Residential Service Charge consultation – developers beware!

It is relatively widely known that landlords of residential blocks must consult their tenants before they can recover (in full) certain items through the service charge regime. For example, if they wish to carry out a substantial redecoration of the exterior of the block.

But that’s once the leases are in place, right?

Unfortunately it’s not that simple! Those consultation obligations can, in principle, bite after contracts have been exchanged, but before any leases have been granted.  In other words before there is, in the everyday sense, a landlord and a tenant.  And that can also be the case even if the building is still being built; so, for example, in the case of ‘off plan’ sales.

In short, this all derives from the fact that the relevant legislation, the Landlord and Tenant Act 1985, includes agreement for lease in the definitions of ‘lease’ and ‘tenancy’.

In practice, what is most likely to require consultation at the agreement for lease stage are ‘Qualifying Long Term Agreements’. That is to say any agreement of more than 12 months, or rolling beyond 12 months, which would result in any individual tenant incurring costs of more than £100 in any accounting period.  One example might be a lift maintenance agreement.  Those are the sorts of arrangements that are often put in place prior to completion of the leases, and even during the construction phase.

The position is not however entirely clear cut.

The case of BDW Trading Ltd [2013] held that consultation was not required, where the building in question was not let.  However, in that instance, there were no consultees at all, as there weren’t any agreements for lease in place.

The case of Ridgewood [2013] brings into question, by analogy, the effect of a condition precedent.  The Court held that agreements for lease must be specifically enforceable to come within comparable provisions in the Landlord & Tenant (Covenants) Act 1995.  The condition precedent in that case was, however, the grant of planning permission.  Would reaching Practical Completion (the usual trigger to completion on a residential development) be viewed differently?  Something that is more within the control of the developer/landlord?

So questions marks remain.

In the meantime, we are aware that many developers do not consult prior to completion of the leases.

However, in the absence of a more specific case on the matter, or a statutory update, the cautious approach would be to consult at the agreement for lease if you are entering into any Qualifying Long Term Agreements. The consequence of getting it wrong is that the eventual tenants are not required to pay more than £100 in respect of each of those Qualifying Long Term Agreements.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.