As you will no doubt know, major works projects to a development will, in many cases, amount to ‘Qualifying Works’ as defined under section 20 Landlord and Tenant Act 1985 (“S.20”) and thus be subject to the need for compliance with the S.20 consultation process prior to their commencement.  The requirements of S.20 are in place to ensure that there is transparency and, to a certain extent, involvement for leaseholders in relation to items of often significant expenditure affecting their development. 

Because works themselves should not be commenced prior to completion of any S.20 consultation process (or dispensation therefrom - see Legal Update from June 2019), in line with the statutory rules we very often see landlords and managing agents confusing the timing of demands in respect of the cost of those works with the completion of the consultation process.  The two are unlikely to be linked in almost all cases. 

This often misunderstood situation can cause problems where enforcement of unpaid service charges or major works costs is then required in order to progress the works. 

What determines when and how demands are to be served? 

The lease will be the document, and the only document, that prescribes how and when demands are to be served.  The S.20 consultation process is not relevant to the timing of demands. 

Most leases will require that a budget is drafted ahead of the financial year upon which demands within that year are to be based.  Some leases will include the ability to include within the budget and maintain thereafter a Reserve or Sinking Fund (see our Legal Update from July 2018 on the difference between the two) and some leases, but in our experience comparatively few, will enable the landlord to raise demands within the year for charges over and above any budget previously produced (commonly referred to as ‘one off’ demands). 

The important point to make in relation to the lease, and a point that you will see repeated regularly in our advices, is that if a process is not provided for in the lease then it is generally the case that it cannot be required of the leaseholder.  This is particularly pertinent for major works costs.  We have set out below common scenarios based upon the types of lease and service charge arrangements that you will frequently see across England and Wales and explain in each case how that affects your recovery of major works costs.    

Scenario 1

The leases require a service charge budget to be produced ahead of the year and provides that demands based upon that budget should be raised say annually, half yearly or quarterly, as is the norm.  This lease is however silent on the ability to raise any other demands within the year.  This type of lease may or may not also include a reserve or sinking fund provision.

In this most common scenario the landlord is not able to lawfully require a leaseholder to pay a ‘one off’ demand for sums not included within the budget and the demands based thereupon. Accordingly, in these leases the landlord must include within its budget an estimate of the costs that it expects to incur in undertaking major works within the financial year so that that cost is included within the annual, half yearly or quarterly demands based upon the budget sum.   Where the landlord fails to do that it is unable to lawfully require any leaseholder to pay any additional sums within the year to cover the cost of the major works, whether or not they completed the S.20 consultation process.  Accordingly, if the reserve/sinking fund does not contain sufficient funds to cover the major woks cost and you find a number of leaseholders not paying ‘one off’ demands served, then there will be no option to enforce recovery immediately and until the major works cost has been lawfully demanded.  That may require the works to wait until the following year when the cost can be included in the budget.

Scenario 2

The lease provides that ‘one off’ demands can be served for advance payment of anticipated costs.

In this less common scenario the landlord may raise a demand following conclusion of (and possibly prior to or during) the consultation process and the demand will likely be enforceable.

Scenario 3

Usually found only in older leases (or poorly thought out more modern leases) but where the requirement to pay service charges is one in arrear either at the end of the year or after an expense has been incurred.

Here there is a whole question of timing to consider and whether or not the client is obliged to forward fund the works.  If charges are only recoverable in the year based upon the accounts then that position is straight forward - a demand within the year is not enforceable.

Where the requirement to pay is only after an expense has been incurred then it is possible to raise a ‘one off’ demand within the financial year and advice should be sought on precisely when that can be done, as it is possible, depending upon the specific wording of the lease, for the landlord to avoid the need to forward fund the project themselves.

Conclusion

Whilst this issue of timing of demands is rarely complicated it can be tricky and some planning, based upon knowledge of the specific provisions of the relevant leases, is always wise.  If you are planning works in the forthcoming financial year then do consider carefully the service charge provisions of the lease and, if you require clarity on the issue, then seek advice from experienced lawyers so that the position is clear before you start the budgeting process.

Should you have any questions regarding this Legal Update, please contact Kevin Lever on 01435 897297 or Kevin.Lever@kdllaw.com.

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