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Phillips v Francis [2015] 1 WLR 741

Published May 2015

Normal Service Charges Resumed: Phillips v Francis [2015] 1 WLR 741

Jonathan Chew acted with Jonathan Seitler QC for the successful landlord in Phillips v Francis and Jonathan Davey acted for the intervener, the Secretary of State for Communities and Local Government.

In Phillips v Francis [2015] 1 WLR 741, the Court of Appeal reversed the controversial decision of Morritt C at first instance ([2013] 1 WLR 2343) on the meaning of “qualifying works” for service charge consultation. The decision was greeted with relief by managing agents and surveyors across the country, who viewed the former Chancellor’s decision as unworkable in practice and harming rather than protecting tenants.

The service charge consultation regime in outline

Sections 18 to 30 of the Landlord and Tenant Act 1985 give tenants statutory protection from excessive service charge costs. By section 19, service charges must be reasonable and reasonably incurred to be recoverable. In addition to that general protection, there is a range of specific methods of protection, including consultation. The purpose of the consultation regime in sections 20 and 20ZA is to give effect to the primary purpose of ensuring that tenants do not pay for poor services, or for more than they should (Daejan v Benson [2013] 1 WLR 854 at [42].)

The consultation regime applies to “qualifying works” (section 20(1)), defined as “works on a building or any other premises” (section 20ZA(4)). Regulations set out the detail of consultation requirements. The consultation process takes time (to give tenants a chance to respond) and costs money to administer (which costs themselves form part of the service charge sums payable by tenants). Failure to comply with the consultation requirements means that, unless the landlord obtains dispensation from the tribunal, the landlord can only recover the “appropriate amount” set by the regulations. Prior to the 2002 Commonhold and Leasehold Reform Act, this was a £1000 sum; now it is £250 per tenant. This is the “statutory cap”.

The issue in Phillips was how to apply the statutory cap to the definition of qualifying works. The problem with the statutory definition is that it only tells you what works are covered: the Act is silent on the question of to what group or value of works on a building the statutory cap applies to. It answers “what?” but not “how much?”

The two approaches

In Phillips, two approaches were canvassed:

  1. The “sets approach”, where a project of works is objectively assessed to see what constitutes one “set” or “batch” of works. The statutory cap is then applied to the value of that set of works: if the works cost less than £250 per tenant there is no need to consult.
  2. The “aggregating approach”, where all works on a building in a given service charge period are taken together. Their value is added together and, if it exceeds £250 per tenant, the cap applies unless there is consultation.

The sets approach originated in the decision of Robert Walker LJ in Martin v Maryland Estates [1999] 2 EGLR 53. There, both sides accepted that a sets or batches approach was correct, and the question was whether a given project of works constituted one or two sets.

In Phillips, before Morritt C, both sides argued for the sets approach. The tenants argued that there was one set of works on the holiday park, the landlord argued that there were multiple sets. Morritt C decided the sets approach was inappropriate, because the statutory definition did not provide for any sets or batching. Rather, he used the service charge period to provide a limit and ordered that all qualifying works carried out within a service charge year be brought into account.

Return to orthodoxy and the benefit of sets approach

The problem with the aggregating approach was set out by this example, given in argument and accepted by the Court of Appeal at [26-7]:

“Imagine a residential block of flats with four tenants: the annual regulatory limit is 4 x £250: £1,000. Three lots of minor works on a building each costing £75 are carried out in the first half of the year. The landlord has spent £225 on service charge items. There has been no consultation. Unexpectedly, in September the outer door of the block breaks and a new door frame is required which would cost £800. A storm in November causes window damage that would cost £400 to repair. On the sets approach, the landlord would not need to consult on any of these items. They are all distinct sets of qualifying works none of which costs more than £1,000. The landlord could respond immediately and repair the damage to the door and the window. The tenants are still protected because they have the after-the-event protection afforded by section 19 of the 1985 Act that the costs are only relevant costs to the extent that they are reasonably incurred and of a reasonable standard.

On the aggregating approach, the annual limit is exceeded by the broken door. The landlord is obliged to consult on it. This process takes time and costs money. If instead he replaces the door immediately, he has no right to recover the full amount without dispensation. Seeking dispensation has attendant legal and administrative costs as well as the risk of non-recovery and delay. But if he does not replace the door, the flats are unsafe and he is likely to have irate tenants.”

The core issue is that consultation acts prospectively, in that the landlord seeks comment on what is to be done, while the aggregating approach necessarily acts retrospectively, in adding up all works done within a given period. Since it is impossible to know what works are going to be necessary, the landlord cannot know what to consult on. The tenants bear the cost of continual protective consultation.

The Court of Appeal affirmed the sets approach and, importantly for practitioners, Lord Dyson MR gave guidance on how to distinguish one set from another at [36]:

“It is a multi-factorial question the answer to which should be determined in a common sense way taking into account all relevant circumstances. Relevant factors are likely to include (i) where the items of work are to be carried out (whether they are contiguous to or physically far removed from each other); (ii) whether they are the subject of the same contract; (iii) whether they are to be done at more or less the same time or at different times; and (iv) whether the items of work are different in character from, or have no connection with, each other. I emphasise that this is not intended to be an exhaustive list of factors which are likely to be relevant. Ultimately, it will be a question of fact and degree. Robert Walker LJ said that, on the facts in Martin’s case [1999] 2 EGLR 53, the fact that all the works were the subject of one contract was a factor which decisively pointed to the conclusion that there was a single set of works in that case. It seems to me that the judge must have had in mind such an approach when he said at para 362 that he had considered “the nature, extent and timing of the works as undertaken and proposed to be undertaken”.”

Etherton C emphasised that this question of fact is to be determined objectively and indicated that the way the works were planned and the landlord’s reasons for the works are of relevance (at [66]).

The Court of Appeal held that the trial judge had gone too far in stating that the works needed to be significant with a permanent effect by way of modification of what was there before (at [38]). So, the limit is the multi-factorial question of what is a “set” and no more: any “work on a building” counts within a set.

As well as indicating a list of factors, the Court of Appeal’s approach emphasises the factual nature of the question. This can only benefit both landlords and tenants. It should move the debate away from legal questions about the meaning of the (badly-drafted) provisions of the 1985 Act and onto the real life issues on the ground at the relevant property. This puts the question in the factual hands of surveyor experts, and limits legal argument to the facts of any given case.

Phillips has been, as it should be, welcomed by practitioners in the field. Not only has the Court of Appeal corrected a wrong turning in the law, it has provided detailed guidance to landlords, tenants, and the first instance courts and tribunals who will deal with such matters on a daily basis. The multi-factorial approach set out provides the definition sorely missing from the legislation and shows the way forward.

 Read the next article (Tindall Cobham 1 v Adda Hotels)>>