Leaseholder organisations at loggerheads

The Campaign Against Residential Leasehold (CARL), which urges widespread adoption of commonhold tenure, has launched a stinging attack in its forthcoming newsletter on the Federation of Private Residents Associations for siding with freeholders.

CARL, headed by Nigel Wilkins, criticises the FPRA for campaigning to increase the minimum amount above which freeholders have to consult leaseholders in a section 20 consultation over major works from £250 per flat.

“Since this allies them with landlord interests, they should stop maintaining the pretence that they represent leaseholders and should be required to step down from any representation on the board of LEASE [the Leasehold Advisory Service],” CARL declares.

This is a reference to Robert Levene, the managing director of the FPRA, who has been a board member of LEASE since 2004.

FPRA chairman Bob Smytherman, who is also on the board of the Leasehold Knowledge Partnership, believes that complying with the section 20 procedures is a “time-consuming administrative task” and a heavy burden on resident management companies.

If the process is not followed correctly RMCs can find that leaseholders can have their contributions to major capital expenditure capped at £250.

“This is a very draconian consequence – especially for resident management companies,” says Smytherman.

“We are certainly not opposed to landlord consultation with leaseholders, however what we are in favour of is good, proper meaningful consultation which sadly under the current threshold all too often leads to a ‘tick box’ mentality by some landlords.

“In my own self -managed block for instance where we the leaseholders are also RMC Directors (landlords) we consult on major works with leaseholders long before the ‘formal’ section 20 stage by presenting a minimum & costed five-year budget plan and a 20-year work program so leaseholders know what to expect year on year and importantly before they buy the leasehold flat in the first place which as you know is rarely the case.

“The FPRA strongly believe we represent the interest of all leaseholders, but accept there are many different structures managing blocks of flats and much of our membership are self-managing RMC/RTM Co’s who I believe should be treated differently from large commercial landlords with differing interests from their leaseholder clients.

“Although, that said, volunteer leaseholder directors must always comply with the various laws of the land whether they like them or not.”

Smytherman recently wrote an article on the subject, “Section 20 consultation: Can it be avoided?”, which is reproduced below.

SECTION 20 CONSULTATION – CAN IT BE AVOIDED?

Bob Smytherman asks: “Just how easy is it to avoid the need to comply with the consultation requirements set out in Section 20 of the Landlord and Tenant Act 1985? Not very!”

As landlords and property managers I do not need to tell you that complying with the consultation procedure laid down in Section 20 of the Landlord and Tenant Act 1985 is a time-consuming administrative task.

Furthermore these provisions apply to ALL landlords – which means even where the landlord is a company owned and run by the leaseholders themselves (as in my case) the consultation provision equally stick.

As a director of a resident management company myself I understand the argument forwarded often that compliance with the consultation requirements is worth the time and effort as it provides leaseholders the opportunity to make observations on proposed major works and arguably, prevents the landlord finding himself out-of-pocket following completion of major works. But from experience in our block, given the rather low threshold of £250 per leaseholder before the landlord must consult, we seem to spend nearly all of our valuable time consulting even where there is consensus among leaseholders rather than simply getting on with other more important management issues.

IS THERE ANOTHER WAY?

Where landlords have not complied with the relevant consultation provision, the amount they will be able to recover from a leaseholder will be capped at the relevant cost threshold (at present £250 for major works and £100 for qualifying long-term agreements). This is a very draconian consequence – especially for resident management companies.

In order to alleviate any potential problems there is power to dispense with the consultation requirements.

Section 20ZA of the 1985 Act provides landlords with an opportunity to apply to the Leasehold Valuation Tribunal (LVT) prior to carrying out major works and/or consulting the tenants. This right was introduced in 2003 by the Commonhold and Leasehold Reform Act 2002, and it allows the LVT to remove some or all of the Section 20 consultation requirements if it is reasonable to do so.

IS DISPENSATION LIKELY TO BE GRANTED?

The case of Daejan Investments Limited v Benson and Others [2011] EWCA Civ 38 should be a warning to all landlords to make sure that they comply with the statutory consultation requirements in respect of service charges.

Daejan Investments Limited (“Daejan”) is the freehold owner of a block of flats and shops in Muswell Hill, London. Daejan gave notice to the lessees that it intended to carry out major works costing £270,000. Although Daejan had given notice to the Lessees of its intention to carry out the works, the Lessees contended that Daejan had not properly complied with its statutory obligations and could not recover all of its outlay.

While the matter started in the LVT, it was been appealed a number of times and ended up in the Court of Appeal. It is now in the Supreme Court for permission to appeal. A decision from the Supreme Court is expected very late this year (2012).

In the case the Court of Appeal found for the lessees. In its decision the court:

Confirmed that the financial consequences of the grant or refusal of dispensation are irrelevant to the exercise of discretion under section 20ZA;
Held that significant prejudice to the leaseholders is a fundamental consideration in exercising the discretion to dispense;
Emphasised the importance of the consultation requirements and that any failure to comply (unless of a minor or technical nature) amounts to significant prejudice; and
Held that a landlord’s offer to apply a discount to the costs claimed from the leaseholders is not a ground for the grant of dispensation.

CONSEQUENCES OF THE COURT’S DECISION

From this determination it is clear that dispensation will be granted only very rarely in cases where the tenants have been prejudiced by the landlord’s failure to properly consult them.

It appears from this decision that there will only be limited circumstances where landlords can gain dispensation going forward. One of these is where works need to be carried out urgently due to an emergency situation. A second example is where the works are of a very specialist nature, and there may only be one contractor to appoint.

The third example is where there is only a minor breach of the section 20 consultation procedure which did not cause any prejudice to the tenants. It is likely that this third circumstance in one which is likely to be the subject of more court cases in the future! So watch this space!

HEALTH WARNING!

As can be seen, even where the landlord is a company owned and run by the leaseholders themselves (as in my case) the consultant provision is equally strict and dispensation is likely to be granted only in very rare cases.

Does this mean the Government and legislative bodies seriously need to consider raising the very low section 20 cost thresholds so the consultation requirement stop being a burden for resident management companies such as mine?

The FPRA has asked both this and the previous Labour government to request raising the threshold for section 20 to bring it in line with inflation trends as the original figure of £250 was set during the introduction of the CLRA Act 2002. Surely 10 years on this is a reasonable request?

Section 20 consultation: ‘FPRA is siding with landlords’

Leaseholder organisations at loggerheads

SECTION 20 CONSULTATION – CAN IT BE AVOIDED?