Francis & Anr v Phillips & Anr, Secretary of State for Communities & Local Government [2014] EWCA Civ 1395

Lest you should need reminding, the case grew out of the Point Curlew holiday site, which contains, amongst other things, over 150 holiday chalets subject to long leases and an Amenity Centre.

In 2008, it came under the ownership of the Francises, who set about carrying out works to overhaul the site. Needless to say, these works were expensive. The Francises did not carry out any consultation, but they planned to put the cost of the works through the service charge payable by the lessees of the chalets.

In the Truro County Court, where the case was first heard by HHJ Cotter, there were two issues. Those issues were the same before Sir Andrew Morritt in the High Court, and before the Court of Appeal:

1) The management charge: whether the Francises were entitled to wages in addition to a 5% management charge provided for in the lease;

2) The meaning of qualifying works. Before HHJ Cotter in Truro, the question turned on the “batching” of the works. Sir Andrew Morritt did away with that concept.

You can read the relevant parts of sections 18, 19(1), 20 and 20ZA of the Landlord and Tenant Act 1985, and short excerpts from the Service Charges (Consultation Requirements) (England) Regulations 2003/1987, quoted by the Master of the Rolls, here.

The qualifying works question is – by a country mile – the issue which has been the main focus of the industry-wide interest in this case.

The Master of the Rolls, unlike Sir Andrew Morritt, therefore began with that issue.

He noted that HHJ Cotter appeared to have followed Martin v Maryland Estates [1999] 2 EGLR 53, in which Robert Walker LJ said:

“Parliament has not made it entirely clear how one batch of qualifying works is to be divided from another. The definition of “qualifying works” indicates what their quality is but not how one batch is to be divided from another.

“The judge was influenced by the fact that all the works were covered by one contract. That would not, to my mind, always be a decisive factor, but, on the particular facts of this case, that was the right approach. The legislative purpose of the limit is to provide a triviality threshold rather than to build into every contract a margin of error, which may in some cases, including this case, simply duplicate a contingency sum that has already been provided for.”

So how had Sir Andrew Morritt avoided following Maryland Estates?

He had distinguished it on the basis that Maryland Estates was decided before the amendments wrought to the 1985 Act and the consultation process by the Commonhold and Leasehold Reform Act 2002.

Here are those distinctions in tabular form.

In the Master of the Rolls’s view, neither of those changes affected the definition of “qualifying works”:

1) A change in the limit on the costs recoverable – and its method of calculation – did not change the policy underpinning it. That policy was to protect tenants from unexpected costs from major works.

2) The change in the consultation process was a change of detail rather than a change of substance.

The Chancellor agreed. The changes brought about by the Commonhold and Leasehold Reform Act 2002 had no impact on the meaning of “qualifying works”:

“If Parliament had intended to make any such critically important change it would undoubtedly have made that intention clear by express provision”, he said.

Sir Andrew Morritt effectively held that all works on a building constitute qualifying works. The Master of the Rolls described this as the “aggregating approach”.

The Francises argued for an approach which batched sets of works. The Master of the Rolls christened this the “sets approach”. He then turned to the 1985 Act:

“Section 20ZA(2) unhelpfully defines “qualifying works” as “works on a building or any other premises. But I am satisfied that the aggregating approach is wrong… It is not a sensible approach and gives rise to serious practical problems”.

He illustrated his point with an example and an analysis of those practical problems. At some stage in the past (nearly) two years, most of us will have wrestled with them. They are the aggravations of the aggregating approach, and include:

• Extra legal and administrative costs if the landlord does not carry out the consultation process and applies for dispensation;
• Risks of non-recovery through prospective consultation;
• Delay in carrying out the works;
• Irate tenants;
• Potential increased costs for tenants if the costs of the consultation process are recoverable through the lease.

Having dealt a fairly robust blow to aggregation, the Master of the Rolls then took issue with Sir Andrew Morritt’s decision that the £250 per tenant limit was an annual limit:

• Section 20 of the 1985 Act does not mention an annual cap, and
• Section 18(3) has the express reverse: “costs are relevant costs in relation to service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period”.

