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Section 20 consultation: The pitfalls and how to avoid them

01 July 2010

If registered providers wish to avoid a cap on the service charge contribution they can recover from leaseholders, they must follow a set process - the Section 20 consultation.

The full extent of what is required is actually found in Sections 18-20 Landlord & Tenant Act 1985, and Sections 150 and 151 of the Commonhold & Leasehold Reform Act 2002.

There is an important set of Regulations to follow as well - the Service Charges (Consultation Requirements) (England) Regulations 2003.

So what's involved? At its simplest:

giving notices containing prescribed information to the right people at the right time
allowing prescribed periods of time to elapse during which observations about the contents of the notices can be received
having regard to observations received during the prescribed periods

It is therefore very much a process, but surprisingly, organisations:

fail to give notices either at all, or when required, or in the manner required, or about the correct matters, or to the correct parties
fail to seek a dispensation from following through the consolation process when they need to do so

The Leasehold Valuation Tribunal (LVT) is often where problems end up having to be resolved if landlords have failed to follow the consultation requirements. There is no certainty that dispensation will be granted, because dispensation is a discretionary remedy.

To avoid the consequences of failing to comply with the consultation requirements - which can be dramatic and potentially disastrous in terms of reputation, customer relationships and impact on business plans - here are some things to bear in mind:

Be certain you know your lease - an item cannot be recovered as part of the service charge if it is not allowed for in the service charge machinery and other clauses in the lease. Often, the issue crystallises around whether a piece of work is 'repair' or 'improvement'. Whist the latter is now recoverable under the legalisation, some old leases do not allow for improvements when it comes to calculating service charge payments.
Consider what you need to do in light of the overall needs of your organisation - some types of agreement under which works could be carried out fall outside the scope of the legislation, but those are very much short term arrangements which would not necessarily be in the best interests of your organisation when it comes to asset management. However, if you are in a position to take advantage of the exception on a one off basis, why not do so?
Allow sufficient time - there are reasonably lengthy periods when leaseholders have a right to make observations. It is important not to have reduced these periods, because case law shows that in the past the LVT has taken a dim view of landlords who bridge the consultation periods. Therefore, try not to leave things to the last moment.
Follow the detail of the 2003 Regulations at all times - what you have to do is contained in four different schedules to the 2003 Regulations. Schedules 1, 2, and 3; and Part 1 of Schedule 4 are relevant when what is called a 'qualifying long term agreement' is, or will be, in place. Part 2 of Schedule 4 applies when qualifying works are to be carried out other than under such an agreement. Always check your proposals against the schedules so you know which procedure you have to follow.
Follow the relevant procedure to the letter - plan the process well in advance knowing what resource you need internally and what you have to do. Dispensation from complying with the Regulations may not be granted, even for a minor instance of non-compliance. Remember, it is discretionary
Make certain you have processes and procedures in place to demonstrate you have regard to observations received - there is little guidance available about what is required as a landlord when you are under a duty to have 'regard', but if you can show how you deal with the observation you will be in a much better place to see off any suggestion that you did not discharge your duty.

Always remember that even if you comply with the consultation requirements, there is an overriding provision in the legislation to the effect that work and services can only be recovered through service charge machinery to the extent that the costs are reasonably incurred, and the services or works are of a reasonable standard.

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Section 20 consultation: The pitfalls and how to avoid them

01 July 2010

If registered providers wish to avoid a cap on the service charge contribution they can recover from leaseholders, they must follow a set process - the Section 20 consultation.

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