Residentsline
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MINI MONTHLY MAGAZINE
ISSUE TEN... MAJOR WORKS Want an electronic copy? email: magazine@residentsline.co.uk
for over 24 years
MINI MONTHLY MAGAZINE Residentsline
in association with
Flats Insurance We are pleased to introduce the tenth edition of our Mini Monthly Magazine.
CONTENTS
We have taken Flat Living's monthly feature and have prepared it as a hard copy for you to circulate to your team.
How to approach major works
4-5
An overview of Major Works and Section 20
6-7
Section 20: Qualifying Long-Term Agreements (QLTAs)
8-9
This month's issue is all about major works. For further copies please email us at magazine@residentsline.co.uk.
“How much should we set aside for our major works?”
To read a full copy of the latest Flat Living Magazine please visit www.flat-living.co.uk.
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To contribute in future issues please contact Rebecca@flat-living.co.uk
This month's edition of our Mini Magazine will be discussing the ins and outs of major works. We hope you find it useful, and please feel free to contact us with any questions – we're always happy to help.
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How to approach major works Chris Cooper, Director at Hamilton Darcey, looks at the top considerations when embarking on major works projects. In this article we will work through the top considerations when embarking on a Major Works project. We will focus on the main areas that we at Hamilton Darcey believe will help Landlords, Managing Agents and Leaseholders. Timing Major works are required every 5 to 10 years in order to comply with lease obligations. It is essential that you start planning these works well in advance and know how long it will take to get the works started. At Hamilton Darcey we provide the following guide when planning for works: • For a small to medium-sized, reasonably well-planned project, it is normal practice to allow a minimum of 4 to 6 months for the precontract stage i.e. Specification, tendering and for Section 20 notices to expire before starting works on site. • For larger projects, we recommend 8 to 12 months of planning in order to minimise the risks, fulfil appropriate consultation and collection of any additional funds. • Factor in the time of year. External/roof projects should ideally be carried out between March and October, while internal works can be undertaken all year round.
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Budget At Hamilton Darcey, we are often asked to provide budget costs for a project, prior to tendering. In order to provide this budget, we would need to know the following: • The costs within an existing Planned Maintenance Programme (PMP) or Capex Plan. • The size and complexity of the works. Budget costs for an internal project will vary considerably from a basic redecoration project to full refurbishment with new lighting and wiring, fire upgrade works, new intercom system etc. Professional advice Everybody is keen to save money and often professional fees might appear to be an unnecessary expense. However, it is often far more expensive in the longer term to proceed with the wrong works, or to do the works in the wrong way. Appointing experienced and appropriate professionals from the outset is invaluable, especially when considering the timing and extent of the works required. As a minimum, we recommend the following: • A professional assessment of the building. • All risk assessments are in place, namely Health and Safety and Fire Risk Assessments, Asbestos Surveys and Electrical Tests. • A detailed Specification is used to Tender the works. • A Competitive Tender and Analysis Procedure is adopted. • A Contract (JCT or similar). Statutory Regulations and Party Wall Matters Statutory obligations can easily be overlooked as unnecessary; however, we recommend that the following checks are carried out at inception stage: • Check if the property is Listed or in a Conservation Area as this will mean the property is subject to strict planning regulations. • Check with the Local Authority if the works to the property require Planning Approval or are subject to Building Regulations approval. • Seek advice as to whether the works are to a Party Wall or Party Structure and whether Notices should be served on adjoining or nearby properties. Chris Cooper, MRICS MCIArb, is a Partner at Hamilton Darcey, a RICS regulated Chartered Surveying practice based in London. Hamilton Darcey have a wealth of experience spanning a range of disciplines, including major works project management, statutory compliance, neighbourly matters and technical due diligence. They act as a trusted advisor to both individuals and corporate entities.
