Landlord and tenant – Service charge – Major works – Consultation – Appellant management company demanding advance payment from respondent leaseholders in respect of proposed major works to residential building – Whether appellant failing to comply with consultation requirements of section 20 of Landlord and Tenant Act 1985 – Whether amount demanded unreasonable – Appeal allowed in part
The appellant was the management company for a house in London, N3 which had been converted into four flats. Each flat was let on a long lease on terms that provided for the payment of a service charge. The respondents were the leaseholder of two of the flats; the leaseholders of the other two were directors of the appellant.
The appellant proposed to carry out major works to the property to which the statutory consultation requirements in section 20 of the Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations 2003 applied. It accordingly served a notice of intention on the respondents, notifying them of the proposed works and inviting them to make observations and suggest possible contractors.
The appellant then obtained three estimates for its proposed works. Each estimate contained some items which had not been specified in the notice of intention. The cheapest estimate was £34,200, inclusive of VAT. The appellant sent copies of the estimates to the respondents and invited written observations, but received none. It then notified the respondents of its intention to award the contract to the cheapest contractor (M). It also issued each of the respondents with a demand for £10,200 in respect of the cost of the proposed works.
The respondents disputed the validity of the demands. The first-tier tribunal (FTT) decided that the statutory consultation had been defective, primarily because the estimates provided were insufficiently detailed. It also expressed concerns about M, after the respondents adduced evidence that it was not registered as a building company and that, between 2001 and 2005, it had been involved in the illegal export of arms to Iran. The FTT considered that there was a risk that some of the money might be paid to M and decided that any estimated demand was premature until an adequate specification, including satisfactory references, safeguards for security of funds, and supervision of the work had been successfully tendered.
It concluded that the £10,200 charge was not reasonable and was not payable save for the sum of £250 per flat, that being the statutory maximum in cases where the consultation requirements had not been either met or dispensed with. The appellant appealed.
Held: The appeal was allowed in part.
(1) A notice of intention, required to be served by a landlord under the 2003 Regulations where it intended to carry out qualifying works, had to describe the proposed works in general terms. The landlord was also obliged to obtain written estimates “for the carrying out of the propped works”. The word “estimate” was not defined in the 2003 Regulations. There was nothing in the regulations that required the estimates to contain unit prices or specific details of the areas on which the estimates were based. So far as the FTT had based its decision on those points, it had been wrong to do so. However, the estimates had to be estimates for the carrying out of the proposed works, which were the works described in general terms in the notice of intention, and there had to be a statement, as regards at least two of the estimates, referring expressly to the estimated cost of the proposed works. None of the three estimates obtained by the appellant complied with those requirements since each included work that went beyond the proposed work. Accordingly, the amounts specified in the relevant statement were not the estimated cost of the proposed works, but were instead the estimated cost of those works plus additional works. It followed that the appellant had not complied with the 2003 Regulations.
(2) However, the FTT had erred in limiting the amount payable by the respondents in advance in respect of the works to £250. The limitation on the tenant’s contribution under section 20 of the 1985 Act, in cases where the requirements of the 2003 Regulations had not been met, was referable to costs incurred by the landlord in carrying out the work rather than in respect of work to be carried out in the future: see section 20(2) and (3). It followed that there was no statutory limit to the amount that could be recovered by way of an on-account demand under the lease, other than by reference to the requirement of reasonableness under section 19(2). It was therefore not necessary that there should be a valid consultation process before a sum in excess of £250 could be recovered by way of a service charge in respect of intended works.
(3) The test of “reasonableness” in section 19(2), in respect of a service charge payable before the relevant costs were incurred, was the same as that under section 19(1). It involved more than a mathematical exercise of looking at the costs of the estimates and the amount claimed. There was a two-stage test, asking first whether the decision-making process was reasonable and, second, whether the sum to be charged was reasonable in the light of the evidence: Southall Court (Residents) Ltd v Tiwari [2011] UKUT 218 (LC); [2011] PLSCS 181 and Carey-Morgan v De Walden [2013] UKUT 134 (LC); [2013] PLSCS 67 applied.
The fact that there had been a failure to comply with the 2003 Regulations might be relevant to the reasonableness of the amount to be paid under section 19(2). However, it was not determinative but was simply a factor to be taken into account.
Further, the risk of some of the money being paid to M was not a good reason for determining that the on-account demand was unreasonable. First, it was not clear that the contract would be awarded to M in the light of the evidence before the FTT. Second, the fact that M had criminal convictions for illegal export of arms to Iran in 2005 or before said very little about its position in 2015. Third, it was normal for a building contractor to expect payments in advance and as the contract progressed. Fourth, there was no basis for the statement that a payment in advance was premature until an adequate specification, including satisfactory references, safeguards for security of funds and supervision of the work, had been successfully tendered. Any such requirement would largely emasculate the provisions for payments in advance. It followed that the FTT had erred in its approach to section 19(2) and its decision could not stand.
(4) It was appropriate to order an advance payment of £7,810.50 for each respondent by reference to the lowest estimate, less the cost of work that was not included in the proposed works specified in the notice of intention. In concluding that such a payment was reasonable, relevant factors included: (i) the fact that the works needed to be done and there was no basis for delaying them, so that it could not be said that an application for an advance payment of service charge was premature; and (ii) the fact that the appellant, while not fully complying with the statutory consultation procedure, had attempted to do so, whereas the respondents had not seriously engaged with it at all. In the absence of any comments or proposals by the respondents, the appellant was entitled to conclude that they had no serious objection to the proposed works.
Brynmor Adams (instructed by Comptons LLP) appeared for the appellant; Mukhtiar Singh (instructed by direct access) appeared for the respondents.
Sally Dobson, barrister
Read a transcript of 23 Dollis Avenue (1998) Ltd v Vejdani and another here