The Chancellor again agreed on both points. The sets approach was correct because:

• There was no fixed period for assessing whether the statutory limit had been exceeded: adieu Sir Andrew Morritt’s annual cap;
• By contrast consultation was required for Qualifying Long Term Agreements where the costs incurred over a twelve month period exceeded £100 per tenant;
• Repeating the Master of the Rolls’s observation, section 18(3) of the 1985 Act gives flexibility in the definition of relevant costs in relation to a service charge, and
• It was “highly improbable that Parliament intended both lessors and tenants to be encumbered” by the practical and financial obstacles posed by Sir Andrew Morritt’s analysis.

The sets approach disclosed by Martin v Maryland Estates was therefore correct.

The Master of the Rolls concluded with the following soundbite:

“The real protection afforded by the 1985 Act to residential tenants is that all service charges must be reasonable and reasonably incurred under section 19. This is the sensible way to control routine works of repair and maintenance which are unlikely to be the subject of a detailed plan in advance”.

The aggregation/sets battle was not the only front on which the lessees had prepared to do battle. They also challenged HHJ Cotter’s application of what was then known as the batching of the works, but will now be known as the sets approach.

The question was whether the works were planned as one big set or several.

Remember, the Francises did not consult at all before beginning the works to the site, so there were no consultation notices to assist the court. It appears that the court had the plans and contracts for the larger projects, but a number of jobs were carried out by Mr Francis, whose evidence was that “one job creates another”.

HHJ Cotter held that there was no clearly identified set of works until the beginning of 2009. By that time, some plans had been drawn up, and it was possible to identify specific sets of works.

“It is not in issue that the question of what a single set of qualifying works comprises is one of fact”, observed the Master of the Rolls. “It is a multi-factorial question the answer to which should be determined in a commonsense way taking into account all the relevant circumstances”.

“What constitute qualifying works … is a question of fact to be determined objectively”, added the Chancellor.

The Master of the Rolls listed some of the factors which may come into play, emphasising however “that this is not intended to be an exhaustive list of factors which are likely to be relevant. Ultimately it will be a question of fact and degree”.

Here then are some potentially influential factors to bear in mind in applying the sets approach:

• Whether the works are physically close to each other;
• Whether the works are covered by the same contract;
• Whether the works are done at the same time;
• Whether the works are of a similar character.

The Chancellor added that the manner in which works are planned and executed is another factor to feed into the fact-and-degree pot.

It will be no surprise to learn therefore that, HHJ Cotter’s decision having therefore been a decision as to the facts – and it being very difficult to persuade appeal courts to interfere with decisions about facts in cases – the Master of the Rolls determined that HHJ Cotter had come to a legitimate conclusion. It was not open to the Court of Appeal to re-open it.

The Master of the Rolls did hold that HHJ Cotter misdirected himself in one respect, although not in a way which materially affected his decision.

HHJ Cotter held that qualifying works are “significant works with a permanent effect by way of modification of what was there before”.

The Master of the Rolls accepted that qualifying works may be significant or substantial, but need not necessarily permanently modify what was there before: redecoration and repair may not have such an effect.

Here is the sets approach in action.

In 2008, the Francises stripped back to a shell the Amenity Centre at Point Curlew.

“The critical question for the judge was whether the work planned by the lessors constituted a single or multiple set of qualifying works”, said the Master of the Rolls.

HHJ Cotter held that the stripping back works were one set of qualifying works, and that the subsequent reinstatement and renovation works were a separate set of qualifying works.

By analogy with the stripping of plaster from a wall and subsequent re-plastering, the lessees argued that the stripping back and renovation works were one set of works.

The Master of the Rolls was not with them. Wall-stripping was “far removed” from the stripping out of the Amenity Centre. Further, when the Centre was stripped back, no decision had been taken as to:

• When refurbishment works would be done, nor
• The nature of those works. Mr Francis gave evidence that the Centre was stripped back so that he could see the full extent of the work required to it.

The word “commonsense” appears no less than four times in this judgment. It is a very pragmatic answer to the upheaval of Sir Andrew Morritt’s judgment.

Both the Supreme Court in Daejan Properties Ltd v Benson [2013] UKSC 14 and the Court of Appeal here have underlined the relationship between the consultation and section 19 of the Landlord and Tenant Act 1985.

Both courts appear to regard section 19 as the touchstone for the assessment of service charges.

If that is the case, it can perhaps be said that the requirement to consult is more about giving the lessee the opportunity to influence the non-financial aspects of major works, such as the selection of the contractor, the duration and the manner of carrying out the works than it is about reducing the costs of those works.

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