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An overview of Major Works and Section 20 Belinda Thorpe, Managing Director of Residentsline, provides an overview of what you need to know about Major Works and Section 20. Major works, otherwise known as qualifying works, are any works being done to the building that would cost each tenant over ÂŁ250. By law, landlords are required to notify tenants if this is the case, and follow a step-by-step procedure or risk being penalised. As stated by LEASE, major works are normally defined as either repairs or replacements to the internal or external building, covering areas such as the roof, window frames, exterior brickwork and communal areas.
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This may seem incredibly steep, but often there is no alternative when the property may need urgent or unforeseen work and, provided the landlord follows the correct procedure, tenants will all have an opportunity to have a say in the contractor chosen to complete the job. Additionally, the tenants may already have funds held in a sinking fund or reserve fund. This is a sum of money put together by each leaseholder and may be used to contribute towards to cost of the works, which may help in alleviating the final cost for tenants. According to the government, major works generally fall under one of three categories:
It is important to note that whilst major works do include communal areas and works to the interior and exterior building, a tenant's lease will not normally define major works as any works required for personal premises, i.e. the internal area of each flat, as this is considered to be the responsibility of the tenant.
1. Exterior decorations: This includes the repair or replacement of joinery, replacing stone sills, painting external woodwork, and metalwork etc.
Are major works included in the service charge?
2. Major repairs: These are described as large “one-off� repairs e.g. replacements of roofs, lifts, doors, windows, heating systems, gutters, bin areas or estate roads etc.
The funds needed to cover major works are usually recoverable from the leaseholders. Although major works are defined as a service charge, their overall cost will usually be considered as an additional payment on top of the standard service charge leaseholders must pay annually.
3. Improvement work: These are works which build an amenity which was not there before, i.e. a children's play area or new concierge system.
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Major works and the Landlord and Tenant Act In 1985, the Landlord and Tenant Act was introduced, alongside the Section 20 clause. This clause was created to protect tenants from paying unnecessarily excessive fees for any major works taking place at their property. To do this, the Act ensures that any landlords who do not follow the S20 consultation procedure are only able to retrieve a capped maximum fee of ÂŁ250 from each tenant. However, this does not mean that tenants can be billed ÂŁ250 for any works without a consultation. By law, the landlord is obliged to notify the tenants of any works beyond a certain cost. According to ARMA, Right to Manage Companies and Residential Management Companies are included under the definition of a 'landlord' for the purposes of Section 20. Section 20 Consultation Procedure There are three stages to the consultation procedure for Section 20. Each step must be followed by the landlord, RMC or RTM, by law: 1. The Notice of Intention This notice comes in the form of a letter which details the works proposed by the landlord. It must include a reason behind the work, as well as allowing a 30-day window of opportunity for the tenants to respond to the notice or nominate a contractor they think is suitable.
2. The Statement of Estimates This notice must be served to leaseholders after an estimated cost of the works has been obtained. This statement must include an estimate from at least one of the tenant nominations, or a contractor who is independent of the landlord. The landlord must also allow another 30-day window to allow tenants to inspect the costs and, if necessary, respond. 3. The Notice of Reasons Otherwise known as the 'Notice of Award of Contract', this should notify the tenants of the landlord's chosen contractor but this only needs to be sent if the landlord did not choose the cheapest option from the prior notice. It also does not need to be sent if the landlord chose one of the tenant's nominations. This notice must be sent within 21 days of the landlord entering into a contract with the proposed contractor and must give reasons as to why the landlord chose this option. Naturally, when the property requires some sort of work to be done, cost is going to be a big factor for both landlord and tenant, yet it is often an unavoidable situation for both. However, having legal steps in place helps to ensure that there are no excessive costs, tenants have a say in the final decision, and that the overall procedure is as smooth as possible. Residentsline's sole focus has always been insurance for flats. Today, 24 years on, Residentsline has grown to be recognised as understanding the intricacies, risks and requirements that are unique to the flats market.
