It is well known that the consultation process for service charges, pursuant to s20 of the Landlord & Tenant Act 1985 applies to residential properties. It is also well known that it does not apply to commercial properties. But is the distinction between the two so clear cut?
S20 consultation is necessary where one set of Qualifying Works costs any one tenant £250 in a year, or £100 for any one tenant, in any one year for a Qualifying Long Term Agreement. If a landlord fails to consult, the level of service charges that can be recharged are capped at £250 /£100 respectively. Hence it is important to know exactly when the consultation applies.
It is not unusual now-a-days to have multiple layers of leasehold interest. For example, a freehold developer, Registered Provider as head leaseholder who then sublet to tenants and/or leaseholder or shared owner. In such a situation the freeholder may well seek to re-charge the head leaseholder service charges. In turn the head leaseholder may well pass these charges on to its sub-tenants, and re-charge for its own services as well.
So who in this scenario must carry out a s20 consultation, and who must be consulted? The answer is that both the freeholder and the RP must consult if any one tenant would be re-charged more than the £250/£100 cap. However, in this scenario it is important to remember that the RP is itself a tenant. So, is the RP a commercial or residential tenant, for the purposes of deciding whether or not s20 applies and does it matter whether or not the RP has let its units out yet to residential occupiers?
For the answer to this we have to look at the case of Oakfern Properties Limited v Ruddy. There the Supreme Court confirmed that an intermediary landlord must be consulted, along with their residential tenant. So it is clear that if the intermediary landlords have residential subtenants both the residential subtenants and the RP (as intermediary landlord) must be consulted.
However, in reaching this decision the court set out how it came to this conclusion. The starting point is the Housing and Finance Act 1972 in which it defines a dwelling as being:
“… a building or part of a building occupied or intended to be occupied as a separate dwelling together with any yard, garden, outhouses and appurtenances belonging to or usually enjoyed with that building or part …”.
This definition of dwelling has then been adopted for the definition of dwelling in s20 consultation.
As such, this suggests that s20 would apply even before the RP sublets to residential occupiers, as each unit is “intended” to be occupied as a single dwelling, even if they are not currently let. If the freeholder has not consulted when they should have done, they will be limited to recover at £250 per set of works, or £100 per year of any QLTA. Freeholders who lease to RPs often believe that s20 does not apply to them. However, Oakfern Properties shows that a freeholder’s non-compliance may well mean that the service charges over £250 or £100 will not be recoverable. Therefore, if you are an intermediary landlord and your landlord is demanding service charges, you should check if they have complied with s20.
For more information, please contact Alex Wyatt.
