Strengthening leaseholder protections over fees, charges and services: consultation

3.2 Reforming the major works consultation process

228. With more warning (via information provided in the new annual report, section 2.1) of major works and better means (via proposed greater use of reserve funds, as proposed in section 3.1) to cover the costs of them, leaseholders should face fewer unplanned one-off bills.

229. Leaseholders should still be informed and consulted about major works, so they can influence what works are carried out, when and by whom. Here we set out proposals to streamline and improve the major works consultation process so that it is both proportionate and relevant.

i) Scope and threshold

230. There is a strong case to raise the financial threshold for requiring a major works consultation to take place, which has remained unchanged at £250 per leaseholder since 2003 (or 2004 in Wales). Due to changes in the value of money over time, it is increasingly bringing small repairs and maintenance activities into scope which was not intended. For example, a block of 12 leasehold flats would require a full consultation, which currently may last up to 3 months, on replacing a standard metal communal entrance door costing a total of £3,000 (but only £250 per flat). Raising the threshold would allow relatively minor and straightforward repairs such as these to be undertaken straight away. It would also allow statutory consultations to focus on genuinely ‘major works’, which was its original intention.

231. There is also uncertainty surrounding what counts as ‘qualifying works’ for the purposes of consultation. In particular, whether they include associated costs, such as legal costs, surveyor or engineer fees, as well as the works alone. This has resulted in considerable case law on the issue. For the avoidance of doubt, we propose to clarify the definition of major works so that ‘qualifying works’ do extend to these other associated costs.

232. Uprating the threshold in line with today’s prices would set it from £250 to around £450 to £500. Likewise, uprating Qualifying Long Term Agreements (QLTAs) would mean raising the threshold from £100 to around £175 to £200. Taking account of our preference to include associated fees, we propose to set the threshold even higher. For this reason, we propose uprating the threshold at which Section 20 consultations are required to £600 for major works per leaseholder and £300 for QLTAs per leaseholder.

233. The scope of activities caught under the existing major works consultation regime is set out in the 2003 and 2004 regulations. Virtually all contracts and services are included (such as hiring managing agents, buying in contractors to carry out refurbishment works, or the procurement of utilities such as electricity for communal areas). Activities which are exempt include contracts of employment or other very specific contractual arrangements (such as agreements between a local authority and a tenant management organisation).

234. We would like views on whether the existing exemptions from the major works consultation process should remain or be changed. We think there is a case for expanding the exemptions in two circumstances:
     1. Energy contracts. Landlords or managing agents are encouraged to shop around to secure the best value for money deal for themselves and their leaseholders. However, the energy market is fast-moving, and many tariffs and contracts are time-limited (sometimes lasting only a day). Longer lasting contracts generally have higher prices. Therefore, to get the best deal, the landlord will either have to seek dispensation well in advance or, alternatively, rely on 12-month contracts which are often set at a higher price.
     2. Single utility providers. There may be circumstances where, due to the nature of the industry, the service can only be provided by a single provider. This includes heat networks where there is only one provider.
235. Neither arrangement is compatible with the current major works consultation regime and may add unnecessary cost for leaseholders and landlords alike. We propose that there are grounds to exempt utilities providers that meet the requirements above.

236. Such exemptions, should we think be accompanied by appropriate levels of transparency for the leaseholder about the contracts entered into, so they can understand the arrangements and challenge landlords where they feel that a contract is unreasonable or does not offer value for money. One way to support this is to require, for energy contracts in particular, that leaseholders are notified of: 
     1. Details of providers approached, and quotes obtained;
     2. Details of the chosen contractor, total cost and length of agreement; and 
     3. Disclosure of any connection between the landlord and any broker or provider

ii) Qualifying long term agreements (QLTAs)

237. Many landlords, but in particular local authority landlords, have contracts that last longer than 12 months and therefore qualify as QLTAs. These often cover contracts for general repairs and regular planned maintenance of buildings.

238. The value of the QLTA determines the procurement route. For some contracts, local authorities must tender for the work in line with public procurement legislation. In such circumstances, the landlord is required to carry out a competitive contract award process that is based on objective, relevant and proportionate criteria.

239. Schedule 3 to the 2003 Regulations (and 2004 Regulations in Wales) provides for when a QLTA has been agreed under public procurement rules and yet the cost to an individual leaseholder meets the threshold for qualifying works. Here, the obligation is for landlords to provide a notice setting out: 
     1. What works need to be carried out, and why; 
     2. The estimated costs; and
     3. How leaseholders may make observations and inspect documents.

