When is a management agreement a qualifying long term agreement?

Section 20 of the Landlord and Tenant Act 1985 places a limitation on the contributions of leaseholders for costs incurred under a qualifying long term agreement unless the consultation requirements have either:-

  1. Been complied with in relation to the agreement; or
  2. Been dispensed with by the First Tier Tribunal (Property Chamber).

 

What’s a qualifying long term agreement?

By Section 20ZA, a qualifying long term agreement is “an agreement entered into, by or on behalf of the Landlord …… for a term of more than 12 months”.

 

What’s the impact?

The cap set down by the Regulations is £100 per leaseholder per financial period.

Therefore, if a landlord intends to enter into an agreement for a term of more than 12 months and the cost per leaseholder per financial year will exceed £100, the landlord must either undertake consultation or obtain dispensation.

The wording of management agreements have traditionally been a headache, particularly in relation to if and how the contracts are terminated, and what happens at the end of any fixed period.

It was this issue under consideration by the Upper Tribunal (Lands Chamber) in Corvan (Properties) Limited v Abdel-Mahmoud [2017] UKUT 0228 (LC).

 

What did the Management Agreement say in Corvan?

The management agreement with the agent included, under the heading “Term” the following:-

The contract period will be for a period of one year from the date of signature hereof and will continue thereafter until terminated upon three months’ notice by either party”

So does this mean it’s an agreement for more than 12 months and therefore a qualifying long term agreement?

 

Decision of the First Tier Tribunal

When this matter came before the First Tier Tribunal, they held that the agreement was for a term of more than 12 months, and that it was a qualifying long term agreement.  In reaching that conclusion, it placed particular importance on the words “and will continue thereafter” which it considered meant that the agreement could not be terminated before the end of 15 months.

 

What did the landlord and leaseholders say?

On behalf of the Landlord, it was argued that the FTT’s analysis was wrong.  The “Term” of the agreement was expressly stated to be one year.  That term could be brought to an end, the Landlord said, on the last day of the year by 3 months’ notice given during that year.  Alternatively, the agreement could be terminated by reasonable notice during the year.

In either event, said the Landlord, it followed that the agreement was not for more than 12 months.

On behalf of the leaseholders, it was argued that the agreement was not for a term of 12 months, but instead was indefinite (although terminable on notice).  The agreement expressly provided that it was for a period of one year which “will continue thereafter”.  That indefinite duration was not altered by the fact that the agreement could be determined on 3 months’ notice after a year.

The leaseholder argued that no notice could be given during the initial 12 months because the provision for termination appeared in the clause after the word “thereafter” signifying that notice could only be given after 12 months had elapsed.  The earlier date on which the agreement could be terminated was, therefore, at the end of 15 months.

 

Decision of the Upper Tribunal

In reaching their decision, the Upper Tribunal concentrated on the precise wording of the clause.  It recognised that although the contract period was expressly stated to be for a period of one year, it then went on to provide that the same contract period is to continue thereafter”.  The period of 12 months therefore represents only the start of the contract period.  The critical question is whether the contract period can be brought to an end on the expiry of that initial 12 months, or whether it must be allowed to continue for some further period, even if only for a single day.

The Upper Tribunal was “reasonably clear” that the agreement is intended to continue until after the end of the initial period for one year.  That continuation, for whatever further period, is not conditional on the absence of notice: it is a continuation “until terminated” and not “unless terminated”.

Accordingly, any notice cannot bring the agreement to an end until a period of continuation after the end of the 12 months has happened.

On that basis, the agreement was for a period of at least a year and a day, and as such, for a term of more than 12 months.

 

Commentary

Consultation for management agreements is pretty rare.

Landlords (and their agents) will need to take care when drafting their management agreements that those agreements are not, inadvertently, qualifying long term agreements and therefore “caught” by the consultation requirements.

Each agreement will, of course, be construed on its own wording.

Perhaps it is an appropriate time for landlords, and their agents, to undertake a review of their standard management agreements…….

 

 

16 June 2017

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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