even though the works are for the benefit of the tenant.
Court of Appeal decision
(C) The Court of Appeal took on board that example in its entirety and as a result has now restored the “batches” or “sets” approach: the £250 is not related to an annual threshold but is related to the exposure of the individual tenant resulting from any given batch of qualifying work. The 2002 Act, it is now established, made no difference to the position under the 1985 Act. If Parliament had intended in 2002 to change the definition of qualifying work, it would have done that explicitly.
(D) In the course of its decision, however, the Court of Appeal expanded on what is meant by “sets” of work. The position is now much clearer than it was when all practitioners had to go on was the “common-sense” assumption made in Martin. It is in this sense that practitioners are now in a better position than previously to work out when the consultation requirements apply.
The Master of the Rolls held that to work out the limits of one “set” of works, all relevant factors must be taken into account: it is a “multi-factorial question”. Although four particular factors were identified, it was emphasised that those four factors were not an exhaustive list.
It will probably never be possible to draw up an exhaustive list, but for now, the author suggests that at least 10 factors are likely to be important when it comes to assessing where one set of qualifying works (works A) ends and where another (works B) begins, starting with the four identified by the Master of the Rolls. These are shown in the box, left.
There is another limb to Phillips concerning the interpretation of provisions relating to management charges.
Although the discussion is erudite and concludes with Etherton C issuing a stark warning to “those who draw up or approve residential leases” that they are “under a duty to take care that there is clarity and certainty in relation to those matters” (the precise categories of expenditure in relation to management that the landlord can recover through the service charge), the result ultimately turns on the wording of the particular clauses in the particular lease under consideration.
The second limb has far less general application than the important findings in relation to what the £250 per tenant threshold relates to for the purposes of consultation with residential tenants under the 1985 Act.
Ten factors to help work out how to define one “set” of works
1 Whether works A and B are carried out in contiguous places or far removed from each other
2 Whether works A and B fall under the same contract
3 Whether works A and B are done at more or less the same time or at different times
4 Whether works A and B are works to the same part of the building or premises
5 Whether works A and B are different in character from, or have no connection with, each other
6 Whether works A and B fall under the same programme or plan of work
7 Whether works A and B are physically dependent on each other
8 Whether the landlord had in mind works B when formulating the idea for works A
9 Whether the tenants were told about works A and works B on the same occasion
10 Whether works A would have had to have been done even if works B did not have to be done
Jonathan Seitler QC is a barrister at Wilberforce Chambers and appeared for the landlord in Phillips v Francis