The landlord is required to have regard to any of these observations.

240. Where the public procurement route is used, leaseholders will need to rely on engagement in that process, rather than the QLTA process, if they want to influence who carries out the work. We understand that typically, few leaseholders engage with the public procurement process, and this lack of involvement and challenge has been a cause for concern for leaseholders who feel they cannot participate in the process.  

241. Once a QLTA is signed there is no scope to influence the choice of contractor. There are few incentives for the contractor to keep costs to a minimum – this risks costs inflating through, for example, multiple sub-contracting (each with a potential to add project management fees). Equally there is no scope to break the contract and choose a new supplier without compensation or, if there is a framework agreement in place, there are no contractors willing to bid for the work.

242. We would welcome views on how the QLTA process works in practice and how it might be improved. One option is to increase awareness of landlord intention to use the QLTA process, which would enable leaseholders to engage with it. For example:
     1. Requiring landlords to provide advance notice of the intent to procure where possible under the proposed annual report that will be required by Section 21E of the 1985 Act; and/or
     2. Ensuring that prospective leaseholders wishing to buy a leasehold property are made aware of the presence of any QLTA.
243. Another option could be limiting the term of any QLTA. Currently with QLTAs, landlords are able to get round the 12-month time-limit, which means they can avoid running a QLTA consultation. Case law has clarified that it is the initial period that defines whether or not a contract is a QLTA, and so, by setting the initial contract as just short of a year, landlords are able to issue a fresh new contract to the same provider. This allows the same person or company to be employed for many years without any real or transparent assessment of value for money. To address this, we could limit the maximum term of a QLTA so that landlords must, as a minimum, market test the service on a periodic basis (e.g. every five years). This would not apply to contracts let under public procurement rules since they are subject to more open competition.

iii) New arrangements

244. The majority of major works consultations require two-stages (see Annex H). This process can sometimes take too long, and also fails to empower leaseholders as intended. Rather than abolishing the two-stage process we believe that there is room to make a number of improvements to it as set out below.

a) Mandating use of standardised forms.

245. We propose mandating the use of standardised forms that landlords (or managing agents) must provide to leaseholders. This would seek to aid their understanding of what works are proposed, when they are likely to take place, and whether the costs of the works are likely to be fully or partially covered by any monies held in a reserve fund (and if partially, to what extent). It might also provide space for observations, such as any planned disruption which leaseholders might benefit from knowing (e.g. if certain areas or assets, such as a lift of the building may not be accessible for a period of time). Greater information about how major works will affect leaseholders would seek to foster greater engagement and participation by more leaseholders in the consultation process. For example, the notices could comprise:

Notice of intention

1. Description of the works;
2. Costs – provide an initial estimate of costs (including add on costs);
3. Funding – clarity if from reserve funds; relative share of total cost;
4. Timeline – approximate timescales: start date, duration, when additional funds might be required;
5. Contractor nominations – set out minimum requirement for nominating a contractor (e.g. level of public liability insurance, required accreditations and qualifications, health and safety policy, references etc);
6. Encouraging participation/engagement – where to request further information and send observations;
7. Observations – e.g. regarding possible disruption or restricted access to assets or parts of the site.

Notice of Estimates

1. Description – any major changes to the original proposal;
2. Costs – final costs (including VAT);
3. Anticipated leaseholder contributions – what share of the costs (minus any reserve fund) they are liable for;
4. Timelines – Updated timelines.

b) Speeding up the consultation process

246. We could speed up the consultation process. Currently, leaseholders have 30 days at both stages of the consultation to respond to any concerns, during which they may also inspect any documents. Shortening the deadline will speed up the process and, if leaseholders are sufficiently warned of works due to be carried out, may not negatively affect the quantity or quality of responses. However, it is vital that the consultation gives leaseholders sufficient time to properly consider proposals. On balance, we would welcome views on the advantages and disadvantages of shortening the consultation period to 21 days at both stages of the process.

c) Setting a deadline for works to begin 

247. Works can sometimes not start for some time after the conclusion of the consultation period. During this time some residents may have either forgotten about the work or moved on, with incoming residents unaware of the current position and who then face a sudden bill for works. A further consequence is that the longer the delay, the higher the risk of increased costs.

248. To encourage timely commencement of major works after they have been consulted on, we would welcome views on the merits of requiring that works starts within a fixed time limit of the final notification of the award of contract. If works do not start until after this time, then the consultation process must be carried out again but could be for a shorter period of time if the same works are to be carried out. We think a sensible time period could be within 12 months, with leaseholders kept informed about progress through the annual report. We would welcome observations.  

d) Making it easier and quicker to receive information

249. A further consideration is how the information is provided. There are often many recipients entitled to see relevant documents. Currently, everything must be provided in hard copy and sent by post. This is dependable, but also potentially time-consuming and expensive compared to providing information electronically.

