Is it possible to “contract-out” of a Section 20 consultation?
11th May 2023
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11th May 2023
This week’s legal update focuses upon a topic that we are regularly being asked by managing agents, Landlords, Residents’ Management Companies (“RMCs”) and Right to Manage Companies (“RTMs”) tasked with undertaking major works projects. The question posed is whether, with the consent of the paying leaseholders, it is possible to “contract-out” of the consultation process set out under Section 20 of the Landlord and Tenant Act 1985 (“the Act”). The reason behind the question is often that the leaseholders wish to avoid the perceived delay and/or cost of complying with the consultation process or the need to apply to the First-Tier Tribunal (“the FTT”) for dispensation.
The question is one that is generally asked by those managing smaller blocks where obtaining such agreement may not necessarily be a logistical nightmare.
The Statutory Rules
The rules relating to when and how consultation is required are generally well known within the leasehold sector but we have previously considered in detail here and here the rules set out within the Act. However, in summary, before a party undertakes a major works project that would be considered “qualifying works” (or enters into an agreement which constitutes a “QLTA”) under the Act, the Landlord, RMC or RTM must follow the prescribed statutory consultation process where at least one leaseholder will incur a proportionate liability for the cost of the works which exceeds £250.00 (or £100.00 in relation to QLTAs) in any accounting period.
Failure to fully comply with the Act will limit the Landlords, RMCs or RTMs recoverability for the major works to just £250.00 (or £100.00 in relation to QLTAs) per leaseholder, irrespective of the total cost of the project. That is unless application is made to the FTT for dispensation in respect of all or any of the Act under Section 20ZA of the Act.
In terms of the requirements for dispensation from the Act, we refer to our Legal Updates here, here and here.
It should be noted that only the FTT has the power under Section 20ZA of the Act to grant a party dispensation.
Accordingly, in order to avoid the severe consequences of failing to comply with the Act or the need to obtain dispensation, consultation must be undertaken in full.
Despite the above, we often see leaseholders willingly asking Landlords, RMCs and RTMs to avoid the need for compliance with the Act, not necessarily because the works are urgent, but simply because they would like the works to go ahead as soon as possible and/or to save the costs associated with compliance with the consultation procedure set down by the Act.
In these circumstances, our advice always is that such requests should not be agreed to and proper consultation in compliance with the Act should be completed or an application made to the First Tier Tribunal for dispensation. Where dispensation is applied for, such an order should be obtained prior to the appointment of contractors for the major works. Any other approach has risks, all of which fall upon the Landlord, RMC or RTM solely.
Notwithstanding the above, if the Landlord, RMC or RTM is content to agree to such requests, it is absolutely imperative to ensure that any agreement is recorded in a document that has been properly drafted by lawyers and to ensure that ALL leaseholders that are subject to the Act have signed it. A failure by one leaseholder to enter into the agreement to contract-out of the Act will negatively affect the value in agreements signed by the others leaseholders. The wording of such agreement would be subject to the drafting of the individual tasked with producing it but it would be wise to include a provision to expressly state that the leaseholder signing the agreement, unequivocally agrees to waive their statutory rights in respect of the Act.
However, proceeding with such an agreement is fraught with potential problems. Even with the agreement to such effect, it should not be taken as certain that the agreement would avoid any subsequent challenge by leaseholders (that the Act has not been complied with), or could be relied upon in the event of any such challenge.
We can envisage a circumstance where the leaseholders have sought to contract-out of the Act, only then to receive a service charge demand for their share of the works which is significantly higher than was perhaps expected. Regardless of any agreement to contract-out, the leaseholders may then challenge the reasonableness of the service charges and seek to cap their contribution to the statutory threshold of £250.00 on grounds that the statutory consultation was not complied with. Disputes may also arise over the precise wording of any agreement and whether what is now being undertaken is what the leaseholders signed up to.
Such challenges raise some rather interesting points of law in terms of what options may be available to a Landlord, RMC or RTM in response. At the very least, it may be possible to advance an argument that the leaseholders have suffered no “relevant prejudice” in respect of the Act for the purposes of a retrospective dispensation application, with due consideration given to the fact that the leaseholders opted to allow the Landlord, RMC or RTM to not comply with it.
Such are the complexities, it would be impossible to address the detail of such arguments here. But there may also be a case for the Landlord, RMC or RTM to argue that the leaseholders should be “estopped” from relying upon their strict legal rights under the Act, because they voluntarily agreed to waive them and the Landlord, RMC or RTM relied upon that agreement to their detriment. We do not delve here into any case law on this specific point, however in other areas of law the Courts have considered whether it is possible to “contract out” of statutory rights, so any such dispute would involve complicated legal arguments.
Therefore, the Landlord/RMC/RTM might take an alternative approach upon obtaining a signed agreement of all parties to waive compliance with consultation, and then make an application for dispensation from the consultation requirements under the Act, instead of simply relying upon that agreement. Whilst such application may take time and there remains the risk that dispensation may not be granted (it is never a given), the Landlord/RMC/RTM might proceed with the works in the meantime and, should the dispensation be approved, the Landlord, RMC or RTM will be fully protected should any leaseholder later seek to challenge the provision of their consent to “contract-out”. Note though that the costs of that application are potentially not recoverable through the service charge and thus may well fall to the Landlord/RMC/RTM to pay from its own funds.
The correct advice here is to simply ensure that a proper consultation process is undertaken in every case and prior to the commencement of any relevant works (or entry into any QLTA) or, where it is not possible (as distinct from convenient) to fully consult, that dispensation is obtained from the FTT prior to or very shortly after the works commence. This will minimise any doubt and disputes.
However, in an age where time and money is precious and where all parties may want to proceed with major works with haste, where the Landlord, RMC or RTM is happy to take on the risk with an agreement seeking to avoid the consultation requirements, then caution and legal advice should be taken before entering into any agreement waiving the leaseholders’ statutory rights in respect of the Act.
Irrespective of the quality of any advice obtained on such an agreement, it remains that there is a risk in approaching the matter other than with full compliance with the Act and that risk falls only upon the Landlord/RMC/RTM. On a basic level, and even if any dispute raised by a leaseholder is ultimately dismissed as a result of the agreement, the costs of advice relating to the drafting of the agreement and the, likely substantial, costs of disposing of a dispute in relation to it, are unlikely to be payable from the service charge under the lease. Accordingly, the costs incurred in seeking that advice or fighting off a dispute later will be a cost likely to be borne by the Landlord, RMC or RTM from its own (not service charge) funds. In the case of an RMC or RTM there may be no such funds from which to pay and thus the effect may be catastrophic for those entities.
Consultation under s.20 need not be onerous but where there is a genuine need to not consult the mechanism to avoid the Act already exists under Section 20ZA . It is there to be used so why risk anything else?!
For more information, please feel free to contact a member of the team on 01435 897297 or email@example.com.
This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above. The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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