Statutory controls on landlords’ repair expenditure – how did we get here?

Brett Williams, founder and managing director of Principle Estate Management, considers the legislation and management requirements involved in repair costs in multi-occupied residential properties. He is a former chairman of the Association of Residential Managing Agents.

Whatever happened in property management during the early 1980s to lead to the implementation of section 20 of the Landlord & Tenant Act 1985?

The answer is that there were many cases of abuse where houses were purchased, converted (often poorly) and sold on long leases (again often poorly drafted) and the landlords would continue to manage the development undertaking substandard repairs at inflated costs and not accounting properly for the costs incurred.

It’s no wonder that statutory protection was required to control landlords’ expenditure on repair items.

In brief, the original s.20 limits were the greater of £50 per flat or £1,000 per block. The consultation process was simplistic. That’s now ancient history.

Modern history appears in the form of the Commonhold & Leasehold Reform Act 2002 which amended the 1985 Act – approaching the coming of age at nearly 18 years old.

The limits and procedures were revised as well as introducing similar procedures for expenditure under Qualifying Long Term Agreements.

In this article we are only looking at repair costs.

What does a landlord have to do to comply with the legislation now? There are now two to three stages of consultation.

The process:

  1. Notice of Intention: this is a Notice with prescribed content and notes. It states the Landlord’s reasons for proposing to undertake the works. It also invites Tenants, and any recognised Residents’ Association, to nominate a contractor and to make observations on the Landlord’s proposal. The Notice must give 30 days for Tenants to respond.
  2. The Landlord can now seek estimates from contractors to undertake the specified works. Estimates cannot really be invited before the Notice of Intention has expired as the Landlord has a statutory obligation to have regard to observations received from Tenants regarding the proposed works and to consider seeking estimates from any nominated contractors.
  3. Statement of Estimates: again, a Notice with prescribed content and notes. This summarises at least two estimates received, one of which must be from a contractor not connected with the Landlord. This Notice must also include a summary of observations received from Tenants in response to the Notice of Intention and detail how the Landlord has had regard to those observations. Again, it gives Tenants 30 days to make observations on the estimates received.
  4. The Landlord is now free to instruct a contractor to undertake the works, subject to having regard to any observations received. However, if appointing a contractor who is not either Tenant (or Resident Association) nominated or the contractor that provided the lowest price, the Landlord must serve a further Notice within 21 days of placing the contract stating why that decision was made. This Notice is simply a statement and does not invite observations.

 

The financial trigger limits have been reviewed since the 1980’s. The legislation is now triggered if the cost of the works is £250 for any single Tenant. More specifically, this relates to any single unit and so isn’t triggered by the total contribution if a Tenant owns more than one apartment. The key therefore is to be aware of the highest percentage contribution from all apartments. In a development with multiple schedules, e.g. one for each building, it will apply on per schedule basis.

If the Landlord doesn’t comply they will not be able to recover more than £250 per leaseholder. In the case of major works, this could be catastrophic for the Landlord.

We are about to place an order for lift replacement costing £80,000 + VAT. Only 12 leaseholders contributing.

If legislation is not followed, the landlord would only be able to recover £2,440 leaving a shortfall of over £93,000.

Not a good way to maintain client relations!

It’s clear that planning is required to ensure compliance which protects both the landlord and the tenant. The process takes a minimum of 60 days. In reality it’s best to add a few days to the 30 day periods to allow for postage.

Also, between the first and second Notice is when the landlord should obtain quotes, so this can often be a further 30 day period.

For routine items, landlords need to consider works a year ahead. The implementation of a formal Long Term Maintenance Plan assists with this and also helps to group similar types of works together for better planning and cost savings. Further, subject to suitable lease provisions, it allows for a more scientific approach to collecting sufficient reserve funds so that when the works are due to be undertaken, the cash is available.

Once the plan is prepared and discussed with residents, it should be diarised.

Good property management systems, such as Qube PM which Principle uses, also have built in protection flagging up when s.20 applies if raising purchase orders above the trigger limits.

We also have a strict workflow to ensure compliance. The financial trigger limits apply whether the works are paid for from reserve funds, built into the current year’s budget or if there is a cash call.

It’s easier to plan for more routine items such as external redecoration or more obvious items such as resurfacing driveways. It is more difficult for emergency repairs, e.g. where patching of a flat roof is no longer effective or for items where expenditure is high due to the cost of parts and where specialist contractors are required, e.g. a lift replacement.

One problem with the removal of the £1,000 per development criteria is the case of small developments.

Previously we have been involved in the management of a house split into two flats, one of which paid two-thirds of the costs. The trigger limit for s.20 in this case was £375. This includes VAT, if applicable.

These days, and remember the current limits are approaching 20 years without any inflationary uplift, you don’t get a lot of building work done for £375. Estimated costs close to the trigger limit are a problem as the landlord needs to decide whether to consult in case of a cost overrun.

The Government has been asked to review the trigger limits and to apply an annual indexation. We hope that one of the Housing Ministers will pick up on this practical point.

A further complication relates to mixed use buildings as the legislation only relates to residential long leaseholders.

In the case of a building with apartments above commercial units, even though all units may be on similar leases and all may contribute to the works, s.20 can be triggered at a cost below the £250 per unit as it only applies to the residential contributors.

This is difficult to record on any computerised system and needs the landlord, or their managing agent, to be familiar with the specific nature of the building.

In the case of buildings with multiple landlords, e.g. freeholder and head-leaseholder, if the superior landlord is proposing the works, they ought to allow some additional time to the 30 days to allow the head-leaseholder to forward the consultation on to the tenants.

Although the Notices do not seek the tenants’ approval to the proposals, the landlord’s regard to the observations have to be real. Fortunately, there is provision for emergency works where dispensation can be applied for via the First-tier Tribunal.

For developments where there is no provision within the lease for the accumulation of a reserve fund and worse so where the service charge contributions are collected quarterly, or even occasionally monthly, funds will not be built up until the last quarter and the final leaseholder pays their contributions. This can often stymie works, preventing what the majority want from happening.

It must be remembered that a landlord, as far as the law is concerned, includes a Residents Management Company (RMC) which still needs to comply with the s.20 process even if all members of the company agree with the proposals. Statute is not overridden by an RMC or even Right to Manage.

It is normal for landlords, or their agents, to charge addition fees for the service of s.20 Notices and for overseeing major works contracts which may be undertaken in-house or by external building surveyors. There is no formal guidance on such fees.

As is the case in all things leasehold, fees and other costs must be reasonable. There has been one key Upper Tribunal case advising that landlords need to be mindful of affordability of proposals for tenants – how would a landlord know what the tenants could afford though?

Surely landlords also ought to have a view on financial impact on tenants’ asset value if works are not undertaken?

What is certain is that landlords, be they freeholders or RMC/RTM companies need to plan and should appoint professional managing agents to look after the best interests of the development overall.

There are thousands of RMCs caught by this legislation which was originally intended to prevent historic landlord abuses. The idea is to give people who are paying for the works, input into what is to be done, by who and at what cost.

Who could say that is a bad thing?