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Phillips v Francis: Back to the Future in relation to Service Charge Consultation

In a long-awaited judgement from the Court of Appeal, the 2012 decision of the Chancellor in Phillips & Goddard v Francis has been overturned.

The Court of Appeal has clarified the law in relation to service charge consultation required under Part 2 to Schedule 4 of the Service Charges (Consultation) (England) Regulations 2003 ("the Regulations"), and has decided that a landlord's obligation to consult their tenants when they propose to undertake "qualifying works" under the Landlord and Tenant Act 1985 ("the Act") is limited to individual "sets" of qualifying works, where any set of qualifying works will result in any one tenant being liable to pay a service charge in excess of £250.

In the current case, the landlord had carried out extensive works to a holiday park over the course of two service charge years without entering into statutory consultation with the tenants. It was not disputed that the works were "qualifying works" under the Act. However, the tenants challenged their service charge liability in respect of these works, arguing that the works had been designed as a single set and accordingly there should have been consultation, failing which the tenants' individual liabilities for the service charges were capped at £250 (section 20(1) of the Act; Regulation 6).

The landlord defended on the basis that the works were carried out as several individual projects as and when funds were available, and consultation was not required because none of the individual projects resulted in an individual service charge liability that exceeded £250.

The trial judge found for the landlord and agreed that the qualifying works did not comprise a single set of works for the purposes of the Regulations. However, on appeal the Chancellor found that the correct approach to whether the consultation obligation applies was to aggregate all works in any given year without division into separate set of qualifying works. If, when considered in aggregate, all qualifying works during a service charge year subjected tenants to a service charge liability of more than £250 per tenant, the obligation to consult (or apply for dispensation) applied. This was not a construction of section 20 of the Act for which the tenants contended but nevertheless the Chancellor adopted what has been referred to by the Master of the Rolls as "the aggregating approach".

The effect of the Chancellor's judgement was a cause of concern for leasehold managers, who now had to consider the possibility of consulting on works some of which, by their very nature, could not be known in advance.

These concerns were considered by the Court of Appeal and it was found that the "aggregating approach" was not sensible and in many cases would be unworkable. The Master of the Rolls recognised that the added administrative burden of the "aggregative approach" must increase costs for landlords, and cannot have been intended by Parliament. Accordingly the landlord's appeal was allowed.

So where are we now? The decision of the Court of Appeal will be a familiar (and welcome) one for leasehold managers: the law has returned to what we have long considered it be following the case of Martin & Seale v Maryland Estates Limited (1999).

It is again a question of fact whether work carried out during a service charge period is all part of one planned single set of works or a series of disparate pieces of work. Landlords will no longer need to steel themselves for applications for dispensation or carry the excess costs of service charges that have not been consulted upon in the circumstances proposed by the Chancellor. The inherent difficulties of the Chancellor's approach have been addressed, until the next service charge decision at least.