What is a Section 20 Notice and what are they for?
In short, a Section 20 process is designed to allow leaseholders a say about items of large expenditure. Whilst the legislation is well meaning, it has generated a tremendous amount of case law and makes up a vast portion of a property manager’s formal training.
Section 20 of the Landlord & Tenant Act 1985 (as amended by the Commonhold & Leasehold Reform Act 2002) sets out the three-stage consultation procedure with which to follow when carrying out qualifying works to your building where the contribution from any one lessee exceeds £250, or a qualifying long-term agreement where the contribution from any one lessee exceeds £100 in one financial year. If your residents’ management company (RMC) is looking to carry out works, or enter into a long-term agreement of this nature, then consultation must take place with all lessees. If there is a recognised tenants’ (or residents’) association (RTA), then you must include them within your consultation.
For qualifying works, under Section 20 you would be required to serve a “Notice of Intention to Carry Out Works” upon all lessees. The notice must generally describe the proposed works, state the reasons for considering the proposed works, and invite leaseholders to make written observations within 30 days. The correspondence address for observations should be stated within the notice as well. The importance of the notice of is that it offers lessees with the opportunity to provide the name of a contractor from whom the landlord/RMC should try to obtain an estimate for the proposed works.
At the expiration of the 30 day consultation period, at least two estimates should be obtained: one of these estimates must be from a person completely independent of the landlord/RMC. If nominations were made within the consultation period, then estimates should have been obtained from at least one of these nominations. The landlord/RMC must then provide a “Statement of Estimates” which sets out the details of estimates that have been obtained and a summary of observations received within the consultation period. Any estimates that have been obtained must be available for inspection by the lessees, including estimates obtained from nominated contractors. A “Notice to Accompany the Statement of Estimates” must also be served in conjunction with the statement of estimates, which sets out the hours and place where details of the estimates may be inspected, inviting lessees to make written observations on the estimates within 30 days, specifying the address to which those observations should be sent.
If, at the expiration of the consultation period, the chosen contractor did not provide the lowest estimate, then a “Notice of Reasons” must be served upon all lessees. This essentially states the landlord’s/RMC’s reasons for awarding the contract. It is worth noting that if a nominee is chosen to carry out the works, and they didn’t provide the lowest estimate, then although the requirements of Section 20 have been fulfilled, it would be prudent to serve a Notice of Reasons because that estimate could be tested for reasonableness by the First Tier Tribunal (FTT) under Section 19 of the 1985 Landlord & Tenant Act.
For long-term agreements, the procedure is essentially the same, with Stage 2 referred to as a Notice of Proposals. For instance, an agreement such as an intercom maintenance contract isn’t just about the cost of the maintenance, but the number of visits per year, frequency of visits, number of staff per visit, inclusions/exclusions of service etc.
In the event that the consultation procedure is not followed correctly and the landlord/RMC is successfully challenged at the FTT, then the maximum amount recoverable from lessees under the service charge is £250 for major works and £100 for long-term agreements.
For fully comprehensive information on Section 20 I would recommend looking at advice guides on the Leasehold Advisory Service website.
Common Ground comment
In the opinion of Common Ground, the legislation is flawed in the following ways:
- The process is extremely cumbersome with many potential pitfalls
- It doesn’t really benefit small sites where the limits are lower. In many cases, it just increases administration and costs
- The limits of £250 (one off projects) and £100 (multi year agreements) are too low. They were set in 1985 and should have been index linked
- The process can work well for large sites or projects of an exceptionally high value. The competitive nature of the process lends itself well to obtaining good value assuming that any savings can offset the costs of running the process. By way of example, Common Ground saved a client more than a quarter of a million pounds on a large redecoration project of a Grade 2 listed building comprising of 122 properties. The cost of the consultation process was a tiny fraction of this amount so the process was very worthwhile.
Where it doesn’t work is smaller developments. In theory, a block of four flats should consult each time more than £1000 is spent (assuming equal contributions to the service charge). Common Ground believes a more workable system for smaller developments could work as follows:
- Projects of £10k and below can proceed if 50% or more of the owners are agreeable to a proposal. If unable to agree Section 20 applies.
- Projects of £25k and below can proceed if 75% or more of the owners are agreeable to a proposal. If unable to agree Section 20 applies.
- A site can opt out of Section 20 if 90% of leaseholders agree. This would be very workable for small sites.
- Increase the limits to £500/£200 and review and increase them every decade
This article is designed to provide a brief overview of the section 20 legislation and Common Ground’s ideas for suggested reform. In truth, a one page summary could never cover all of the complexities of section 20 so for those that wish to explore further, the Leasehold Advisory Service (https://www.lease-advice.org/) has published an excellent and extensive guide to the legislation which can be viewed here.