Question 1

Annual Contracts

Accepted Answer

Annual Contracts Q: We are planning the decorating of communal hallways this year and we were checking the Section 20 Process, (we have done this on a number of occasions before but wanted to make sure nothing had changed). We came across the following on the Lease Advice website and are now concerned about our annual contracts for gardening, cleaning, insurance, maintenance etc. “QUALIFYING LONG-TERM AGREEMENTS A qualifying long-term agreement is an agreement entered into by the landlord with a wholly independent organisation or contractor for a period of more than 12 months. (Agreements before 31 October 2003 are exempt.) The deciding factor is the minimum length of the commitment. In other words, it is an agreement for a term which must exceed 12 months. Landlords must consult where the amount payable by any one contributing leaseholder under the agreement in any accounting period exceeds £100. Thus, in a property with unequal service charges, the landlord must consult all leaseholders if any one of them would have to pay more than £100 in any one year. The figure is to be calculated on the basis of the leaseholder’s total contribution resulting from the agreement, including VAT. If consultation is not undertaken, the landlord may not be able to recover more than £100 per leaseholder in any accounting period towards the costs under the agreement. Examples of potentially qualifying long-term agreements include:

agreements affecting the building generally (e.g. lifts, entry-phone systems, waste management or maintenance contracts);
cleaning and gardening;
insurance;
utilities; and
management agency agreements.

Some of these services may only have one realistically possible supplier. Nonetheless, consultation must be carried out, unless dispensation from compliance has been granted by the Tribunal. Contracts that are not qualifying long-term agreements include:

contracts of employment;
an agreement between a holding company and its subsidiary, or between subsidiaries of the same holding company (the definitions following those in the Companies Act 2006);
an agreement for less than five years which was entered into at a point when there were no leaseholders or leaseholders at the property (for example on a new development);
an agreement for more than twelve months which was entered into before 31 October 2003.

QUALIFYING WORKS UNDER A LONG-TERM AGREEMENT Where the long-term agreement includes provision for the carrying out of works to the property (for example, a schedule of rates agreement for general maintenance), and these works will result in a charge to any one leaseholder of more than £250, then a separate consultation must be carried out under the provisions of Schedule 3. The original consultation under Schedule 1 in respect of the agreement itself does not provide any exemption from consultation for the works. This requirement for consultation for works equally applies in cases of long-term agreements entered into prior to 31st October 2003 where at the time no consultation on the agreement was required.” Our annual cost for cleaning has recently increased due to a change of company but would come below the £100 per flat. Other costs such as insurance (£12,500 per annum) and gardening (£21,000 per annum) would fall within the £100 per flat. Should we be carrying out a Section 20 for all items individually, collectively?, or are they exempt from Section 20 if they are reviewed annually? On this basis should we be obtaining quotations on an annual basis to ensure best value for money? What processes should we have in place to ensure we do not fall foul of the “Long Term Agreement” consultation process? FPRA Director Shula Rich replies: If your contracts are for one year or less, then they are not qualifying long term agreements. Generally, to be certain, blocks make the contacts for 364 days - one year less a day. If the contract has a firm end date of one year less a day, it can be renewed each year for a further similar period. It’s excellent that you are paying such close attention to the regulations. [Submitted February 2019]

Question 2

Annual Contracts

Accepted Answer

Annual Contracts Q: We are planning the decorating of communal hallways this year and we were checking the Section 20 Process, (we have done this on a number of occasions before but wanted to make sure nothing had changed). We came across the following on the Lease Advice website and are now concerned about our annual contracts for gardening, cleaning, insurance, maintenance etc. “QUALIFYING LONG-TERM AGREEMENTS A qualifying long-term agreement is an agreement entered into by the landlord with a wholly independent organisation or contractor for a period of more than 12 months. (Agreements before 31 October 2003 are exempt.) The deciding factor is the minimum length of the commitment. In other words, it is an agreement for a term which must exceed 12 months. Landlords must consult where the amount payable by any one contributing leaseholder under the agreement in any accounting period exceeds £100. Thus, in a property with unequal service charges, the landlord must consult all leaseholders if any one of them would have to pay more than £100 in any one year. The figure is to be calculated on the basis of the leaseholder’s total contribution resulting from the agreement, including VAT. If consultation is not undertaken, the landlord may not be able to recover more than £100 per leaseholder in any accounting period towards the costs under the agreement. Examples of potentially qualifying long-term agreements include:

agreements affecting the building generally (e.g. lifts, entry-phone systems, waste management or maintenance contracts);
cleaning and gardening;
insurance;
utilities; and
management agency agreements.

Some of these services may only have one realistically possible supplier. Nonetheless, consultation must be carried out, unless dispensation from compliance has been granted by the Tribunal. Contracts that are not qualifying long-term agreements include:

contracts of employment;
an agreement between a holding company and its subsidiary, or between subsidiaries of the same holding company (the definitions following those in the Companies Act 2006);
an agreement for less than five years which was entered into at a point when there were no leaseholders or leaseholders at the property (for example on a new development);
an agreement for more than twelve months which was entered into before 31 October 2003.

QUALIFYING WORKS UNDER A LONG-TERM AGREEMENT Where the long-term agreement includes provision for the carrying out of works to the property (for example, a schedule of rates agreement for general maintenance), and these works will result in a charge to any one leaseholder of more than £250, then a separate consultation must be carried out under the provisions of Schedule 3. The original consultation under Schedule 1 in respect of the agreement itself does not provide any exemption from consultation for the works. This requirement for consultation for works equally applies in cases of long-term agreements entered into prior to 31st October 2003 where at the time no consultation on the agreement was required.” Our annual cost for cleaning has recently increased due to a change of company but would come below the £100 per flat. Other costs such as insurance (£12,500 per annum) and gardening (£21,000 per annum) would fall within the £100 per flat. Should we be carrying out a Section 20 for all items individually, collectively?, or are they exempt from Section 20 if they are reviewed annually? On this basis should we be obtaining quotations on an annual basis to ensure best value for money? What processes should we have in place to ensure we do not fall foul of the “Long Term Agreement” consultation process? FPRA Director Shula Rich replies: If your contracts are for one year or less, then they are not qualifying long term agreements. Generally, to be certain, blocks make the contacts for 364 days - one year less a day. If the contract has a firm end date of one year less a day, it can be renewed each year for a further similar period. It’s excellent that you are paying such close attention to the regulations. [Submitted February 2019]

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