Landmark Court of Appeal ruling balances contrasting ‘aggregate’ and ‘sets’ approaches to service charges, resulting in boon for landlords and tenants alike

Ref. Francis v Phillips (2014)

Section 20 of the Landlord and Tenant Act 1985 limits a landlord’s recovery of the cost of qualifying works from residential tenants by service charge to £250 per tenant, unless the landlord complies with a prescribed consultation process or obtains a dispensation from doing so from the appropriate tribunal. The issue assessed by the Court of Appeal in this case related to the specific meaning of “qualifying works”, because interpreting this phrase directly influences the maximum amount of costs that can be incurred without having to consult or seek dispensation.

The High Court adopted the ‘aggregating approach’, by which all works carried out during the year are aggregated together, regardless of work type. Once the combined value exceeds the £250 limit per tenant, the landlord would have to consult or obtain dispensation from the appropriate tribunal. If he or she were to fail to do this, they would have no right to recover the full amount without court dispensation.

For example, a block of flats has four tenants and the annual regulatory limit is four x £250 = £1000. The landlord carries out works to the building costing £275, but does not consult. In the same year, he also carries out door and window works costing £825 and £360 respectively. Under the ‘aggregating approach’, the door works exceed the limit for the year.

The ‘Sets approach’ differs, however, and it is this interpretation that the Court of Appeal favoured. Under this approach, Section 20 should be applied by reference to the individual sets of works. As such, in the example above each set of work is distinct and would be treated separately. The Landlord could therefore go ahead and undertake all three work types, without consultation.

This is significantly more efficient and avoids the expense of a lengthy consultation process. Even so, the tenants still have the statutory protection of the costs being ‘reasonably incurred’ and the works being of a ‘reasonable standard’.

Having established that the sets approach should be applied, the Court went on to distinguish what qualifies as a single set of works. The following relevant factors were established as a result:

• where the items of work are to be carried out (whether they are contiguous to or physically far removed from each other);
• whether they are the subject of the same contract;
• whether they are to be done at more or less the same time; and
• whether the items are different in character from, or have no connection with, each other.

The ruling avoids a potentially serious change in the interpretation of service charges across the country and will likely be well received by tenants and landlords alike.

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08.12.14                                                                                                                                             SRJ