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There are an estimated 5 million leasehold homes in the UK, and many of the leaseholders occupying these homes will be liable for service charges.
These payments are payable to the Freeholder and are used to maintain a property and fulfill a leaseholder’s contractual obligations.
For certain proposed works payable by service charges, the landlord must go through the Section 20 Consultation process, which this article will address.
A full guide to the process can be found on the Lease Advice website here.
What is the Section 20 Consultation Process?
A landlord, for the purposes of Section 20, is anyone who has the right to enforce service charge recovery.
Most commonly, this includes the freeholder, management company, or right to manage company.
It is a legal requirement for landlords to consult with leaseholders who pay variable service charges before qualifying works are undertaken or a long-term agreement for the provision of services is entered into.
This all falls under Section 20 of the Landlord and Tenant Act 1985 (as amended by S151 of the Commonhold and Leasehold Reform Act 2002) which set out the precise procedures landlords must follow.
The requirements in the Regulations are defined under three headings:
1. Qualifying Works
‘Qualifying works’ are defined as ‘works on a building or any other premises’, i.e. repair, maintenance or improvement works. VAT on works must be included in the estimated cost.
Landlords must consult tenants through the Section 20 process if these works cost over £250 for any one contributing leaseholder.
Thus, in a property with unequal service charge contributions, the landlord must consult all leaseholders if any one of them would have to pay more than £250.
Landlords who don’t consult their leaseholder may not be able to recover costs over £250 per leaseholder. This can therefore have a massive detrimental impact on the landlord to cover the costs of required works if the process is not carried out correctly.
2. Qualifying Long-term Agreements
A qualifying long-term agreement is one that a landlord enters into with an independent organisation/contractor for over 12 months.
This minimum 12-month period of the commitment is crucial and is the ‘deciding factor’.
If the amount payable by any one contributing leaseholder under the agreement in any accounting period exceeds £100, the landlord must consult.
Therefore, in a property with unequal service charges between the leaseholders, the landlord must consult all leaseholders if any one of them would have to pay more than £100 in any one year.
The figure should be based on the leaseholder’s total contribution as a result of the agreement, including VAT.
What if the Landlord Doesn’t Consult?
If the landlord does not consult, they may not be able to recover more than £100 per leaseholder in any accounting period towards the costs under the agreement, similar to Qualifying works.
This can therefore have a massive detrimental impact on the landlord to cover the costs of required works if the process is not carried out correctly.
3. Qualifying Works Under Long-term Agreements:
If:
- The long-term agreement includes provision for property works to be undertaken (e.g. schedule of rates agreement for general maintenance),
- and these works will result in a charge to any one leaseholder of more than £250,
Then a separate consultation should take place in line with the provisions of Schedule 3.
Under the original Schedule 1 consultation, the actual agreement does not supply any exemption from consultation for the works.
Section 20 – Who Needs to be Notified?
In situations where the Section 20 Consultation procedure is needed, the landlord will need to serve Consultation Notices to the individual leaseholders and any RTA.
Leaseholders will need to nominate possible contractors to take on any works. If any more than one contractor is nominated, then you, as a landlord, must attempt to obtain cost estimated from the most ‘popular’ nomination.
If challenged by any leaseholder, any chosen contractor will need to be justified by the landlord.
Landlords, therefore, need to act proportionately in the interest of all parties, to include reasonable costs and required skill/expertise to undertake the works, along with timescale proportionality.
How Many Notices Must be Served?
In the process of awarding a contract, you may have to serve consultation notices on the leaseholder during any of the three stages outlined below:
- The pre-tender stage – The notice of intention should be served
- The tender stage – The notice of your proposals and estimates should be served
- In some cases, a notice of reasons for awarding the contract.
As the landlord, you are legally obligated to consult and update the leaseholders and respond to concerns.
How Long Does Section 20 Consultation Take?
Leaseholders should be given enough clearly outlined time to respond to your notices.
Any notice, of course, will have to be posted. So, for notices that require 30 days, we recommend adding on an extra couple of days as a ‘buffer’.
The whole consultation process may take a number of months as:
- Leaseholders have 30 days to respond to a notice of intention served at the pre-tender stage;
- Any nominated contractor may need to be invited to tender;
- If any nominated contractors submit a tender, you will need to ensure that they meet certain requirements
- The time spent having regard to observations from leaseholders;
- Any observation or response to the notice of intention must be recorded and sent to the leaseholders with the notice of landlord’s proposals or statement of estimates
- Once the notice of landlord’s proposals has been served at the tender stage, a further thirty-day period begins where leaseholders must respond to the notice of landlord’s proposals.
What Happens if the Process is not Followed Correctly?
While the main reason for the consultation process is to gain the leaseholders’ views on the landlord’s proposals, the provisions effectively limit non-compliant landlords’ abilities to recover fees.
As the landlord, if you do not carry out the full consultation procedures correctly, you may not able to collect or recover service charges above the statutory minimum; which is:
- £100 per leaseholder per year in respect of a long-term contract,
- or £250 per leaseholder for works to the building.
Any potential losses will have to be covered by landlords and in the case of an RMC or an RTM Company, the consequences could be disastrous.
Landlords in this situation could end up with an insolvent company and the inability to fulfil their obligations to leaseholders.
If the leaseholders wish to challenge the validity of the process
Tribunal proceedings may be commenced where the leaseholder wishes to challenge the validity of the process, this will come at a further monetary and time expense to all of the parties involved.
Frettens Solicitors
If you feel that you would benefit from advice on the Section 20 Consultation process, please feel free to contact the Property Litigation Department at Frettens Solicitors.
Please don’t hesitate to call us on 01202 499255 for a free initial 30-minute telephone appointment.
