Under the terms of a lease, some leaseholders have to pay towards the cost of any services or work to the building their home is in or the estate it is on. This is done through the payment of service charges.
Under section 20 of the Landlord and Tenant Act 1985, landlords have to consult leaseholders who pay variable service charges before undertaking specific works or long-term agreements.
This process is called a Section 20 Consultation.
The consultation doesn't aim to get leasehold approval on works or services. Rather, its main goal is to let leaseholders share their thoughts on the landlord's plans, nominate a contractor for an estimate, and make sure the landlord proves they're getting value for money in their selection.
What is a section 20 notice?
A Section 20 notice is a formal notification for leaseholders about upcoming work or services that they need to contribute towards.
The notice outlines what's planned, estimated costs, and gives leaseholders and registered tenants' associations the chance to have their say in the consultation process around the proposed work or services.
What is the Section 20 consultation process?
There are three stages in the Section 20 consultation process:
Pre-tender stage - Notice of intention
In the first instance, notices must be sent to each leaseholder and RTA if there is one. These notices should describe the works or services, give reasons, and give 30 days for observations. Leaseholders can also nominate a contractor within the 30 days.
Landlords must then consider any observations made by leaseholders and get estimates from chosen and nominated contractors.
Tender stage - Preparation of landlord's proposals
During the tender stage, the landlord must prepare at least two proposals (estimates) for the services, goods, or works.
At least one of these proposals must be from a contractor who is not connected in any way to the landlord.
If nominations are made, proposals must also include estimates from nominated contractors.
When sharing the proposals with leaseholders and the RTA (if applicable), the landlord must provide information on important matters, the parties involved, their connections, and the costs involved.
If appointing a property management agent, details about their affiliations and practices must be included. The notice should invite written feedback, specify where to send it, and mention the deadline for comments. A summary of received observations and the landlord's responses should be shared.
While the landlord doesn't have to make all estimates available, it's recommended they do so for transparency.
Notification of landlord's proposals
After finalising the agreement, the landlord must inform each leaseholder and the RTA within 21 days. This notice should clarify why the contract was awarded or where to check the reasons. It should also include a summary of received observations, the landlord's responses, and where to review them.
If copies aren't available for inspection, free copies must be provided upon request. However, this notice isn't needed if the contract is awarded to a nominated contractor or the lowest tender.
Can leaseholders stop the Section 20 process?
Leaseholders can't stop their landlord from issuing a Section 20 notice, but they do have the right to contest the incurred costs.
To do this effectively, leaseholders should actively participate in the Section 20 process and gather evidence if the other party acts unreasonably or causes them to face excessive costs. For instance, if a suggested contractor by a leaseholder was significantly cheaper than the chosen one for the work, this could be a valid reason to challenge the cost.
When should a landlord consult with leaseholders?
Repairs, maintenance, and improvements
Landlords need to consult with leaseholders if proposed works will cost over £250 for any contributing leaseholder. Even in properties with uneven service charge contributions, the landlord must consult all leaseholders if any would pay more than £250.
Qualifying works include repairs, maintenance, or improvements. However, landlords can't recover costs for improvements unless that is specified in the lease. VAT on works must be considered in estimating costs.
In 2012, a High Court case created uncertainty about a cost threshold for landlords needing to consult on works. However, in October 2014, the Court of Appeal reinstated the "sets approach," applying section 20 consultation to individual sets of works without considering time periods or service charge years. The Court also provided guidance on factors to identify a set of works, considering location, contract unity, timing, work character, and the lessor's planning reasons.
Long term-agreements
Landlords need to consult if any leaseholder would pay over £100 in a year under the agreement. In properties with uneven service charges, they must consult all leaseholders if any would pay more than £100. The calculation includes total contributions, including VAT. If they don't consult, the landlord may not recover more than £100 per leaseholder per year for the agreement's costs.
A qualifying long-term agreement is a commitment with an independent organization or contractor lasting more than 12 months.
This could be agreements for:
Building-wide services like lifts, entry-phone systems, waste management, or maintenance;
Cleaning services;
Gardening services;
Insurance;
Utility services;
Management agency agreements.
Even if there's only one realistic supplier for these services, consultation is still required unless the Tribunal grants an exception.
Some contracts aren't considered 'qualifying long-term agreements' such as employment contracts, agreements between a holding company and its subsidiary, and agreements for less than 5 years that were made when there were no leaseholders at the property.
The rules also don't apply to any agreements lasting more than 12 months that were entered into before 31st October 2003.
Long-term agreements including works
If the long-term agreement involves works costing a leaseholder over £250, a separate consultation is needed, even for agreements made before October 31, 2003, that initially didn't require consultation.
Who must be consulted?
Landlords are required to send consultation notices to individual leaseholders and any Recognised Tenants' Association (RTA).
During consultations, leaseholders and RTAs can nominate potential contractors. The law doesn't say that these contractors must be unrelated to the nominating party, but if any relationship is known, it may influence the landlord's choice of contractor.
