Service charge consultation: do you need to obtain new estimates where works change?

Reviewing the Court of Appeal decision in Reedbase v Fattal

The Court of Appeal has recently considered the consultation requirements relating to residential service charges contained in the Landlord and Tenant Act 1985, on an appeal from the Central London County Court, in Reedbase Ltd & Anor v Fattal & Ors [2018] EWCA Civ 840 (19 April 2018).

The issues related to two penthouses in an apartment block on Nottingham Terrace in London. The management company wished to repair an asphalt roof under the terraces adjoining the two penthouses. The appellants (the tenants of the two penthouses), however, had placed tiles on top of this roof. Accordingly the management company recognised that it would have to come to some agreement with the tenants about removing these tiles.

They proposed to seal the roof with plastic on to which some tiles would be placed. However, after sending out a specification, the management company discovered that it would invalidate the guarantee offered for the plastic product if the tiles were placed directly on it. The tenants in any event wanted a more expensive tile. Accordingly, the management company put forward the proposal that the tiles should be fixed by a pedestal system, which involves inserting small plastic wedges between the tiles and the plastic. The financial difference was approximately £30,000 on works worth over £300,000.

The works were carried out and all other tenants paid their service charge contribution. However the two appellants refused to pay their 10 per cent contribution. In the county court, the landlord had brought a claim for arrears of rent relating to the unpaid service charge and the two tenants had counterclaimed for damages for breach of covenant. The damages claim failed on the facts in the county court and that decision was upheld on appeal, the key point being that the system introduced by the landlord complied with their obligation to keep the property in good and substantial condition.

However, the more interesting questions for practitioners generally was whether the landlord had complied with the consultation requirements within the Landlord and Tenant Act 1985. Briefly, there are two stages which involve:

• the landlord consulting with tenants over their intention to carry out works by service of a notice, with a requirement that the landlord must have regard to observations made by the tenants; and

• the landlord carrying out a second consultation on estimates which the landlord obtains for the works. The tenant is first given the opportunity to put forward the name of a person from whom the landlord should try to obtain an estimate and the landlord must try to seek an estimate from that person. There must be at least one contractor unconnected to the landlord. The landlord must provide tenants with a “paragraph (b) statement” setting out as regards at least two of the estimates, the amount specified in the estimate as the estimated cost of the proposed works; and where the landlord has received observations to which he is required to have regard, a summary of the observations and his response to them. When the landlord enters into any contract for the works (other than with a nominated person or contractor who has submitted the lowest estimate), it must within 21 days give notice to the tenants of its reasons for doing so.

It was accepted that the first stage was carried out. However, as to the second stage, the tenants argued that there should have been a re-tendering at stage 2, once it was realised there had to be a variation to the proposals to take account of the agreement reached on tiles. It was argued that the inability to fix tiles directly to the plastic was a material change and that a re-tender was therefore required.

The Court of Appeal gave short shrift to that argument. Here are the Court of Appeal’s key findings.

The relevant test, as to whether stage 2 of the process needed to be repeated, is:

• whether, in all the circumstances, the tenants have been given sufficient information by the first set of estimates;

• the information provided about the old and the new proposals should be compared objectively; and

• it must also be considered whether, in all the circumstances, and taking account of the position of the other tenants who did not object to the changes, the protection to be accorded to the tenants by the consultation process was likely to be materially assisted by obtaining fresh estimates.

• As to that last point, in this particular case, fresh estimates would not materially assist.
  • First, the tenants who contended that there should have been a fresh tender knew about the change in the works (including the need for the pedestal system and plastic wedges) and approved it, and did so without contending at that point in time that there should be a fresh tender. Therefore they had not been ambushed by the landlord.
  • Second, the change in cost was relatively small in proportion to the full cost of the works.
  • Third, all the original tendering parties would have to be asked to re-tender. The ones who had originally been unsuccessful might obviously be reluctant to do so. There was no evidence of a potential cost saving and no contractor had been put forward by the tenants.
  • Fourth, the re-tendering process would have led to a loss of time, with potential prejudice to other tenants.
  • Fifth, the tenants continued to have their protection under section 19 of the Landlord and Tenant Act 1985 against the inclusion of unreasonable costs in the service charge.

Comment: while some of these points are specific to their own facts, it is anticipated that similar points may arise in other cases, so this decision could well be of useful to those advising both landlords and tenants upon the residential service charge consultation process.