The consultation conundrum

When a landlord decides to appoint a manager for a block of flats they will need to first consider whether there is power (a) to make such an appointment in the leases and (b) to charge the leaseholders for the costs of employing agents. A landlord must also consider consulting the leaseholders before making such an appointment. This is because the agreement with the proposed agent may be a “qualifying long-term agreement”. Key points Landlords must consult tenants on appointment of managing agents under qualifying long-term agreements What qualifies as a long-term agreement? This is defined as an agreement for a term of more than 12 months (section 20ZA(2) of the Landlord and Tenant Act 1985 (the 1985 Act)). Where the proposed agreement will last for more than 12 months, the landlord must first consult with the leaseholders in the way set out in The Service Charges (Consultation Requirements) (England) Regulations 2003. Failure to comply with these consultation requirements caps the landlord’s recovery of the costs it incurs under the agreement at £100 per accounting period. Using renewable annual agreements Experience has shown that many landlords seek to avoid carrying out a statutory consultation by the simple expedient of entering into an agreement for just 12 months with a clause allowing for the agreement to be renewed at the end of the original term. This may satisfy a potential managing agent who might be reluctant to take over management without some guarantee that the job will be theirs for a few years. However, such a practice denies the leaseholders the right to have a say in who should be appointed and to propose an alternative agent. There have been relatively few reported challenges to this way of avoiding the statutory consultation. The latest decision is that of the Upper Tribunal (UT) in Corvan (Properties) Ltd v Abdel-Mahmoud [2017] UKUT 228 (LC); [2017] PLSCS 124. It involved a substantial claim for service charge arrears which had accrued over four years. The charges claimed included the costs of employing two successive firms of managing agents, each of whom had a similar agreement. It was common ground that the landlord had not adhered to the consultation procedures in the 1985 Act to either agreement. (Had the landlord assumed that both agreements were for a term of no more than 12 months and therefore outside the scope of section 20 of the Act?) The case arose following appeals against several aspects of the decisions of the First-tier Tribunal (FTT). This note examines the management agreements which the FTT decided were for longer than 12 months. The landlords should, therefore, have consulted the leaseholders prior to entering into them. The wording of the agreement is critical. In Corvan each agreement included under the heading “term”: “The contract period will be for a period of one year from the date of signature hereof and will continue thereafter until terminated upon three months’ notice by either party.” Previous decisions There were two previously reported cases. First, the county court case of Paddington Walk Management Ltd v Peabody Trust [2009] 2 EGLR 123, where the agreement was “for an initial period of one year from 1 June 2006 and will continue on a year-to-year basis with the right to termination by either party giving three months’ notice…”. Here the court decided that as there was no commitment for the agreement to go on for longer than 12 months it was not a qualifying long-term agreement. In the second case – Poynders Court Ltd v GLS Property Management Ltd [2012] UKUT 339 (LC) – the agreement did not state its term or duration though either party could terminate it by giving three months’ notice. Here the UT found that as the agreement was of an indefinite duration until terminated, it was for longer than 12 months. In its consideration of the appeal in Corvan the UT found it “difficult to reconcile” the reasoning in these two cases. But it reached the conclusion that the FTT was correct in deciding that the agreement was for a term of more than 12 months. It was intended that the agreement would continue after the initial period of one year until terminated by one or other of the parties (it “will continue thereafter”). And the agreement could only be terminated by notice. Whether the notice is given during or after the initial 12 months it could not terminate it, reasoned the UT, until after the end of the initial agreement: “On that construction the agreement was for a period of at least a year and a day.” The decision dealt with the first of the two agreements but it was accepted that the decision applied to both. As a result, both are long-term qualifying agreements requiring prior consultation, which had not taken place. As there are costs incurred under the agreements over a four-year period, presumably the landlord will seek an order dispensing with the consultation requirements (under section 20ZA of the Act). In light of the decision in Daejan Investments Ltd v Benson and other [2013] UKSC 14; [2013] 2 EGLR 45, dispensation might well be granted provided the charges made are considered reasonable. The future? With now three reported decisions on the construction of one-year (renewable) agreements, perhaps the time has come for landlords and agents to consider a different approach by consulting with the leaseholders over a proposed longer-term agreement to manage the premises. Where leaseholders have a recognised tenants’ association (RTA) they may require the landlord to consult them before making such an appointment (section 30B of the 1985 Act). Why not consult whether there is a RTA or not? James Driscoll is a solicitor and a consulting editor to the Handbook of Residential Tenancies