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 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.

Firstly, a significant number of 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 contradictory, 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-to-month, 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 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.

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 First-tier 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.

 

Reviewed: July 2019