What are the rules around nominating contractors?
When dealing with contractor nominations, landlords must:
Try to get an estimate from the nominated contractor if a single nomination is made; or
If multiple nominations are made by more than one leaseholder or an RTA, the landlord should get an estimate from the contractor with the most nominations or if there is no clear majority, the landlord should consider those with equal nominations.
If both a leaseholder and an RTA make nominations, the landlord must get estimates from at least one nominee from each party.
How should a landlord choose contractors?
Landlords can set criteria when seeking estimates from leaseholders' nominees, such as insurance, tax status, and safety policies. They must justify these criteria to the Tribunal, avoiding overly restrictive terms. Including criteria in tender requests or notifying leaseholders promotes fairness and competition. However, landlords should be cautious not to exclude smaller contractors when initially organising contracts for multiple estates.
How many notices should be served in the consultation process?
Landlords must provide consultation notices to leaseholders at three stages in the contract award process:
The pre-tender stage (notice of intention);
Tender stage (notice of landlord's proposals);
Notice of reasons for awarding the contract.
What does 'the duty to have regard' mean?
During the section 20 consultation process, landlords must consider any written observations received. If they choose a contractor who didn't submit the lowest estimate or wasn't nominated by a leaseholder or RTA, the landlord must provide written reasons or specify where the reasons can be inspected. Failure to follow these procedures may be considered by a Tribunal in relevant applications.
Connections between landlords and contractors
For one of the estimates during the consultation, regulations require it to be from a contractor not connected to the landlord. The connection includes situations where individuals are directors or managers of each other's companies, or if there are family relationships like being spouses, parents, siblings, etc. This ensures independence in the contractor selection process.
How long do leaseholders have to reply to notices in the consultation process?
Notices should provide a clear period for leaseholders to respond. For instance, if the notice gives a 30-day response window, it's good practice to allow an additional 2-3 days to account for posting time.
How long does a section 20 consultation take?
A section 20 consultation can take several months, not least because leaseholders have 30 days to respond to a notice of intention and another 30 more days to respond to the notice of the landlord's proposals.
Therefore, at a minimum, the process will take two months. Other factors also add extra time to the process including:
Inviting nominated contractors;
Checking if nominated contractors meet the criteria;
Considering observations from leaseholders;
Creating a summary of responses to the first notice.
What is the role of the Tribunal in a Section 20 consultation?
Landlords can request Section 20 dispensation from the Tribunal if urgent works are needed or if there's a mistake in the consultation process.
In a key case (Daejan Investments v Benson), the Supreme Court emphasised that the only relevant factor for dispensation is the financial impact on the leaseholder because of improper consultation. Therefore, leaseholders must show losses and suggest their observations if properly informed.
If dispensation is granted, the leaseholder pays the full cost, minus proven prejudice.
What is the penalty for not consulting leaseholders?
If a landlord doesn't follow the consultation process properly, they may not be able to collect service charges above a certain amount. These are:
£100 per leaseholder per year for long-term contracts;
£250 per leaseholder for building works.
Instead, the landlord would have to cover the loss themselves. For companies, this could have serious consequences, even leading to insolvency.
Section 20 consultations vs service charge collections process
Section 20 consultations focus on proposals for using service charge funds. This is separate from the service charge collection process.
A lease should outline the leaseholder's responsibility for paying service charges and estimated 'on account' charges usually required at the beginning of the financial year, potentially before or during the consultation.
Leaseholders can dispute service charges by making an application to the Tribunal. However, this is separate from a Section 20 consultation.
Is a Section 20 consultation necessary if money is already held within the reserve fund?
Yes. A reserve fund is made up of service charges collected in advance, and before spending it on significant works, consultation is needed, especially if the costs exceed a certain threshold. The process makes sure decision-making regarding the reserve fund is transparent.
Do landlords have to choose contractors nominated by leaseholders?
No, leaseholders don't get to choose the contractor that is used; the final decision rests with the landlord. However, the landlord must get a price from at least one proposed contractor and include those prices in a Statement of Estimates. Ultimately, though, the landlord has the flexibility to choose a different contractor if they wish.
Can leaseholders refuse to pay towards major works?
Leaseholders are required to pay service charges outlined in the terms of their lease. Therefore, leaseholders shouldn't withhold payment of service charges if they don't agree with a Section 20 Notice.
Instead, leaseholders can ask a First Tier Tribunal whether a charge or a proposed charge, is reasonably incurred. An application can be made whether charges have been paid or not, and the Tribunal will determine whether a service charge is payable, who should pay it, and when.
If you are looking to challenge a Section 20 notice or bill, it's wise to enlist the support of other leaseholders and seek specialist advice from a property solicitor.
It is not recommended that you refuse to pay, as this could end up being very costly if you lose the case in court and are ordered to pay costs. Sometimes, these costs will be far greater than the original bill, which isn't ideal.
For more help and information regarding Section 20 consultations and service charge disputes, whether you're a landlord or leaseholder, contact us today for a free case evaluation.