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Section 20: Qualifying Long-Term Agreements (QLTAs)
Roger Hardwick, Partner & Head of Leasehold Enfranchisement at Brethertons LLP, delves into the detail of QLTA's. Whenever a landlord enters into a “qualifying long-term agreement”, he is required to follow a statutory consultation process. Failure to either comply with the consultation requirements or (successfully) obtain dispensation from a First-Tier Tribunal (Property Chamber) will result in the landlord only being able to recover £100 per tenant towards any costs incurred under that agreement in any given accounting period. The term "qualifying long-term agreement" is defined by s.20ZA(2) of the Landlord and Tenant Act 1985 as "an agreement entered into, by or on behalf of a landlord or superior landlord, for a term of more than twelve months". In the first Court of Appeal decision on qualifying long term agreements, Corvan (Properties) Ltd v Abdel-Mahmoud [2018] EWCA Civ 1102, McFarlane LJ considered a management agreement, which provided that “The contract period will be for a period of one year from the date of signature hereof and will continue
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thereafter until terminated upon three months' notice by either party”. The Court determined that the words “and will continue thereafter” indicated that the agreement must last for a minimum of at least 12 months and 1 day, which meant that it was a QLTA. F i r s t l y, a s i g n i f i c a n t n u m b e r o f management agreements contain (or at least contained - it is possible that there has been a frenzied rush to amend the wording of existing management agreements or enter into new management agreements) similarly worded provisions in respect of the term of the agreement. So, there is a good chance that there are quite a few management agreements in existence which were assumed not to be QLTAs at the time they were entered into, but which are in fact QLTAs. The consequences of this are discussed below. Secondly, although the comments are strictly obiter (persuasive, but not binding, because they are not essential to the outcome of the decision), McFarlane LJ helpfully reconciled a tension in two earlier, potentially contradictor y, authorities.
In Paddington Walk Management Ltd v Peabody Trust [2010] L & TR 6, HHJ Hazel Marshall QC held that a management agreement which was specified to have an “initial term of one year” to “continue on a year-to-year basis” until terminated on three months' notice was not a QLTA: “48. In my judgment an agreement for a year certain and then from year-to-year to continue subject to not being terminated is not “an agreement for a term of more than 12 months” (emphasis added by HHJ Marshall) within the meaning of this part of the statute. I reach this conclusion with a little hesitation … In other words, the structure of the Act is that the definition of qualifying long-term agreement is to apply to a contract in which the tenants would definitely have to contribute in respect of a period of more than 12 months. 49. In my judgment the whole flavour of the provisions extending to these agreements is “long term”. I cannot see how a periodic contract for, for example, a month and thereafter from month-tomonth, could be regarded as long term as a matter of impression… A line has to be drawn somewhere, and it has been drawn at a commitment which exceeds 12 months. A commitment of 12 months only
is on the non-qualifying side of the “long term” line.” In Poynders Court Ltd. v GLS Property Management Ltd, the Upper Tribunal (Lands Chamber) held that a management agreement with no fixed term, but which provided either party with the right to terminate on three months' notice at any time was a QLTA. HHJ Gerald considered that the agreement was effectively indefinite and drew a distinction between termination and duration. At the time, Poynders Court caused quite a stir in the property management sector. Most property managers would not have considered a management agreement with no fixed term, and which was terminable at any time on three months' notice, to be a QTLA. Corvan will come as something of a relief to landlords, RMCs, and RTM companies and property managers alike. McFarlane LJ could not have been clearer:
If a landlord (or RMC or RTM company, as the case may be) enters into a QLTA without complying with the statutory consultation requirements, he will not be able to recover more than £100 per flat, in any accounting year in respect of costs incurred under the agreement, unless he makes a successful application to the FirstTier Tribunal (Property Chamber) for dispensation from the consultation requirements. In such a case, it is likely that dispensation would be granted, following Daejan v Benson [2013] UKSC 14. It would be for the leaseholders to demonstrate, on balance of probabilities, that they suffered prejudice as a consequence of the failure to consult. Even if prejudice is proven to have been caused, the appropriate response is likely to be for the FTT to grant dispensation on the condition that some compensation is paid to put the lessees in
the position they would have been in had consultation been carried out. However, one condition may be that the landlord covers the costs incurred by the leaseholders in connection with the dispensation application, and of demonstrating non-compliance with s.20, if appropriate. For that reason alone, landlords should ensure that they comply with s.20 consultation requirements. Dispensation is a last resort. Roger Hardwick is Partner & Head of Leasehold Enfranchisement at Brethertons LLP whose team of residential property specialists advise business customers on the full range of issues you are likely to face in respect of property you own or manage.
