Consultation: when is it necessary to repeat stage 2?

One of the questions that I’m often asked by managing agents is whether or not they need to repeat stage 2 of the consultation process where there are changes to the proposed programme of major works.

This was the issue before the Court of Appeal in Reedbase Limited and Anr v Fattal and Ors [2018] EWCA Civ 840.

 

Consultation

One of the statutory restrictions that’s placed on the recovery of service charge is the requirement to consult. Section 20 of the Landlord and Tenant Act 1985 (as amended) makes clear that the contributions of leaseholders will be capped unless either

  1. the consultation requirements have either been complied with; or
  2. dispensation granted by the Tribunal.

If there’s been no consultation or dispensation, then the contribution per leaseholder is capped at £250.00.

The procedure for undertaking consultation is set down by the Service Charges (Consultation Requirements) (England) Regulations 2003.

Consultation is a staged process.

Stage 1 requires the leaseholders (and any other recognised tenants’ association) to be given a notice of intention. The Regulations set out what must be included in the notice. Regard must be had to any observations received and any contractors proposed.

Stage 2 is the notice of estimate stage.  Leaseholders (and any RTA) are given a notice of estimates (commonly referred to as a paragraph (b) statement).

Again, the notice of estimates has to contain certain information prescribed by the Regulations, and allow leaseholders (and any RTA) to make observations.

There is a third stage, but this only applies where the contract for the works is placed with a contractor who was not the cheapest or was not nominated.

It was made clear by the Supreme Court in Daejan Investments Limited v Benson  that the purpose of consultation is to protect the section 19 rights that leaseholders have in relation to reasonableness of service charge.

In Reedbase, the leaseholders argued that there’d been a breach of the consultation requirements at the stage 2 notice of estimates stage.


Background

In Reedbase, there was a proposed project of major works to the asphalt roof under the terraces of two penthouses.  The leaseholders of those penthouses had placed tiles on top of the roof.

It was proposed to seal the roof with a plastic substance called Decothane on which tiles called grantile would be placed. However, it was only after sending out the specification for this that it was discovered that the guarantee offered by Decothane would be invalidated if tiles were placed directly on the Decothane. Accordingly, it was proposed that the tiles should be fixed by a pedestal system, and essentially wedges inserted between the tiles and the Decothane.

The financial difference of this was approximately £30,000 on works worth over £300,000.

 

Consultation undertaken

So far as consultation was concerned, it was common ground that stage 1 had been completed, and details of the general works that were proposed had been circulated. No issue was taken by the leaseholders in relation to stage 1 of the consultation.

However, because of the change to the works, the leaseholders argued that there should have been a retendering at stage 2 once it was realised that there’d been a variation to the proposals regarding the tiles.

Essentially, the leaseholders argued that a new second stage notice was required once the specification had changed.

On behalf of the management company, it was argued that an increase in the cost is not of itself sufficient to invalidate consultation (since all the landlord is required to do is to produce estimates).

 

Decision of the Court of Appeal

It was recognised by the Court of Appeal that it’s sometimes necessary for a landlord to repeat stage 2 of the consultation process. And that there’s no statutory guidance on when this should be done.

The Court of Appeal therefore have assisted both landlords and leaseholders by setting out the relevant test about when a fresh set of estimates should be obtained.

The test is whether, in all the circumstances, the leaseholders have been given sufficient information by the first set of estimates. This involves comparing the information provided about the old and the new proposals.

Although in this case there was an additional cost of the pedestal system for fixing the tiles, that would not necessarily result in a material change to the information provided to the leaseholders.

Or, looking at it another way, would the protection afforded to leaseholders by the consultation process be materially assisted by obtaining fresh estimates?

The Court of Appeal took account of several factors on answering that question.

  1. The leaseholders knew and approved of the system, so there was no ambush on the part of the landlord in doing something fundamentally different from the works originally proposed.
  2. The change in cost was relatively small in proportion to the overall costs of the works.
  3. It was unrealistic to think that contractors who hadn’t been awarded the main part of the contract would tender for this small part of it (i.e. supplying and fixing the tiles), and in any event there was no evidence that there would have been any saving in cost.
  4. The retendering process would have led to a loss of time in completing the works, which might prejudice other leaseholders.
  5. The leaseholders continue to have their protection under section 19.

 

Commentary

This test set down by the Court of Appeal is welcome practical guidance for landlords undertaking consultation. Essentially, it involves looking at:

  1. was sufficient information provided?; and
  2. would a fresh consultation materially assist the leaseholders’ statutory protection?

If sufficient information was provided, then it’s unlikely that a new consultation will materially assist the leaseholders, and so it’s not necessary to repeat stage 2.

 

 

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.
2 Responses to “Consultation: when is it necessary to repeat stage 2?”
  1. Edward Lilley says April 30, 2018

    Dear Cassandra, Many thanks. A very clear setting down of the principles behind the Court of Appeal’s decision. Should be useful to all who find themselves in a similar situation. Carry on the good work.

    • Cassandra Zanelli says May 5, 2018

      Thanks Edward. It’s a welcome (and sensible) decision.

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