Legal notes James Driscoll reviews the much-awaited decision in Phillips v Francis
Key points
- “Those who draw up or approve residential leases are plainly under a duty to take care that there is clarity and certainty in relation to those matters” [88]
- “The real protection afforded by the 1985 Act to residential tenants is that all service charges must be reasonable and reasonably incurred under section 19. This is the sensible way to control routine works of repair and maintenance which are unlikely to be the subject of a detailed plan in advance” [29]
Two of the most common disagreements over residential service charge collection are first, whether there has been compliance with the consultation requirements (in section 20 of the Landlord and Tenant Act 1985 (the “1985 Act”) and the regulations made under that provision); and second, on the interpretation of the relevant terms of the leases concerned. Both of these issues have been considered in Phillips v Francis [2014] EWCA Civ 1395; [2014] PLSCS 300, in an important and eagerly awaited decision which should bring some clarity to these issues, particularly on the application of the statutory consultation procedures to qualifying works.
Background to Francis
Situated on a site in St Merryn, Cornwall, are some 150 chalets (and other buildings) held on 999-year leases. The freehold of the site was sold and the new landlords (Mr and Mrs Francis), after some discussions with the leaseholders, embarked on a modernisation programme. There was no consultation under section 20 of the 1985 Act.
Although the modernisation plans met with the approval of the chalet owners, the subsequent increase in their service charges was not welcomed. Litigation ensued. The chalet owners challenged the charges for 2008 and 2009, which included the costs of works and the freeholder’s management fees. There had been no consultation on the works carried out and no dispensation from this statutory requirement. As to the management charges, the lease provided that 5% of the costs of the service charges were to be charged to cover the management of the estate. In addition, a company was set up (Francis Leisure Ltd) on behalf of, and wholly owned by, the landlords, which made additional service charges representing the wages paid in employing Mr and Mrs Francis.
The litigation has been protracted. Nearly five years ago the High Court decided that the 1985 Act service charge provisions apply to “holiday homes” (see [2010] EWHC B28 (QB); [2010] 2 EGLR 31).
High Court litigation
In this latest decision, the Court of Appeal was dealing with an appeal from the High Court ([2012] EWHC 3650 (Ch); [2013] 1 EGLR 47) which in turn was considering an appeal from the county court. Allowing the leaseholder’s appeals, the High Court had decided that the full service charges demanded were irrecoverable for want of consultation and that, as a matter of the correct construction of the leases, the landlords could not charge for their time managing the development, though the 5% charge is allowable in principle. It was against these decisions that the landlords appealed to the Court of Appeal.
The High Court decision on recovery of service charges drew a considerable body of criticism, particularly from those involved in the management of residential leasehold premises. In practical terms, it seemed to require landlords and managing agents to consult with leaseholders over all works in a particular service charge period where it is likely that the bill for that period might require any leaseholder to pay more than £250 towards the landlord’s costs.
The High Court decided that qualifying works are all the works carried out for which the landlord is entitled to make service charges and where contributions are payable on an annual basis. The limit above which the consultation requirements apply (£250 per leaseholder) is applied to the works carried out in a particular year. Putting this another way, section 20 requires a landlord to consult (or seek a dispensation) by aggregating all works in a given year without dividing them into separate sets of qualifying works.
The Court of Appeal decision
The Court of Appeal disagreed with this “aggregating approach” as it found it to be an approach that creates serious practical problems since “it requires that, at the very latest, once the [£250] limit… has been reached… the landlord must consult… on any service charge items however small they may be” [26]. If this were required for every piece of minor repair work the landlord had to carry out over a year “there would have to be perpetual consultation” [28].
The main protection to leaseholders afforded by the legislation, reasoned the court, is the basic requirement that all service charges must be reasonable and reasonably incurred (provided for in section 19). Moreover, the annual limit adopted by the High Court is inconsistent with the 1985 Act, which provides that recovery of charges is not limited to the period to which the demand relates.
So, one must concentrate (with section 19 in mind) on single items of works, which is essentially a question of fact and degree when factors such as whether one set of works are contiguous to another item, or subject to the same contract, or done at the same or at different times.
As to the issue concerning the management charges, the High Court decided that the landlords could not claim both the 5% charge as well as the wages paid by Francis Leisure Ltd to Mr and Mrs Francis. The Court of Appeal agreed with this conclusion, though for different reasons to the High Court.
The Court of Appeal decided that as a matter of construction of the leases, the parties could not have intended that, in effect, the landlords could recover twice for managing the estate, once by the lease clause that allows them to charge 5% of their costs for a particular period and twice by incorporating a company that provided management services to the estate which employed the landlords and paid them salaries. In closing, the court commented on the lack of clarity in many cases of lease provisions dealing with service charges, a lack of clarity that is capable of affecting huge numbers of lessors and leaseholders which can cause expense and disharmony.
Professor James Driscoll is a solicitor and a writer
