Section 20 Consultation

introduction

The Landlord and Tenant Act 1985, amended by the Commonhold and Leasehold Reform Act 2002, sets out detailed regulations for landlords to follow when it comes to service charges. The Service Charges (Consultation Requirements) (England) Regulations 2003 provide specific procedures that must be followed.

The Regulations define requirements under three headings:

  1. Qualifying works
  2. Qualifying long-term agreements
  3. Qualifying works under long-term agreements

For the purposes of this Article we shall discuss the first scenario, which is the most common of these, whereby the Landlord or Managing Agent is minded to carry out "Major Works" and must carry out a consultation process with the leaseholders before incurring certain types of expenses covered by service charges.

 

WHEN DO CONSULTATION PROCEDURES ARISE?

A landlord planning to carry out works that will cost more than £250 for any leaseholder who contributes to the service charge, they must follow the Section 20 consultation process. This means that if there are different levels of service charge contributions among leaseholders, you must consult all leaseholders if any of them would have to pay more than £250. Failing to carry out this consultation may result in the landlord not being able to recover costs exceeding £250 per leaseholder.

There has been some confusion regarding whether there is a specific cost threshold below which landlords are exempt from consulting on qualifying works. A 2012 High Court case (Phillips and others v Francis) raised doubts about this requirement.

However, in October 2014, the Court of Appeal overturned the decision made in the Phillips and others v Francis case. This means that the "sets approach" should be followed when it comes to Section 20 consultation. Landlords should apply this approach to individual sets of qualifying works, rather than accounting only for specific time periods or service charge years.

The Court of Appeal gave guidance on what factors are to be taken into consideration in identifying a single set of qualifying works.It is a question of fact and degree and accounts for all relevant circumstances. Relevant factors are likely to include:

  • Where the items of work are to be carried out;
  • Whether they are the subject of the same contract;
  • Whether they are to be done at more or less the same time or at different times;
  • Whether the items of work are different in character from, or have no connection with, each other
  • Whether all the works are the subject of one contract and;
  • The way in which works are planned and the lessor’s reasons for the way they are implemented  are also of relevance.
PROCEDURE
WHO MUST BE CONSULTED

In accordance with the Commonhold and Leasehold Reform Act 2002, landlords are required to follow a consultation process known as Section 20. This process involves sending consultation notices to individual leaseholders as well as any Recognised Tenants' Association (RTA).

As part of this process, landlords must also give leaseholders and RTAs the opportunity to nominate potential contractors. These nominations are specifically for consultations conducted under Schedule 1 and Schedule 4 (Part 2) of the Regulations.

It is important to note that the Act does not mandate that contractors nominated by leaseholders or RTAs must have no connection to the leaseholder or RTA in question. Additionally, landlords are not initially required to be informed of any existing relationships. However, if the landlord becomes aware of such a relationship, it may be a factor considered when deciding which contractor to select.

By following the Section 20 consultation process and allowing leaseholders and RTAs to nominate contractors, the landlord ensures a fair and transparent decision-making process.

NOMINATED CONTRACTORS

Nominated Contractors

In the Section 20 consultation process under the Commonhold and Leasehold Reform Act 2002, the selection of contractors is an important step. Here are the guidelines for landlords:

  1. Single Nomination by RTA: If the Residential Tenants' Association (RTA) makes a single nomination, regardless of whether any leaseholder also makes a nomination, the landlord must make an effort to obtain an estimate from the nominated contractor.

  2. Single Nomination by Leaseholder: If only one leaseholder makes a single nomination, regardless of whether the RTA also makes a nomination, the landlord must try to obtain an estimate from the nominated contractor.

  3. Multiple Nominations by Leaseholders: If multiple leaseholders make nominations, whether or not the RTA makes a nomination, the landlord must follow these steps to obtain estimates: a) The landlord should try to obtain an estimate from the contractor who received the highest number of nominations. b) If there is no contractor with the highest number of nominations, but two or more contractors received the same number of nominations, the landlord should obtain an estimate from one of those contractors. c) If there are multiple nominations from different leaseholders, but no contractor has more than one nomination, the landlord should obtain an estimate from any of the nominated contractors.

  4. Multiple Nominations by Leaseholder and RTA: If a leaseholder and the RTA both make multiple nominations, the landlord must obtain an estimate from at least one contractor nominated by the leaseholder and at least one contractor nominated by the RTA.

