This week’s Legal Update looks at a very important decision of the Upper Tribunal from 2016 that dealt with the question of who is to serve who with Section 20 consultation notices ahead of major works or entry into a qualifying long term agreement on a development that consists of leases and under leases.

This issue commonly arises on developments consisting of Housing Association or part ownership properties or, specifically inner city developments where there may be a number of tiers of ownership of a block or development.

In Leaseholders of Foundling Court and O’Donnell Court -v- Mayor and Burgesses of the London Borough of Camden and others the Upper Tribunal gave the answer to the above question.

The background    

Allied London (Brunswick) Limited was the freeholder of the Brunswick Centre, a Grade II listed complex of shops, flats and other premises (“the Building”). Foundling Court and O’Donnell Court formed part of the Building that contained residential flats let on long leases (“the Flats”).  Of the flats some were let by Allied London to the London Borough of Camden (“Camden”) on a head lease out of which Camden granted leases to leaseholders of the individual flats (“the under leases”).

Certain of the under leases of the Flats required the leaseholders to pay a service charge to their immediate landlord, Camden, as head leaseholder in respect of the Flats.

It was the intention of Allied London in 2005 to carry out qualifying works that would have triggered the consultation requirements set out by Section 20 of the Landlord and Act 1985 (“Section 20”). Allied London set out to consult with Camden as required under Section 20 but they did not see the need to consult with the individual leaseholders of the Flats, as they had no direct contractual relationship with those leaseholders. Whilst Camden did then seek to consult with the leaseholders of the Flats, what they did was not compliant with Section 20 (the notice period was less than the requisite 30 days).

Under the terms of the headlease, Camden paid the costs of the works to Allied London and then sought to recover those costs from the leaseholders of the Flats under their under leases.   Camden therefore issued service charge demands which included the cost of the major works, and as a result the leaseholders of the Flats made application to the First-Tier Tribunal to dispute their liability to pay because they were not properly consulted under Section 20. The consequence of the failure to consult is that each leaseholder of the Flats would only be liable to pay the statutory maximum sum of £250.00 toward the cost of the works.

The Upper Tribunal Decision

Because of the general importance of the case, the matter was heard as a first instance hearing by the Upper Tribunal.  The Upper Tribunal was asked to determine a number of issues as between the parties but for the purposes of this Legal Update, we only focus upon who ought to have consulted the leaseholders of the Flats under the under leases.

The Upper Tribunal made clear that that liability falls to the party intending to carry out the works triggering Section 20, who has the duty to consult.  Here that was Allied London.  Allied London therefore was bound to serve Section 20 notices on all of its tenants and, importantly, any sub-tenants who may be required to contribute to the cost of those works under their respective under leases.  This obligation applies regardless of the practical difficulties for Allied London of knowing the identity of those tenants with whom it was obliged to consult.

Accordingly, not only was Allied London required to consult with Camden, they were also required to consult the leaseholders of the Flats despite there being no direct contractual relationship with them under the under leases. The premise behind this is that it was Allied London who were to undertake the work, at their cost, but that it was the leaseholders of the Flats that would ultimately be asked to pay for them, and as a result they must be consulted.

The practical difficulties referred to by the Upper Tribunal related to how Allied London were expected to properly consult the leaseholders of the Flats under Section 20 when they did not necessarily know who they were and the address for service for each of those to enable good service of the statutory notices. The Upper Tribunal suggested that:

• the simplest and cheapest approach would be to deliver a consultation notice addressed to 'the leaseholder' to each of the Flats in the Building. Whilst this may not guarantee that it comes to the notice of every leaseholder, Section 20 does not contain service provisions and so proof of receipt may not matter.  Those who were not entitled to be consulted may respond with observations, but that could be discouraged by an appropriately worded notice and could be regarded as a risk of no great significance;

• the better course might be for the consulting party to obtain the necessary information by asking the intermediate landlord to provide it. An intermediate landlord may have a vested interest in cooperating to avoid the risk that Section 20 was not satisfied because if that were the case the amount they could collect from sub-tenants would be limited to £250.00 unless a dispensation could be obtained. The same limitation on its own liability could not be guaranteed and the consulting party may have a stronger case for dispensation; or

• alternatively, the consulting party could seek dispensation from Section 20 (for more on which, see here).

A further practical option would be for the consulting party to obtain the occupational leaseholders’ identities by obtaining the Office Copy Entries for each property from the Land Registry for a small fee per entry (although it is worth noting that the address for owners set out on the office copies of title may not be the up to date service address for that owner - see more here).

Conclusion

This is a hugely important decision for those parties involved in undertaking qualifying works or entering into qualifying long term agreements under Section 20. The party undertaking the works or entering into the agreement must ensure that the party that is ultimately asked to pay the costs, usually the occupational leaseholders, must be consulted along with any party that has an intermediate interest under a headlease.   A failure to do so has serious financial consequences due to the £250.00 contribution cap set by Section 20 which would result in the full costs of any work or agreement not being recovered in full. Where leaseholder-owned entities are involved, such a limitation on the contributions that can be recovered could result in their insolvency that would throw the management of their blocks into uncertainty.   

The golden rule is, as always, if you are a landlord or advising a landlord on consultation and you are at all unsure as to the make up of the block or the requirements in relation to consultation at that specific development, then get advice before starting.

For more information, please feel free to contact a member of the team on 01435 897297 or info@kdllaw.com.

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