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Consult again? Guidance from the Court of Appeal on repeating the second stage of the consultation process for qualifying works

Sarah Latham discusses the Court of Appeal judgment in Reedbase Ltd and another v Fattal and others [2018] EWCA Civ 840, which is concerned with whether a change in proposals for qualifying works required the landlord to repeat the second stage of the consultation process.

In Reedbase Ltd and another v Fattal and others [2018] EWCA Civ 840, the Court of Appeal had to consider whether a change in the proposals for qualifying works, after tenants had been provided with estimates for the works, required the second stage of the consultation process to be repeated. The Court decided it was not necessary in this case and Arden LJ’s judgment provides guidance for landlords on this issue.

Background
The appellants were tenants of two penthouse apartments in a block of flats. Both apartments had terraces around them and a large terrace on top of the adjoining property. The management company for the block wished to repair an asphalt roof under the terraces adjoining the two penthouse flats. However, the appellant tenants had placed tiles on top of the roof. The specification issued by the management company proposed to seal the roof with a plastic substance on which particular tiles would be placed. It was then discovered that the guarantee for the plastic substance would be invalidated if the tiles were placed directly onto it.

The appellants had in the meantime requested that a more expensive type of tile be used instead. The management company therefore proposed that the (more expensive) tiles should be fixed in place by inserting small plastic wedges between the tiles and the plastic substance. The increase in the cost of the works resulting from the changes to the tiles and this new method of attaching was £31,000, 6% of the full cost of the works.

It took seven months to locate the new tiles, following which the works were completed. The cost of the works was added to the service charge, the appellants' proportion being 10%. The remainder was paid for by the other tenants in the building, none of whom objected to the costs.

Prior to contracting for the works, the management company went through the two-stage consultation process required by sections 20 to 20ZA of the Landlord and Tenant Act 1985 (LTA 1985) and the Service Charges (Consultation Requirements) (England) Regulations 2003 (2003/1987) (2003 Regulations). It was common ground in the appeal that the works were "qualifying works" subject to the process and that if the landlord had correctly followed the consultation process, it would be entitled to recover the reasonable costs for the works.

The appellants argued that the landlord had breached the consultation requirements because of the changes to the proposals concerning the tiling, which they considered were material. They considered that the second stage of the procedure should have been repeated, with the works re-tendered and fresh estimates notified to tenants. Therefore, the appellants argued that the landlord could only recover £250 from each tenant for the works.

Judgment
The Court of Appeal disagreed with the appellants and dismissed the appeal. Part of Arden LJ's reasoning derived from Lord Neuberger's judgment in the Supreme Court case of Daejan Investments Ltd v Benson [2013] 1 WLR 854, which considered the purpose of the consultation requirements. Lord Neuberger stated that sections 19 to 20ZA of the LTA 1985 are directed towards ensuring that tenants are not required to pay for unnecessary services or services provided to a defective standard, and are not required to pay more than they should for necessary services which are provided to an acceptable standard. The consultation requirements, he considered, are a means to the protection of tenants in relation to service charges and give practical effect to the two purposes he had specified.

Arden LJ considered that it is "sometimes necessary" for the second stage of the consultation process to be repeated, but, she said, neither the 2003 Regulations nor the LTA 1985 provide any guidance as to when this should be done. In her judgment, the relevant test for when a fresh set of estimates must be obtained was whether, in all the circumstances, the appellants had been given sufficient information by the first set of estimates. This would involve comparing the information provided about the original and revised proposals on an objective basis. In light of the statutory purpose set out by Lord Neuberger in Daejan, it should 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 accorded to the tenants by the consultation process was likely to be materially assisted by obtaining fresh estimates.

Arden LJ held that the answer was no for the following reasons:

  • The appellants knew about the changes to the works and approved them, without contending at that point that re-tendering was required.
  • The cost difference was relatively small in proportion to the full cost of the works, especially as the increase due to the appellants' choice of tile was primarily for their sole enjoyment.
  • It was unrealistic to expect that the contractors who had tendered but not been awarded the contract would be likely to tender for a small part of the works (supplying and fixing the tiles).
  • The re-tendering process would have led to delays in completing the works, which might have prejudiced other tenants.
  • The appellants were still protected by section 19 of the LTA 1985 against the inclusion of unreasonable costs in their service charge.

Comments
Arden LJ's judgment sets out a suggested test for when landlords will be required to repeat stage two of the consultation process, following a change in the proposals for qualifying works. While the judgment provides some guidance on the relevant factors to consider, Arden LJ focused on the facts of this case rather than giving more general guidelines on the basis of hypothetical examples. This is perfectly understandable, given that the stated test is to be considered in light of all the circumstances of the case. Therefore, it may not always be clear when fresh estimates will "materially assist" tenants.

Each case will clearly depend upon its particular facts. While landlords can take comfort from the fact that there is no requirement to re-tender following any change whatsoever to the proposed works, it was evidently an important factor in this case that the appellants knew of the change and were in part responsible for it. Furthermore, while the fact that the revisions to the proposed works resulted in a "relatively small in proportion" 6% increase in the costs of the works was also a key point, no guidance was provided on where the line may be drawn as to the proportion by which costs may be increased before it is necessary to repeat the second stage of the consultation process.

It will be important for landlords and their advisers to consider their position carefully or to seek dispensation from the First-tier Tribunal (Property Chamber): failure to comply with the consultation requirements limits a landlord's recovery to £250 per tenant for the relevant works. Arguably, in appropriate cases, it will be sensible for the landlord to notify tenants of any changes to the proposed works where the change in costs is small, and it is not feasible to carry out re-tendering for the works, in order to minimise the likelihood of a finding that the consultation requirements have been breached.

This article was first published in the  Property Litigation Column, 21st May 2018

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