Section 20 Consultations Bite!
Landlord £270,000 out of pocket after failing to carry out Section 20 consultation with tenants regarding service charge expenditure.
As the landlord of a block of flats, you will be required to maintain the common parts of the building. The tenants will fund these costs by payment of a service charge, and the details will be set out in their leases. However, there is a related piece of legislation that landlords cannot afford to ignore. If any proposed works cost an individual tenant £250 or more, or if you enter into a long term contract likely to cost each tenant £100 or more, you must first carry out a statutory consultation process with your leaseholders. If you fail to do so, you will be unable to recover from them any costs arising over the £250 or £100 limit per flat.
In the recent case of Daejan Investments Limited v Benson the landlord was severely punished for failure to consult with its tenants. The case concerned a block of flats in Muswell Hill, London where major works costing £270,000 were needed to the property. The landlord proceeded with the works without properly consulting with the tenants, and then tried to recover the cost through the service charge. The 5 leaseholders pointed to the Landlord and Tenant Act 1985 and refused to pay any charges over £250 per flat (totalling £1,250). The landlord took its case to the Leasehold Valuation Tribunal, the Lands Tribunal and the Court of Appeal. All refused to grant the landlord an order that the statutory consultation process could be ignored. The landlord is now appealing to the Supreme Court, where most industry experts believe it will fail again, only to rack up huge legal bills on top of the £268,750 irrecoverable repair costs.
So what should the landlord have done? The procedure is known as a Section 20 Consultation and it essentially involves three stages. First, a notice must be served on all the leaseholders informing them that the landlord intends to carry out significant works, inviting observations from the leaseholders and asking for the names of any contractors that the leaseholders would like the landlord to obtain estimates from.
Second, the landlord must then seek at least two estimates and serve a further statement on the leaseholders setting out details of the estimates and a summary of the observations that may have already been received from any of the leaseholders. After 30 days the third stage is that the landlord must give notice to the leaseholders of his choice of contractor, giving reasons if that choice is not a contractor nominated by the leaseholders.
The Section 20 notice procedure is undoubtedly cumbersome and time-consuming and many landlords are tempted to ignore it. In practice, landlords may have got away with it in the past if their leaseholders were not aware of the law. However, the tenants in the Daejan case clearly knew their rights and the courts are applying the law strictly in their favour.
The section 20 consultation is just one of many statutory requirements which can trip up landlords. Most tenants are very clued up nowadays and will scrutinise their landlord’s every move. If you are a landlord and feeling burdened by all the legislation involved in self-managing a block of flats, pick up the phone and speak to one of our friendly team at BlocMan. We can remove the pressure by taking over the day to day responsibilities of block management.