Should Landlords/Managing Agents serve Section 20 Notice on Lessees in breach?
11th April 2019
11th April 2019
We are commonly asked by our clients and their managing agents, if the Landlord should serve a Section 20 Notice on any Lessee whose arrears (or other non-monetary matter) are currently with legal advisers and are as yet to be concluded.
You are probably already aware that if the Landlord fails to include any Lessee within the whole of the Section 20 process, the Lessee may argue and more than likely succeed, in claiming that their liability in respect of those works be limited to the statutory maximum of £250, with the Landlord making up any shortfall of the Lessee’s proportion. That proportion could well be in the thousands!
Where a Lessee is in breach of the lease, the Landlord’s right to forfeit is invoked, unless that right is waived. Waiver occurs upon the recognition of the continuance of the lease following knowledge of the breach. The service of a Section 20 Notice is possibly going to amount to an act of waiver. Whilst the breach itself is not waived, the right of forfeiture, as a means of enforcement, may well be. Although forfeiture is rarely exercised, its threat is important and there is also a further consequence of waiver, which may be of more importance to the Landlord. In most leases, the Lessees are contractually liable to reimburse all or some of the Landlord’s costs of enforcement action where they are in breach. It’s quite common for that liability to be attached and subject to that action being taken in contemplation of forfeiture. Accordingly, if the Landlord were to waive its forfeiture right, it may also be excluding any contractual right to recover costs of any current enforcement action from the Lessee.
Historically, the view has been that consulting with a Lessee in arrears is an effective acknowledgment of the lease and therefore, in serving consultation notices, a Landlord would waive the right to forfeit.
You may recognise the case Stemp and Anor v 6 Ladbroke Gardens Management Ltd  UKUT 375 (LC) from our February 2019 Legal Update, which focused on the affects of waiver when serving demands for rent/service charges. Today, we focus on the Section 20 consultation element of the case.
This case concerned the top floor flat leaseholders in a five-dwelling block in London. The lease had clear repairing covenants, which 6 Ladbroke Gardens, the Landlord (“LL”) was bound by, but there was no provision for a sinking or reserve fund to accumulate funds for future major works projects.
By 2014/2015 the building was in a state of disrepair and in 2016 LL demanded close to £19,000 from each Lessee to carry out the repairs. LL also had to comply with statutory notices and have all the doors replaced with fire doors.
LL included the Stemps (“T”) in the Section 20 consultation process, despite them being in arrears at the time. T claimed that in serving Section 20 Notices after LL was aware of the breach (arrears), LL had waived any right of forfeiture, as the consultation was a recognition of the lease.
In considering the question of waiver, the Upper Tribunal (“UT”) considered “whether in all the circumstances the act relied on as constituting waiver is so unequivocal that, when considered objectively, it could only be regarded as consistent with the lease continuing.”
With this test for waiver at the forefront of his mind, Judge Huskinson in the UT took the view that neither the inclusion within the Section 20 consultation, nor the enforcement of the fire authority statutory notice, amounted to acts that “could only be regarded as being consistent with the lease continuing”. Judge Huskinson explained that LL could not be expected to treat the ongoing arrears dispute as a reason to postpone the major works as it would breach the repairing covenants in the lease. Equally, by excluding T from the major works consultation, it could leave LL insolvent.
Both the acts in question can be regarded in more than one way, unlike for example, a demand for ground rent, which can only be regarded as being consistent with the lease continuing.
To serve, or not to serve?!
There are essentially three options when deciding whether to serve Section 20 on a Lessee in breach:
Wait until the arrears have been recovered or the case is concluded;
Include the defaulting Lessee and risk that the right to forfeit has been waived, if a Court or Tribunal do not consider that the circumstances of that case are sufficiently consistent with Stemp, or
Exclude the defaulting Lessee from the consultation and risk a shortfall in the major works fund.
The Golden Rule
The decision as to whether a Landlord should include the defaulting Lessee within the Section 20 consultation process is one that only the Landlord should make, in light of the possible consequences resulting from their choice, and each case will need to be judged on a case by case scenario.
It can be a challenge to understand how and when forfeiture has been waived due to the complexities surrounding forfeiture. This is where the all important “Golden Rule” from our June 2018 and February 2019 Legal Updates comes into effect, “If in doubt - ask the lawyer first and only then act!”
For more information, please contact Susan Fox, Senior Litigation Executive, on 01435 897297 or firstname.lastname@example.org.
This 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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