Why should landlords ensure they comply with the section 20 procedures?

The Commonhold and Leasehold Reform Act 2002 (CLRA 2002) requires that long residential leaseholders must be consulted before a landlord carries out qualifying works or enters into a qualifying long term agreement which they intend to recover through the leaseholders' service charge.

Section 151 of CLRA 2002 introduced section 20ZA into the Landlord and Tenant Act 1985 (“the Act”) which came into force in England on 31 October 2003. The Service Charges (Consultation Requirements) (England) Regulations 2003 (SI 2003/1987) (the “Regulations”) set out the stringent procedures to be followed.

What are qualifying works?

Qualifying works is defined in the Act as “works on a building or any other premises”. This includes works of repair and maintenance. If there is a liability for costs of improvements in the lease, these can also be included. A landlord must consult if any one leaseholder will pay over £250 through the service charge in relation to the qualifying works.

There have been a number of cases on what constitutes “qualifying works” and how to identify if something is part of a related set of works or is one single unrelated set of works. The leading case in this area is the Court of Appeal’s decision in Francis v Philips [2014] EWCA Civ 1395.

• In summary, the Court of Appeal held that it is a question of fact and degree whether a set of works is one single set or part of a related set of works. The relevant factors are:
  Whether the “sets” of work are physically close to each other.
•  The timing of the “sets” of works.
• Whether the “sets” of works have any connection with each other.
• Whether they come under the same contract.

The Court of Appeal also held that qualifying works will often be significant or substantial but they do not have to permanently modify what was there before.

Therefore, landlords should follow the Court of Appeal’s guidance above. If the criteria are fulfilled, and the cost of the individual set of qualifying works will exceed £250 for any one leaseholder, the landlord must consult the leaseholders.

What are qualifying long term agreements?

A qualifying long term agreement is an agreement entered into by the landlord with a contractor for a period of more than 12 months. It is best to assume this covers ongoing contracts entered into after 31 October 2003.

Landlords must consult leaseholders where the amount payable by any one leaseholder under the agreement will exceed £100 including VAT in any accounting period.

Section 20 Consultation for Qualifying Works – The Process

The landlord’s consultation with the tenants must follow three distinct steps:

i) Pre-tender stage – Notice of intention

The landlord must give the leaseholders and the Recognised Tenants Association (RTA), if there is one, notice in writing of its intention to carry out the qualifying works.

The notice must describe in general the proposed works, state the reason why the landlord thinks the works are necessary, and invite the leaseholders to make observations (in writing) in relation to the works within a relevant period (usually 30 days but an end date must be specified). An address for the leaseholders to send their observations must be given in the notice together with an invitation for leaseholders to nominate a contractor to carry out the works.

ii) Tender Stage – Estimates and responses to observations & notification of estimates

The landlord must obtain at least two estimates for the proposed works and at least one of the estimates must be from a contractor unconnected with the landlord. NB: If during the relevant period one or more of the leaseholders nominate different contractors, the landlord must try to obtain an estimate from one of the contractors nominated.

Once the landlord has obtained the estimates it should send to the leaseholders (and RTA), a notification of the estimates (free of charge) which must include:

• A statement setting out the estimates for at least two of the contractors.
• If contact was made with a leaseholder nominated contractor, that contractor’s estimate should be included.
• A summary of any observations made by the leaseholders in the 30-day pre-tender stage and the landlord’s responses.
• Notification of the place and hours where all the estimates can be inspected (not just the ones referred to in the landlord’s statement).
• An invitation to the leaseholders to make observations on those estimates in writing and provide an address for them to be sent to. The date by which observations must be made (usually 30 days from delivery of the notice) must be included.

The landlord must have regard for any observations received by the date stated in the notice.

iii) Award of contract

The landlord should supply all leaseholders with a written notice stating the following:

• The reasons for awarding the contract or specify a place where those reasons can be inspected.
• Summarise any observations received during the 30-day tender stage and the landlord’s responses to them.

This notice must be sent within 21 days of entering into the contract with the contractor.

However, the landlord is not required to provide a notice to the leaseholders where the contract has been awarded to one of the leaseholder nominated contractors or to the contractor who submitted the lowest estimate.

Section 20 Consultation for Qualifying Long Term Agreements – The Process

i) Pre-Tender Stage

The landlord must give each leaseholder who will be asked to contribute through their service charge and the RTA a notice in writing of its intention to enter into a qualifying long term agreement.

The notice must describe the works or services to be provided (or provide a place and time where a description can be inspected free of charge), state the reason why the landlord thinks the agreement is necessary, and invite leaseholders to make written observations within a relevant period (usually 30 days from service of the notice). An address for the leaseholders to send their observations must also be given together with an invitation to nominate a contractor to be considered for the long term agreement (within 30 days).

ii) Tender Stage – Estimates, Proposals & Notification

The landlord must obtain an estimate from its chosen contractor and at least one other and prepare proposals. At least one of the contractors is to be unconnected with the landlord. NB: If during the relevant period one or more of the leaseholders nominate different contractors, the landlord must try to obtain an estimate from one of the contractors nominated.

Once the landlord has prepared the proposals it should give notice to the leaseholders (and RTA). Each proposal should be included with the notice or specify a reasonable place and time where the proposals can be inspected. Each proposal must include:

• A statement of the relevant matter.
• A statement of name and address of each party to the proposed long-term agreement.
• Any connection between the proposed contractor and the landlord.
• An estimate of the cost per leaseholder (if practicable) or cost to the building as a whole.
• Whether the proposed long term agreement is for management of the property.
• Whether the proposed contractor is a member of a professional body or regulation.
• The intended length of the agreement.
• A summary of observations received during the 30-day pre-tender stage and the landlord’s responses to them.

The notice should invite leaseholders to make written observations by a specified date (usually 30 days from the delivery of the notice) on the proposals and provide an address for them to be sent to.

There is no requirement to make all the estimates received available to the leaseholders.

iii) Award of contract

The landlord should supply to all leaseholders, within 21 days of entering into the contract with the contractor, a notice in writing stating the following:

• The reasons for awarding the contract or specify a place where those reasons can be inspected.
• Summarise any observations received from leaseholders in the 30-day tender stage and the landlord’s responses to them.

However, the landlord is not required to provide a notice to leaseholders where the contract has been awarded to one of the leaseholder nominated contractors or to the contractor who submitted the lowest estimate.

Failure to comply with the section 20 procedure

If the landlord fails to comply with the section 20 procedure in relation to the qualifying works, its ability to recover the costs of the works is limited to £250 for each tenant. For qualifying long term agreements, the landlord’s ability to recover any cost is limited to £100 per leaseholder per year. This means the landlord would have to pay any remaining balance themselves!

The First-Tier Tribunal (FTT) can dispense with the requirements for consultation if it is satisfied that it is reasonable to do so. The FTT would consider the prejudice suffered by the tenants due to the landlord’s failure to comply.

It is therefore very important that landlords ensure that they comply with the section 20 procedures.

This article originally appeared on the Practical Law website.