Adhering to these guidelines will ensure a fair and transparent process in selecting contractors for the Section 20 consultation.

NOMINATION OF CONTRATORS

When it comes to obtaining estimates for works or services, the Commonhold and Leasehold Reform Act 2002 does not specify the exact terms for landlords to approach leaseholders' nominees. However, most landlords typically have certain basic requirements for their contractors. These may include having public liability insurance, a valid tax exemption certificate, confirmation of VAT status, copies of health and safety policy, and confirmation of company status.

If landlords face a challenge from the Tribunal, they will need to justify their selection procedures. If the Tribunal finds their criteria to be too restrictive or anti-competitive, there is a risk that the consultation process could be deemed invalid.

To avoid any confusion, it is recommended that landlords clearly state their criteria in their requests for tenders from nominated contractors. This will make it evident that meeting these criteria is a necessary condition for any potential contract. Alternatively, landlords may consider including a brief statement about the selection criteria in the Notice of Intention to leaseholders when inviting nominees. This will help tenants understand that nominated contractors must meet certain requirements to be seriously considered for the contract.

The aim of allowing a wider range of contractors to be nominated is to promote openness and encourage competition, ultimately leading to fair and reasonable charges for leaseholders. However, it may be prudent to exercise caution when initially packaging contracts, especially for multiple estates, as this could limit the ability to nominate smaller contractors.

HOW MANY NOTICES MUST BE SERVED

How many notices must be served?

Landlords may have to serve consultation notices on leaseholders at the following three stages in the process of awarding a contract:

  • the pre-tender stage – notice of intention; and
  • the tender stage – notification of landlord’s proposals (estimates); and
  • in some cases, notice of reasons for awarding the contract.
INSPECTION OF DOCUMENTS

Reasonable Place and Hours for Document Inspection

In order to ensure fairness, the landlord must specify a reasonable place and hours for leaseholders to inspect documents related to the Section 20 consultation process under the Commonhold and Leasehold Reform Act 2002. The specified place and hours should be convenient and accessible.

Free Access to Documents

Leaseholders have the right to inspect these documents free of charge at the specified location during the specified hours. This means that landlords cannot charge leaseholders for accessing the documents.

Copying Facilities

Ideally, landlords should provide facilities for leaseholders to make copies of the documents during the inspection. This allows leaseholders to have their own copies for reference.

Provision of Copies

If it is not possible for leaseholders to make copies of the documents during the inspection, landlords must provide copies upon request and free of charge. Leaseholders should not be financially burdened for obtaining copies of the documents.

Recovery of Costs

While certain facilities such as document inspection and copying must be provided free of charge, landlords may be able to recover the costs incurred in administering and managing these facilities through service charges. This allows landlords to cover the expenses associated with providing these services without imposing additional financial burdens on leaseholders.

THE DUTY FOR THE LANDLORD TO HAVE REGARD

When a landlord receives written observations during the Section 20 consultation process, they are required to take these observations into consideration. The term "have regard to" is not specifically defined in the law, but in some cases, the landlord must respond to the observations within 21 days.

If the landlord chooses a contractor who did not submit the lowest estimate or was not nominated by a leaseholder or RTA (Right to Manage Company), the landlord must provide a written explanation for awarding the contract. Alternatively, they can specify the location and hours where the reasons for the decision can be inspected. It is important for the landlord to follow the correct procedures, as failure to do so may be taken into account by a Tribunal if there is any application related to the consultation process.

Connections between landlords and contractors

Contractors Unconnected to the Landlord

According to the Commonhold and Leasehold Reform Act 2002, Schedule 1 and part 2 of Schedule 4 of the Regulations mandate that at least one of the estimates provided during the Section 20 consultation process must be from a contractor who is 'wholly unconnected' with the landlord.

Definition of 'Connection'

For the purpose of determining the connection, the following criteria apply:

  1. Landlord as a Company: If the landlord is a company, a person or party cannot be considered wholly unconnected if they are, or are to be, a director or manager of the company, or if they are a close relative of any such director or manager.

  2. Landlord as a Company and Person/Party as a Partner in a Partnership: If the landlord is a company and the person/party is a partner in a partnership, a connection exists if any partner in that partnership is, or is to be, a director or manager of the company, or if they are a close relative of any such director or manager.

