Must a superior landlord consult subtenants on works and agreements? James Driscoll discusses a case which ruled on this issue
Key points
- Statutory consultation requirements apply where a landlord is considering incurring expenditure for works, or before entering into certain long-term agreements.
- The Upper Tribunal decided that a superior landlord must consult with all leaseholders or subleaseholders who pay service charges
In the seminal case of Oakfern Properties Ltd v Ruddy [2006] EWCA Civ 1389; [2006] 3 EGLR 30, the freeholder of a block in mixed residential and commercial use had the expense of managing the building as a whole. It let some of the building for commercial use and it granted a head lease of a number of flats which were all let on long sub-leases. The head leaseholder reimbursed the freeholder for 90% of the expenses of maintaining the building. In turn it recovered its expenditure from the 24 flat leaseholders. One of them, Mr Ruddy, it was decided, was entitled to challenge his service charges in the leasehold valuation tribunal (as it was then known).
The court decided that a head landlord of residential units who pays the freeholder charges for the upkeep of the building is paying a “service charge”, as defined in the Landlord and Tenant Act 1985 (“the 1985 Act”). It also decided that a flat owner who has a sublease and pays towards the head landlord’s charges has the necessary standing to challenge charges incurred by the freeholder (under the 1985 Act).
But there are other issues in this situation. Chief among them is: who is to carry out the statutory consultation required under section 20 of the 1985 Act where there is a head lease and subleases of flats?
Who should consult?
Put another way, who should a freeholder consult over service charges where there is a head landlord? This was perhaps the most important of the four preliminary issues decided by the Upper Tribunal (“UT”) in Leaseholders of Foundling Court and O’Donnell Court v London Borough of Camden and others [2016] UKHT 366 (LC); [2016] PLSCS 233.
The litigation concerned the Brunswick Centre, a Grade II listed residential and shopping centre in Bloomsbury, London. Built in the 1960s, it is thought to be one of the earliest mixed-use developments. The residential section is leased to the London Borough of Camden (“Camden”)for use as council housing, while the developer retains ownership of the structure and shopping areas. Eighty-seven of the flats have been sold and are owned leasehold.
Under their head lease of the flats, Camden contributes towards costs incurred by its landlord, the freeholder of the centre. In addition, Camden must keep parts of the building in repair. The flat long leases contain service charge obligations in the usual fashion. Leaseholders are required to contribute to the costs of Camden’s payments to its landlord, the freeholder.
The litigation
Proceedings were launched by the leaseholders challenging the recoverability of costs incurred by the then freeholder for major works undertaken between 2005 and 2006. As the UT observed, these works “were not a success” and further remedial work was needed. In addition to Camden there were four other respondents to the application, one of which (Allied London) was the freeholder which carried out the major works. The complaints included:
- allegations over the quality of the works;
- the leaseholders’ claims that they were not consulted by the freeholder under section 20 of the 1985 Act; and
- that such consultation that was undertaken by Camden was faulty. (Allied London maintained that its only obligation was to consult Camden over service charges and Camden had passed on the consultation notices it received from Allied London).
The statutory consultation requirements under the Service Charges (Consultation Requirements) (England) Regulations 2003 apply where a landlord is considering incurring expenditure for works, or before entering into certain long-term agreements.
An application was made under section 27A of the Landlord and Tenant Act 1987. Given the scale of the issues, the chamber president of the First-tier Tribunal directed that the application should be transferred to the UT for a determination.
The outcome
The issues were keenly contested and all parties pointed to practical problems which would arise if their position did not prevail. The UT decided that the freeholder that is to carry out works (or enter into long-term agreements) must consult not only with its tenant (Camden in this case) or tenants, but also with any subtenants who pay service charges. Under the 1985 Act, the expression “tenant” includes subtenants and the consultation must take place for costs incurred by or on behalf of the landlord or any superior landlord. Under regulation 1(3) it is the landlord which intends to do the works that must carry out the consultation. Applied to this case, it was clearly Allied London, not Camden, which intended to carry out the works.
Following the ruling on this point and other preliminary issues, hearings of the challenges to the charges are scheduled to start in April 2017. Presumably Camden may seek a dispensation from the consultation requirements and, in light of this preliminary decision, Allied London will also have to apply for dispensation. Without such dispensation the flat leaseholder’s contributions are capped at £250 per leaseholder.
No doubt all sides will have regard to the decision of the Supreme Court on the appropriate approach to dispensation in Daejan Investments Ltd v Benson and others [2013] UKSC 14; [2013] 2 EGLR 45. The court decided that compliance with the consultation requirements exists to protect leaseholders against excessive or unwarranted charges; it is not an end in itself. Tribunals should use their dispensing jurisdiction with that purpose in mind.
James Driscoll is a solicitor and a writer and the consulting editor of the Handbook of Residential Tenancies
