In this week’s Legal Update we focus on Ghosh v Hanover Gate Mansions Ltd [2019] UKUT 290 (LC). This was a case where a leaseholder argued that the management agreement was be a qualifying long term agreement (“QLTA”) under section 20 Landlord and Tenant Act 1985 if it had come into existence when the performance of management services commenced and not on the (later) date that the landlord’s payment for the services was provided.

If the leaseholder was correct and the particular contract was a QLTA, then the statutory consultation requirements under section 20 of the Landlord and Tenant Act 1985 applied and, if those had not been completed (which they had not), the leaseholder’s liability for the managing agent’s fees would be limited to just £100 per annum.

This is a guide as to how not to start your relationship with your landlord or managing agent and is notice of what can be a really easy mistake to make.  Read this article and then check your agreements to ensure that you have not fallen foul of the same issue.

Section 20 Consultation

Section 20 of the Landlord and Tenant Act 1985 (“Section 20”) provides that before a landlord enters into a QLTA for works or services, it must consult with leaseholders paying a variable service charge.  A QLTA is an agreement for more than 12 months, where the cost to each leaseholder is more than £100 per accounting year. If a landlord fails to consult correctly, the amount it can recover is capped to £100 per year (unless dispensation is obtained).

The Facts

Mr Ghosh was a leaseholder of a flat.  His landlord was Hanover Gate Mansions Limited (“Hanover Gate”).  Hanover Gate appointed Faraday Property Management Limited (“Faraday”) to mange the block. The management contract was drafted on Faraday’s standard terms, stating that Faraday would “perform the services from 12 June 2017 to 11 June 2018. After this period, the Agreement shall continue on the terms set out, subject to termination under Clause 7”.

Clause 7 of the agreement enabled “Either party may terminate this Agreement following expiry of 9 calendar months of the stated Management Period, by serving on the other not less than three months’ notice in writing.”

The draft contract, which stated it started on 12 June 2017, was never signed or dated, before Faraday started providing services. Hanover Gate did not take any steps to prevent the performance of the agreement. The first payment for the provision of services was made on or around 24 June 2017.

The Issues

Both parties agreed that if the management contract between Hanover Gate and Faraday started on 12 June 2017, as stated on its face, then it was a QLTA because the earliest it could terminate was 12 June 2018 being not less than 3 months’ notice served only after 9 months of the term had expired.  In short, the termination provision in the agreement required the contract to run for not less than a year + one day as distinct from 12 months or less.

The issue then was whether the agreement started on 12 June 2017 as stated, or the later date of 24 June 2017 as claimed by the landlord, that being the date when payment was first made under the agreement.  If the latter, then the agreement would not be a QLTA as termination on 12 June 2018 would be less than 12 months after the claimed start date of 24 June 2017.

Hanover Gate argued that reference to 12 June 2017 merely signified the start of a “trial period” with the formal appointment following at a later date.  On that basis there was no formal contract as the contract had not been signed and no payment made under it (until 24 June 2017), so no QLTA thereby no ability for Mr Ghosh to avoid liability for the full proportion of the management fee claimed.

First Instance Decision

The First-Tier Tribunal (“FTT”) held that the management agreement was, in the absence of a signed written contract, an oral contract evidenced by both performance and payment. The Tribunal purported to apply the case of Brogden v Metropolitan Railway Co (1877) that such a contract could not come into being until a payment had been made.  The FTT accepted that as payment was not made until 24 June 2017, the agreement commenced at some date after 12 June 2017 and thus  was for a period of less than 12 months and, accordingly, not a QLTA.

Decision on Appeal

The issue considered on appeal was when the management agreement actually took effect and whether, therefore, it was indeed a QLTA.

Judge Cooke reviewed the decision in Brogden, an old case relating to the purchase and delivery of coal to a steam locomotive operator.  She considered that Brogden is simply authority for the proposition that a contract may arise by performance in the absence of a formally signed agreement and that it appeared that the FTT misunderstood the effect of the decision in that case.

The Upper Tribunal therefore overturned the original decision.  It held that there is no general rule that performance of a contract only takes place when goods or services are paid for.  Applying authority from Brogden, the Upper Tribunal favoured Mr Ghosh’s argument that the management contract took effect by performance when management services commenced on 12 June 2017. Therefore, it held that the management agreement was a QLTA and therefore, as Section 20 consultation was not carried out, Mr Ghosh’s contribution to the management agents fee was capped at £100 per year.

Moral of the story

There are two important issues that arise from Ghosh:

1. The case provides a useful reminder to be cautious and check whether agreements you/your agent are entering into meet the QLTA definition and trigger a need for Section 20 consultation.  This case shows how just one day in the term of that agreement can have a drastic effect on the outcome. Although not substantial in this case (recovery was capped at £100 instead of the £218.73 claimed from Mr Ghosh), failure to consult properly can have significant financial consequences for landlords.

2. The Brogden decision confirms that unsigned contracts or verbal agreements can take effect when performance commences and not when the goods or services are paid for.  The date of performance and not the date of payment will nearly always be the crucial date when considering when a contractual relationship began.

This case serves as an important lesson to landlords when entering into agreements that clear legal advice should be sought if in any doubt as to what the agreement requires.

If you have any queries at all, please do get in touch with a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

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