Residential Service Charge – Time for Reform?

Introduction

On Halloween in 2003, the Service Charge (Consultation Requirements) (England) Regulations 2003 (the “Regulations”) came into force, amending section 20 of the Landlord and Tenant Act 1985 (“LTA 1985”). This amendment set a financial limit to works carried out on a residential building, beyond which a landlord would have to consult with tenants. That threshold is £250 per tenant. The nature of the consultation is prescribed by section 20 LTA 1985.

There are two problems with it. First, the consultation process (prescribed by s20 LTA 1985) is expensive, time consuming and archaic. Secondly, the £250 threshold no longer reflects economic reality, nor does it take into account the vast variation in property values across the country.
Let us look briefly at how section 20 LTA 1985 works, then take each of those issues in turn.

The Current Requirements of Section 20

Section 20 LTA 1985 sets out the consultation process that must be undertaken when a landlord wishes to carry out qualifying works of repair, maintenance or improvement that would cost an individual tenant more than £250.

There is no prescribed form for notices under S20, however, any notices must comply with the requirements of the Regulations. These (in summary) include:

1. giving written notice to each tenant and any tenants’ association;
2. allowing a reasonable consultation period during which observations can be presented by tenants;
3. making the description of proposed works available for inspection at a place and at times that are reasonable with facilities for copies to be taken or sent to tenants on request;
4. setting out a contract statement that includes (amongst other things) details of the contractor and any relationship or connection between the landlord and that contractor.

Interpretation of the £250 threshold

One problem with a financial threshold for works is that the wily landlord can split the work up into phases or stages that individually fall below that threshold. In Francis v Phillips [2014] EWCA Civ 1395, Lord Dyson provided some guidance on how to assess what constituted a “set” of works, listing the following factors to be taken into account:

1. where the items of work are to be carried out (whether they are contiguous to or physically far removed from each other);
2. whether they are the subject of the same contract;
3. whether they are to be done at more or less the same time or at different times; and
4. whether the items of work are different in character from, or have no connection with, each other.
Useful guidelines as to what constitutes a set of works that would trigger a consultation requirement.

Issues with the consultation process

The consultation requirements are not easy to carry out properly. In Ashleigh Court Right to Manage Company Ltd v De-Nuccio[2015] UKUT 258 the Upper Tribunal concluded that the landlord had failed to comply with consultation requirements because the place and hours specified in the notice to tenants were not reasonable and estimates for the works were not available free of charge during those hours.

The current consultation process seems akin to a planning consultation. This is arguably a flawed model as a planning consultation is structured to bring the scheme to the attention of, and then inform, a public who may not be already engaged. In the case of a landlord and their tenants, there is an existing relationship, all parties are known to each other and all parties have an existing interest and level of engagement in the property.

Importantly, the process does not reflect the fact that it is often tenants who seek urgent or beneficial improvements for which they are willing to pay. They are understandably frustrated when having requested action by the landlord, there is then a consultation process which seems contrary.

Issues with the current £250 threshold

There are two issues with the current threshold. First, it is preventing the country from achieving energy efficiency targets. Secondly, it does not reflect the value of the property in question or the level of service charge paid on that property.

The European Union has a target of achieving 20% energy savings by 2020. The difficulty in implementing energy efficiency measures has been in part addressed by Article 19 of the Energy Efficiency Directive 2012, which obliges governments to look at barriers to energy improvement and address them.

Studies carried out in England and Scotland, suggest that, “The legal rules (or absence of rules) around decision-making processes create organisational barriers and impinge on the capacity of [property] owners to obtain funding for works …” In other words, the £250 threshold is one of the barriers to achieving energy efficiency because of the lengthy consultation process.

The second issue with the threshold is that it does not provide context. For some tenants, £250 may represent a sum higher than their annual service charge budget. For them, the current limit provides protection. For others, £250 may represent less than a week’s worth of service charge budget and a requirement to consult at this level of threshold is a nonsense. The value of each tenant’s property for which the works are proposed may be tens of thousands or tens of millions of pounds. Neither of these things is reflected in the current limit.

A proposed solution

The consultation process should be based on Civil Procedure Rules, which set out the timings for and methods of serving documents, disclosure and gathering responses in relation to a civil lawsuit. A consultation based on these rules should serve well for service charge expenditure, creating a “pre-action protocol” for consulting on works.

The threshold to trigger a consultation in relation to qualifying works expenditure should be based on a percentage of either an agreed property value or an agreed annual service charge budget, rather than a blanket £250. The result would be that super-prime central London tenants might only need to be consulted when a set of works cost an individual tenant over £5,000 whilst a tenant in low value accommodation would still be protected from unaffordable surprises.

Conclusion

Section 20 LTA 1985 needs reform along with the Service Charges (Consultation Requirements) (England) Regulations 2003. The per-tenant works limit threshold of £250 does not reflect reality. In addition, the consultation process is unfit for purpose. In my opinion the solution lies in a consultation process that mirrors CPR and an expenditure limit reflective of the values of either service charge budget or property. If the simplicity of the solution were not incentive enough, the government is obliged to reform this area of land law under Article 19 of the Energy Efficiency Directive 2012 – ideally before we start hollowing out this year’s pumpkin.