250. To ensure all leaseholders can access information, we believe that receiving documents by post should remain an option for those who do not wish to or are unable to receive electronic communications. However, there are potential efficiencies in sending out documents electronically, and so we are interested in views on allowing the communication of documents by email subject to the agreement of the leaseholder.

iv) Better leaseholder engagement where there is an intermediate landlord

251. Where an intermediate landlord is in place, they are consulted directly by the landlord (the ‘head lessee’) of the building as part of the major works Section 20 process. This means that leaseholders in these situations, and who often remain liable to pay towards the works, have no rights or role in the consultation process.

252. We think the leaseholder who owns the flat should have the right to engage in the Section 20 process. This means that the landlord of the building will need to know the details of the resident leaseholder in order to provide details of the proposed works.

253. To enable this, we think the simplest approach is to place an obligation on the intermediate landlord to inform the landlord of the building at the outset and each time there is a change in ownership of the lease of a flat. This will avoid the landlord having to check each time they need to issue a notice.

v) Clarifying rules around dispensation

254. Landlords may apply to the appropriate tribunal to be able to dispense with the requirements to consult. This might be to speed up delivery of works because of an emergency, such as to address a pressing safety or security matter which might affect leaseholders' ability to live in the building (such as unforeseen structural damage, severe leaks or replacing a roof damaged by the weather). It is for the appropriate tribunal to determine whether or not to grant dispensation on an individual basis.

255. The impact and effect of the current arrangements were heavily influenced by a Supreme Court decision in 2013, Daejan vs Benson Investments Ltd. This case made a number of critical observations about the case for dispensation and the purpose of Section 20 consultations more generally.

256. The Supreme Court determined that when considering dispensation, the main factor is any financial prejudice suffered by the leaseholder due to the landlord’s failure to consult properly. The consultation process is therefore not to be seen as an end in itself, but as part of the overall discussion on whether or not the service charge being requested was reasonable. Consequently, the burden of proof shifted from landlords to leaseholders, who now have to demonstrate that they are prejudiced from the failure to consult. If successful, the landlord still has the power to disprove their claim. If the landlord’s failure to consult did not affect the scope, quality or costs of the work, dispensation can still be granted, despite the seriousness of the breach. The appropriate tribunal also expects leaseholders to indicate what observations they would have made if they had been given all the necessary information, essentially reconstructing what would have happened in the consultation process.

257. As a result, dispensation has frequently been granted, undermining the protections that the Section 20 process was intended to provide. We think that there is merit in retaining the consultation process for major works and are minded to legislate to clarify the legislation to ensure that dispensation is granted only when properly justified.

258. We are seeking views on a number of potential improvements to the dispensation procedure. For example:
     1. Change existing legislation to make it clear that the appropriate tribunal must consider the extent to which the landlord tried to formally consult leaseholders, when deciding whether to grant dispensation; and
     2. Set clear grounds for when dispensation is justified. This might include emergency works which must be carried out in the interest of health and safety of individuals living in the building, or which risks the structural integrity of the building.
259. We are also minded to propose an exemption from the need to seek dispensation if a sufficient number of leaseholders and the landlord agrees that a consultation is not necessary – a ‘majority dispensation’. For example, in a small block where the landlord and all leaseholders agree with proposed works and plan to undertake them (e.g. a small resident led block, such as a Resident Management Company). It would be important that there was due process and a sufficient audit trail to confirm that this was the will of the majority. This would be required to avoid disputes or people changing their minds after the event and contesting the lack of a consultation. For such an arrangement to work effectively and fairly, we would welcome views on whether the following criteria should be used should before a ‘majority dispensation’ could proceed:
     1. Any leaseholder agreement to avoid dispensation should take place in advance of works being carried out;
     2. The threshold for foregoing this right should be set high. For example, it would need to be at least 85-90% of all leaseholders who pay towards the major works;
     3. In order to create a clear audit trail, landlords would need to prepare a “prescribed consent document” to set out the terms of the agreement and works for which dispensation had been waived.

vi) Other comments

260. The proposals in this section seek to improve the existing arrangements. However, we are open to alternative ideas to support leaseholders and landlords. We would welcome any general observations about the Section 20 process, any other aspect of the regime not mentioned above, as well as proposals for an alternative regime, or other changes to the existing regime that we should make.