When is an Agreement a Qualifying Long Term Agreement?

Qualifying long term agreements, particularly in the context of management agreements, have been firmly on the radar following the decisions of the Upper Tribunal and Court of Appeal in the Corvan case.

QLTAs in the context of management agreements have, once again, troubled the Upper Tribunal recently in Ghosh v Hanover Gate Mansions Limited and anr [2019] UKUT 290 (LC), but this time in the context of the date on which a contract comes into effect.

 

The statutory position

Section 20 of the Landlord and Tenant Act 1985 (as amended) operates as one of the various limitations on the recovery of service charges. “Relevant contributions” of leaseholders are capped unless the consultation requirements have either

(a) been complied with; or
(b) been dispensed with by the Tribunal.

A “qualifying long term agreement” is an agreement entered into, by or on behalf of the landlord or a superior landlord, for a term of more than 12 months.

If consultation has not been undertaken (or dispensation obtained) then a landlord is limited to recovering £100 per leaseholder per financial period in relation to that agreement.

 

What happened in Ghosh?

Hanover Gate Mansions comprises of six purpose built blocks of flat.

During April and May 2017, discussions took place with a managing agent, with a view to instructing the agent to act on behalf of the management company. Those discussions resulted in a management agreement being produced (albeit the agreement was never signed).

 

The management agreement

Although the agreement was never signed, the first provision reads

“This Agreement is made the 12th day of June 2017”.

So far as the term was concerned,

“The Agent shall perform the services on 12th June 2017 to 11th June 2018. After this period, the Agreement shall continue on the terms set out, subject to termination under clause 7”.

So far as termination is concerned,

“Either party may terminate this Agreement following the expiry of 9 calendar months of the stated Management Period, by serving on the other not less than 3 months’ notice in writing”.

 

Decision of the FTT

The leaseholder argued that this was a qualifying long term agreement.

It appears to have been conceded by the management company (and freeholder) that if the contract had come into effect on 12 June, that it would have been a qualifying long term agreement.

The management company accepted in their statement of case that the managing agent “commenced the provision of management services in relation to the property and demanded service charges as the agent of [the management company] from on or about 12 June 2017”.

It was the management company’s case that this was a trial period, and that at some point a form of contract on a periodic basis would have come in to being on that trial basis.

The FTT accepted that no formal written contract was entered into, instead, the FTT determined that an oral contract evidenced by the actions of supply and a subsequent payment was entered into on some date after 12 June 2017. The start date is, of course, imperative in assessing whether or not the management agreement is a QLTA.

The FTT heard submissions from the management company, who argued that an oral contract based on a draft could have only taken effect when payment was made. This was given to be 24 June 2017.

On that basis, the Tribunal found that the contract was for less than 1 year’s duration, and was not, therefore, a QLTA.

 

Discussion on Appeal

In their arguments before the FTT, the management company and landlord relied on a House of Lords case from the 1870s: Brogden v Metropolitan Railway Company.

Unfortunately, the Tribunal misconstrued the Brogden case, and, consequently, came to the wrong decision.

Brogden is a case that deals with the supply of coal from a colliery in Wales to the Metropolitan Railway Company. In that case, a draft agreement was drawn up in December 1871, but was never signed. Coal was supplied in accordance with the terms of the contract from the beginning of January 1872, and no-one had cause to refer to the contract until the supply arrangements broke down and the colliery owners claimed that there was no contract.

The important part of the Brogden case is that it’s authority for the proposition that the contract came into effect when coal was supplied in accordance with the terms of the agreement.

It was not, as the FTT thought, authority for the proposition that a contract takes effect only when goods or services are paid for.

Accordingly, in Ghosh, the contract took effect by performance and when performance commenced on 12 June.

The upshot is, of course, that the management agreement is a QLTA. On the basis that consultation had not taken place, the leaseholder’s liability for that element of the service charge was limited to just £100.

 

Commentary

This case serves as a reminder that management agreements (and indeed any other agreements that might be “caught” as a QLTA) need very careful drafting so as to avoid challenges that those agreements are qualifying long term agreements, and avoid situations where the recovery of costs is limited to just £100 per leaseholder per financial period.

 

 

 

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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