Court of Appeal’s Judgment on Phillips v Francis – Service Charge (Major Works Decision)
As you are all by now aware, the High Court decision in this case (i.e. that the correct approach to determining when Section 20 consultation was required was to use an “aggregate” approach to all works in a given year.) The Court of Appeal has now held this was not a sensible approach and could not possibly have been intended by the legal draftsmen and Parliament. The approach would have required landlords to consult on any service charge items, no matter how small, once the £250 per tenant limit had been reached. Therefore, all managing agents can now breathe a sigh of relief and go back to” as you were” and consult, essentially for those projects or schemes of particular works which will carry the costs to each tenant over the £250 limit.
As is now apparent, the Court of Appeal has restored the ‘sets/individual projects/scheme’ approach when assessing qualifying works for residential service charges under Section 20 of LTA 1985. By overturning the High Court and rejecting the “aggregate” approach, the Court of Appeal has come out on the side of common sense. Given all the practical problems created by the “aggregate” approach, this was the only outcome that could surely have been reached.
From this point on and since the judgement, separate sets of work should be identified for the purpose of establishing the relevant costs exceeding the recoverable limit and therefore trigger consultation process under Section 20. This is a good decision for landlords of residential property, as it significantly reduces the consultation burden which placed them in an almost impossible position especially when dealing with emergency repairs.
Note, however, that the Court of Appeal dismissed the landlord’s appeal on the issue of management charges. The landlords appointed a company (wholly owned and controlled by them) to be the managing agent. The company employed the landlords. Their wages, as well as the management charge of 5%, were claimed as part of the service charge and the Court of Appeal did not accept this double recovery and ordered that the landlords were not entitled to recover for an item of expenditure under the terms of the lease that has already been recovered as part of the 5% management charge.
That having been said, and the judgment welcomed, in practical terms, the threshold for consultation to kick in is still relatively low [£250 per flat] – so consultation will still be required in a lot of cases.