Wright Hassall acted for a residential landlord in carrying out a major works consultation under Section 20 of the Landlord and Tenant Act 1985.
The landlord was the management company of a block of 20 flats in Birmingham which had recently acquired the right to manage, due to lack of maintenance by the former managing agent.
The management company needed to replace the windows in the four storey block of flats. The work was going to cost around £75,000 and the directors sought advice from us on how to collect this money to carry out the work.
What is a Section 20 Consultation?
Landlords of residential dwellings (or management companies which collect service charge) are required to consult with leaseholders before undertaking works of a certain value or entering into long-term agreements for the provision of services. A common example of major works is the replacement of a roof of a block of flats. A long term agreement could include a garden maintenance contract.
What are the consequences of not carrying out the consultation process?
If a landlord fails to follow the proper consultation process, then it will be limited to recovering the sum of £250 from each leaseholder under the service charge, regardless of the actual cost of the works. This can have a significant effect on cash flow and a landlord’s ability to carry out the works.
If a landlord wants to carry out works which will cost more than £250 per affected leaseholder, and put the cost through the service charge, then it must consult.
Who must carry out the consultation?
Under the legislation, “landlord” is defined as a person who has the right to enforce payment of a service charge under a long lease. Therefore, this will include a management company whose function it is to collect service charges, for example a right to manage company.
The process
The consultation process is a three stage process, which requires service of three notices on the leaseholders by the landlord, giving specific periods of time for the leaseholders to respond.
The first notice is the Notice of Intention and must describe the proposed works, give reasons for the works and specify when and where observations should be sent. Leaseholders should be informed that they may nominate a contractor of their choosing to carry out the proposed works and have a period of at least 30 days from the date of service of the notice to give their observations or nominations.
The second notice is the Notice of Estimates, where the landlord must provide estimates for the work from at least two separate contractors. If leaseholders have nominated contractors, the landlord must obtain an estimate from those contractors. The notice should also contain a summary of any responses from the leaseholders and a summary of any observations. Copies of the estimates must be available for inspection and the leaseholders must have at least 30 days to provide comments on the estimates.
The final notice is the Notice of Award of Contract, where the landlord must give details of the contractor selected for the works. If it is not the cheapest quote given, or not one of the leaseholders’ nominated contractors, the landlord must provide a summary of reasons for selecting that contractor over the others.
When should the works be carried out?
The legislation does not stipulate how quickly the works should be carried out after the consultation process has been completed. However, the 2013 case of Jastrzembski v Westminster City Council suggests that a significant delay in commencing works can mean problems with retaining the funds.
In this case, the Council delayed for more than two years to commence the works after the completion of the consultation and the First Tier Tribunal found that it could not recover more than £250 per leaseholder, as the nature of the required works had changed from those described in the original consultation. It considered that the relevant timescale for carrying out works was months rather than years.
Dispensation
In some circumstances, it is possible for a landlord to seek dispensation from the consultation requirements. This involves an application to the First Tier Tribunal of the Property Chamber and requires the landlord to explain why it has not carried out the consultation, and to show that the individual leaseholders have not been prejudiced as a result.
Can landlords collect the funds in before the works are carried out?
Technically, a landlord can only collect money through the service charge for costs that have already been expended. This would have caused a problem for the management company we acted for, as its only income was the service charge, and it could not afford to pay for the window replacement upfront and then collect the funds from the leaseholders.
Fortunately, the lease was relatively modern and made provision for a sinking fund, allowing the management company to collect payment over a two year period. This made it easier for leaseholders to budget and when it was time to actually carry out the works following the consultation, the money was already in place.
If your lease does not contain provision for a sinking fund, it might be worthwhile considering making an application to the First Tier Tribunal to vary the leases; the Tribunal generally considers this to be a practical and pragmatic amendment.
Top tips for landlords
- Ensure you leave plenty of time for carrying out the consultation; the process takes around three months
- Make sure you have obtained at least two estimates from two unconnected contractors for the works.
- Check your database or records of leaseholders’ contact details to ensure all notices have been properly served.
- Check the lease to see if there is a sinking fund to allow you to collect the funds in advance.