  3. Both Landlord and Person/Party as Companies: If both the landlord and the person/party are companies, a connection exists if any director or manager of one company is, or is to be, a director or manager of the other company.

  4. Person/Party as a Company: If the person/party is a company, a connection exists if the landlord is a director or manager of the company, or if they are a close relative of any such director or manager.

  5. Person/Party as a Company and Landlord as a Partner in a Partnership: If the person/party is a company and the landlord is a partner in a partnership, a connection exists if any partner in that partnership is a director or manager of the company, or if they are a close relative of any such director or manager.

Please note that a 'close relative' for this purpose refers to a spouse or cohabitee, a parent, parent-in-law, son, son-in-law, daughter, daughter-in-law, brother, brother-in-law, sister, sister-in-law, step-parent, step-son, or step-daughter of the person.

By adhering to these guidelines, the Section 20 consultation process ensures transparency and impartiality in selecting contractors for estimates.

The Timing of Notices

Leaseholders must be given sufficient time to respond to notices during the Section 20 consultation process. To ensure this, it is recommended that notices provide a clear period of 30 days for leaseholders to comment. Additionally, it is advisable to add an extra 2-3 days to account for the time it takes to physically deliver the notices.

The Duration of the Consultation Process

The Section 20 consultation process can take several months to complete due to various factors. These include:

  1. Response Time: Leaseholders are given 30 days to respond to a notice of intention served at the pre-tender stage.

  2. Contractor Nomination: If a contractor is nominated by one or more leaseholders or an RTA (Resident Management Company), they may need to be invited to submit a tender.

  3. Contractor Evaluation: Landlords are required to assess whether the contractors nominated by leaseholders or an RTA meet the necessary criteria.

  4. Consideration of Leaseholder Observations: Time must be allocated to carefully consider any observations provided by leaseholders.

  5. Summary of Observations: Landlords are obligated to create a summary of the leaseholder observations and responses to the initial notice of intention (first notice). This summary must be sent to leaseholders along with the notice of landlord's proposals or statement of estimates (second notice).

  6. Response Time (Tender Stage): Leaseholders are given an additional 30 days to respond to the notice of landlord's proposals served at the tender stage.

By understanding the duration and various stages of the Section 20 consultation process, leaseholders can actively participate and provide their valuable input.

THE ROLE AND FUNCTION OF THE TRIBUNAL IN S20 CONSULTATION

The Tribunal's Powers

The Tribunal has the authority to make decisions on Section 20 matters. This includes the power to waive the consultation requirements in specific cases, known as dispensation. The Tribunal can exercise this power if it believes it is reasonable to do so.

The Supreme Court's Guidance

In a 2013 case (Daejan v Benson), the Supreme Court provided guidance on how Tribunals should handle applications for dispensation from landlords. This guidance is important for understanding how the Tribunal should approach these requests.

Protecting Lessees

The purpose of the Regulations is to protect lessees from unfair situations. This includes ensuring that they don't have to pay for inappropriate works or pay more than is reasonable. When considering dispensation requests, the Tribunal should focus on whether the lessees have been prejudiced by the landlord's failure to comply with the Regulations.

Identifying Prejudice

When a landlord has not complied with the Regulations, there may be a disagreement about whether the lessees would suffer prejudice if dispensation is granted without conditions. The legal burden falls on the landlord, but the lessees have the responsibility to demonstrate some credible case of prejudice. They should identify what they would have said if given the opportunity. Once the lessees have shown credible prejudice, the Tribunal should consider the landlord's response and be sympathetic to the lessees' position.

Compensation for Prejudice

If the lessees can demonstrate relevant prejudice, the Tribunal should generally require the landlord to reduce the amount claimed to fully compensate the lessees for that prejudice. This is unless there is a good reason not to do so.

In summary, the Tribunal has the power to make decisions on Section 20 matters and can waive consultation requirements in certain cases. The Tribunal should focus on protecting lessees from inappropriate charges and determine if the failure to comply with the Regulations has caused prejudice. The burden of proof falls on the landlord, but the lessees must demonstrate credible prejudice. If prejudice is proven, the Tribunal should require the landlord to reduce the amount claimed to compensate the lessees.

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