Residential Service Charge Consultation and Framework Agreements Good News for Landlords

Residential service charge consultation and framework agreements – good news for landlords

This article summarises a recent important Upper Tribunal (Lands Chamber) decision, which has settled long standing uncertainty over how to consult with leaseholders when procuring works under framework agreements. In its decision, the Upper Tribunal has cleared a potential obstacle to the use by landlords of framework agreements when procuring works and services.

On the face of it, Royal Borough of Kensington and Chelsea v the Lessees of Pond House and Others [2015] UKUT 395 concerned a relatively straightforward application by The Royal Borough of Kensington and Chelsea (RBKC) under s.27A(3) of the Landlord and Tenant Act 1985 (LTA 1985) for determination of the liability of certain lessees to pay residential service charges.

The real purpose of the case, however, was to establish once-and-for-all that framework agreements, under which landlords enter into long term umbrella arrangements which allow the call-off of a wide range of works and services, constitute Qualifying Long Term Agreements under the LTA 1985

The application was made by RBKC before entering into a number of framework agreements under which contractors would provide repairs and maintenance and improvement works to the Council's housing stock. Where permitted under the terms of its leases, the Council intended to recover the costs of delivering these works and services from its leaseholders by way of a service charge.

Framework Agreements

Framework agreements are best understood as 'umbrella arrangements' establishing the terms and conditions under which a contracting authority is able to call on an economic operator to carry out works and services as and when required. In modern construction procurement, framework agreements are most frequently employed by local authority and housing association landlords to create long-term relationships and reduce the need for frequent procurements.

Residential service charge consultation requirements

The statutory controls over the amount of service charges payable by tenants include the obligation of the landlord to consult lessees where a Qualifying Long Term Agreement (QLTA), defined as an agreement for a term of more than 12 months, is to be entered into, or where qualifying works are to be carried out.

Before entering into a QLTA under which tenants will be required to pay more than £100 per year, the landlord has to comply with two 30 day consultation periods, notifying tenants of its intention to enter into a QLTA and subsequently its proposals for entering into the QLTA and having regard to observations made during the process.

For Qualifying Works (any works to a building or premises) which result in a tenant contributing more than £250, the consultation requirements differ depending on whether the works are being carried out under a QLTA or if they are standalone Qualifying Works. If standalone Qualifying Works, there are two 30 day consultation periods. If being carried out under a QLTA, the consultation requirements are shortened, involving only one 30-day consultation period, and landlords are not required to gain more than one estimate for the works. Once a landlord has entered into a QLTA, it may benefit from the shortened consultation period and less competitive rigour when calling-off works under the QLTA. This is an important administrative benefit for landlords.

THL.122854271.1 1 DVR.99999.9 The key question

The key question was whether the framework agreements were QLTAs so when calling-off individual works and services under the agreements, RBKC would be able to follow the shorter consultation requirements.

Part of the reason why there was uncertainty over this issue was the 2007 decision of the Leasehold Valuation Tribunal in the case of the London Area Procurement Network v All Right to Buy Lessees. In that LAPN case the LVT had held that framework agreements were not the agreements upon which leaseholders ought to be consulted (i.e. not QLTAs) because costs were not incurred under the framework agreements. Instead, the LVT said that costs would be incurred under the respective call-off contracts. The LAPN decision raised the possibility that the use of framework agreements would become practically unworkable because it would be necessary to hold a full-scale consultation exercise and re-procurement for every call-off contract.

Since the decisions of the LVT are not binding, RBKC applied to the Upper Tribunal for a binding ruling to settle this issue. The case was heard by Siobhan McGrath, the president of the First Tier Tribunal (Property Chamber) sitting as a judge in the Upper Tribunal, and the reasoning applied will bind the decision-making of future First-tier Tribunals, which deal with the majority of service charge cases.

The arguments

In formulating its argument for framework agreements to be considered as QLTA's, RBKC accepted that framework agreements do not themselves provide goods, services or works. Instead, RBKC submitted that the statutory provisions contained in s20 LTA 1985 by lack of prescription recognise that a QLTA is a "broad and flexible concept".

RBKC submitted that without the governing framework agreements, those call-off contracts to be subsequently awarded (incurring "relevant costs") could not exist. The framework agreements which existed alongside the specific call-off contracts, which were intended to be in the ACA's and ACE's standard form of contract for term partnering, TPC2005, formed one whole agreement and should not be regarded in isolation. Consequentially, the costs arising out of the call-off contracts should correctly be held to be incurred under the governing framework agreement.

RBKC drew on the treatment of framework agreements in the Office of Government Commerce 2003 guidance as further supporting evidence. This noted that the requirements under procurement legislation regarding contract publication were held to be satisfied via publication of the framework agreement notice, and not by a requirement to publish notice of the individual call-off contracts.

The Respondents included the lessees of Pond House and a number of other leaseholders of other properties within RBKC ownership. A substantial part of their reply relied upon the LAPN case, which saw the LVT find that framework agreements were not QLTAs within the meaning of section 20 LTA 1985. In particular, the respondents placed particular emphasis on the wording "incurred under" used in the 2003 Consultation Regulations and the LTA 1985, arguing that the "relevant costs" referred to in the Consultation Regulations and the LTA 1985 will not be "incurred under" the framework agreements, but instead under the call-off contracts. This fundamentally was the reasoning employed by the LVT in LAPN.

The Respondents also relied on Office of Government Commerce guidance published in 2008 to support their position. This stated that under the 2003 Consultation Regulations QLTAs are only

THL.122854271.1 2 DVR.99999.9 formed under call-off contracts. Framework agreements set out the terms and conditions of these call-offs but do not impose any obligations on the contracting authority.

The decision

The Upper Tribunal held that the framework agreements under consideration could be considered to be QLTAs and therefore RBKC was entitled to rely on the consultation that had already been carried out before entering into the QLTA. The shortened consultation process would be sufficient when works were called-off under the framework agreements.

On the key question of whether the "relevant costs" were to be seen as arising "under" the framework agreements, the Tribunal found that "there must be a sufficient factual nexus between the subject matter of the agreement and the works themselves."

The Upper Tribunal found that there was ample evidence to be satisfied that the works were being carried out under the framework agreement, because the specific terms of the framework agreement identified the works to be carried out with sufficient particularity and the procedure by which call off contracts were entered into did not allow for any substantial amendment of terms laid down in the framework agreement.

Conclusion

The Upper Tribunal's decision in RBKC gives encouragement to landlords, primarily local authorities and housing associations, that they can create long term relationships with their contractors by entering into framework agreements with greater certainty as to how to consult and recover their costs from leaseholders. The case also provides assurances for contractors when they tender for long term housing works agreements that the landlord will be able to commit to the relationship without fear of losing funding from leaseholders.

In providing a greater degree of certainty for landlords who enter into framework agreements, the Tribunal in its reasoning provided guidance to contracting authorities and contractors as to what needs to be included in their framework agreements in order to ensure that they are effective. The concept of a "sufficient factual nexus" provides a reasonable and attainable approach to drafting.

As a warning, the presence of an agency relationship between a landlord and a contracting consortium may cause difficulties in establishing that the "sufficient factual nexus" exists between the framework agreements and call-off contracts.

Assad Maqbool, Partner, Projects and Construction, Trowers & Hamlins LLP, tel: 020 7423 8605, email: [email protected]

Douglas Rhodes, Senior Associate, Property Litigation, Trowers & Hamlins LLP, tel: 020 7423 8343, email: [email protected]

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