Landlords, property managers, tribunals and, yes, lawyers are all still getting to grips with the implications of the much-discussed Phillips & Goddard v Francis case. Four months on from that landmark major works judgment, Brady Solicitors sets out a pragmatic approach to dealing with the current uncertainty.
Current case law states that a landlord can only recover £250 per leaseholder towards the costs of qualifying works unless he, the landlord, has followed the statutory consultation process or obtained dispensation from the LVT.
By way of reminder, the High Court judge in the Phillips case ruled that major works costs could no longer be considered on a project-by-project basis but must instead be considered ‘in the whole’.
The implication of this ruling is huge and managing agents have quickly found that, without the ability to separate out both proactive and routine work into individual projects, the statutory limit of £250 per leaseholder is being reached all too soon.
Although it has been recently reported that permission to appeal against the High Court decision has been sought, we must assume we are stuck with the decision for at least six months – even if the leave to appeal is granted.
As we get to grips with this ruling and its implications, we suggest there are three broad options for the property manager to discuss with his clients when considering how to ensure full recovery of the costs of qualifying works:
- follow the statutory consultation route
- obtain dispensation from the LVT
- do nothing
These options must be considered in the context of the planned expenditure, the nature of the block, and your relationship with the leaseholders. You may need a different strategy for each block and indeed it is unlikely that any managing agent can take a ‘one size fits all’ approach.
The first step is to look at your likely expenditure on the block for the coming year, including routine repairs and maintenance. If it will exceed £250 for any individual leaseholder (taking into account their individual percentage contributions) then the landlord is at risk of not being able to recover the full amount if you fail to consult or secure dispensation from the LVT.
The first option, statutory consultation, has various stages to inform leaseholders of the nature and necessity of the works, and then the estimates obtained for completing them. Leaseholders can make observations about the works themselves and any proposed contractor, and are entitled to propose their own contractor.
It can be a time-consuming process but the legislation essentially exists to protect leaseholders, to allow them an involvement in the works carried out at their premises and, in particular, how their money is spent. It also gives reassurance, before the works are started, that the landlord can recover his costs through the service charge.
Option 2, dispensation from consultation, has been the subject of recent scrutiny. The Daejan ruling in the Supreme Court earlier this year set a precedent by considering the degree of prejudice caused to the leaseholders by the landlord’s failure to follow the statutory consultation procedures.
Whilst Daejan is a ruling for common sense, considering as it does the impact of any errors in the consultation process as opposed to simply the presence of the errors, it reinforces the importance of acting at all times in the best interests of the leaseholders, of being transparent, engaged and knowing your blocks.
If you opt for the dispensation route you will need to demonstrate to the LVT beyond doubt that you have caused no prejudice to the leaseholders. In practical terms this means you will need to be able to show that the leaseholders have been involved with the planning process and are aware of how and where the money is being spent.
Dispensation is a practical and sensible option for managing agents with good leaseholder relations that are willing to engage in regular, open and transparent communications, and to demonstrably act at all times in the best interests of the leaseholder.
The third option to discuss with your RMC, RTM or landlord client is to sit tight and do nothing. This is clearly the riskiest of all three routes but there may well be circumstances where you would advise it to be the best commercial decision.
For example, if when you have done your expenditure calculations and there is only a marginal excess over the allowed £250 limit, you may take the commercial view that the cost involved in the consultation process (recovered of course through the management fee) would far outweigh the sum that your client would be prevented from recovering. But you can’t make this decision until you have done the calculations!
Equally, if you know your block well and are comfortable that you have a settled and trusting group of leaseholders, you may take the pragmatic view that an amount in excess of the £250 limit would not be challenged and so there is no need to invest in either statutory consultation or dispensation.
From your point of view, it is important that your clients understand each of three options. If the landlord takes a commercial view, and opts to “do nothing