“If this interpretation is correct, it would follow that HHJ Gerald was wrong in Poynders Court. Whether the agreement is for a term exceeding 12 months is not about the substance of the management agreement and its various obligations. Rather, it is about whether it is an agreement for a term which must exceed 12 months. In Poynders Court, whilst the managing agent may have been “intended” to provide the services for a period extending beyond 12 months, the relevant clause as to the term of engagement did not secure that they were under contract to do so for the period of more than twelve months. The requirement that the contract be for a term of more than twelve months cannot be satisfied simply by the contract being indeterminate in length but terminable within the first year.” So, now we know. It is the minimum length of the commitment that determines whether an agreement is a QLTA. It remains to be seen how this will be applied to retainers with solicitors, surveyors and other professionals; particularly where the retainer relates to a particular project which is likely to last for longer than twelve months. In such cases, the parties would be well advised to ensure that the terms of the agreement (and, in particular, the rights of either party to terminate the retainer) are clearly set out.
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How much should we set aside for our major works?
Gordon Whelan, Managing Director at Haines Watts Service Charge, advises how much of the budget should be set aside for Major Works. A director of a Residents’ Management Company (RMC) recently asked us the following question: “We are considering what would be the approximate percentage that should be allocated to reserves within the annual budget. I have three sets of comparative accounts – all out of date – and a range of between 5% - 9% is evident. Our managing agents are charging 5% (last year and current). Could you gave me an opinion on this matter? What % are your other clients setting aside? Can you benchmark us against your other clients?” Our response was as follows: “A % of budget allocation basis for allocating contributions to reserves may be considered a reasonable way to arrive at annual reserve contributions. However, it might be better to arrive at reserve contributions on a more rational basis. From a review of your lease, most of the material expenditure items that a reserve fund might be used for in the future would be covered by a well-thought-out planned maintenance programme. If this exercise is carried out by a Chartered Surveyor, then their professional opinion will add credibility to support the amount requested for reserve fund contributions. You also need to be mindful of the case of Syed Balakhi v Southern Land Securities [2016] UKUT 0239 (LC). The outcome of this case was, broadly, that the burden of proof on determining the reasonableness of reserve fund contributions rests with the Landlord or the RMC directors. A % contribution based on budgeted service charge expenditure may turn out to be an unreasonable basis to use if the cost of the major works in the future turns out to be significantly less than the amount collected.
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Our suggestion is to go back to the Managing Agent and ask them to carry out a Planned Maintenance Programme and then to provide you with the following: • A description of the future works to be carried out. • A timetable for the works. • The estimated costs. • Let you know if a section 20 consultation will be carried out. In regard to the comparison of reserve contributions across different properties I am not sure if this type of benchmarking will be useful. The circumstances for each property are likely to be very different and the reserve requirements will depend a number of different factors specific to each property.” Major works and the size of reserve contributions to meet those works are often difficult issues that require judgement for directors of RMCs. It is helpful for directors to be able to turn to competent and experienced professionals to assist them with these matters. At Haines Watts we are always happy to have an initial discussion with directors to see if we can help in any way. Gordon Whelan is Managing Director of Haines Watts Service Charge. The Haines Watts Service Charge Team has worked with Managing Agents, Surveyors, Landlords and Residents.
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