Service Charge: Payability of service charges where section 20 consultation procedure was not followed (Collingwood and others v Carillon House Eastbourne Ltd – 2021)

Where a landlord requires service charge contributions from tenants towards the cost of major works but has breached the statutory consultation procedure, is the tenant liable for the payment of service charges demanded?

The background

In Collingwood and others v Carillon House Eastbourne Ltd [2021], the 3 appellant leaseholders held 125-year leases of flats within a building which contained 7 residential flats in total. The respondent landlord owned the building, and the remaining 4 leaseholders were shareholders in the landlord company, although the appellants were not. All leases contained service charge provisions.

Consultation with leaseholders was required under section 20 of the Landlord and Tenant Act 1985 where qualifying works were proposed to be undertaken which would result in any leaseholder’s service charge contribution exceeding £250. In compliance with the requirements of section 20 consultation, the landlord was required to seek estimates for the works, including from any nominee tenants.

In respect of the proposed external redecoration and repairs, a leaseholder who was also the sole director of ‘Affordable Roofing Eastbourne Limited’ (“AREL”) nominated AREL as a contractor for the works. However, in its stage 3 statement of estimates, the landlord had listed two different contractor estimates. It transpired that the nomination of AREL had not been put forward to the landlord’s managing agent at the time and an estimate had not been sought. Upon the nominee tenant questioning why AREL had not been invited to quote, the landlord contacted AREL and invited them to provide an estimate. Whilst the quote provided by AREL was a lower quote, AREL were not recommended by the landlord’s surveyor because they had not supplied the price, specification, and other relevant paperwork. Eventually, the work was awarded to a third-party contractor and each tenant was required to contribute £5,342.53 towards the cost.

For the periods 2018 and 2019, the landlord also demanded sums from the leaseholders in respect of costs incurred by the landlord’s managing agent in running itself as a limited company.

The appellants brought an application under section 27A Landlord and Tenant Act 1985 in the First-tier Tribunal, seeking a determination as to the reasonableness and payability of the service charges demanded in respect of the major works and managing agent fees. The leaseholders stated that consultation had been defective, and the landlord accepted that it had not made an application for dispensation. Despite this, the FTT found no evidence of the leaseholders having suffered prejudice on the basis that the landlord had carried out some form of consultation and had sought further quotes when resistance was expressed by leaseholders as to the amount of the estimates obtained. Further, the FTT found that the management costs were recoverable through the service charge and were therefore reasonably incurred and payable.

The decision

On appeal, the Upper Tribunal found in favour of the appellant leaseholders. In considering each issue:

1. The Service Charges (Consultation Requirements) (England) Regulations 2003 (“Consultation Regulations”) were to be strictly followed, and that there is no room in the clear wording of the regulations for flexibility in their interpretation. The Upper Tribunal found that any contractor nominated must have its quote included in the statement of estimates supplied to leaseholders. The statement of estimates supplied in this case did not comply with the Regulations as it did not contain the AREL estimate, regardless of any rationale the landlord’s managing agent may have put forward to justify its exclusion from the notice.

The appeal succeeded on this issue, and the landlord was found to not to have complied with the requirements of the Consultation Regulations. The Upper Tribunal concluded that reference by the FTT to prejudice was wrong and irrelevant to the section 27A application before it.

2. The appellants also argued that they should not be liable for the managing agent’s fees. The Upper Tribunal found that the FTT had considered the incorrect issue here, referring to managing agents’ fees in respect of the external works instead of the managing agent’s charges for running the landlord company, including submission of its accounts and annual return. The leaseholders were only required to pay fees and disbursements incurred in the management of the property, not the management of the landlord company.

The appellants’ appeal therefore succeeded on this point and they were found by the Upper Tribunal not to be liable for the fees demanded.

Advice and action for landlords

This decision starkly highlights the importance of following strictly the Consultation Regulations in respect of qualifying major works or making an application for dispensation of those requirements where necessary. The tenants’ contributions towards the works in this case were limited to £250 each instead of the £5,342.53 that they were each charged, meaning that the landlord found itself liable for almost the entirety of the costs, and further was unable to recover its managing agent’s fees from the leaseholders.

Landlords are advised to carefully consider the service charge provisions as to whether costs incurred in the management of a property portfolio are recoverable through the service charge, and to ensure that the Consultation Regulations are followed.