Section 20 and long-term agreements: the £100 a year rule

Most people who have heard of Section 20 think of it as the rule for big one-off jobs: a new roof, external decorations, a lift replacement. But section 20 has a second trigger that gets far less attention. It applies to long-term contracts too, and the threshold is much lower: £100 a year per leaseholder.

If you are a leaseholder, an RMC director or a small managing agent, this is the part of Section 20 that is easiest to overlook. This guide explains what a qualifying long-term agreement (QLTA) is, how the £100 test works, what is excluded, and what consultation is required.

This covers England only. The rules come from the Landlord and Tenant Act 1985 and the Service Charges (Consultation Requirements) (England) Regulations 2003 (referred to below as "the 2003 Regulations").

What is a qualifying long-term agreement?

The starting point is section 20ZA(2) of the 1985 Act. Subject to some exclusions, a qualifying long-term agreement means:

an agreement entered into, by or on behalf of the landlord or a superior landlord, for a term of more than twelve months.

Three things to notice:

"By or on behalf of" means an agreement signed by a managing agent for the landlord can count.
"More than twelve months" means a contract for exactly twelve months is not caught by this definition.
It is about the agreement, not the type of work. The 2003 Regulations describe the "relevant matters" under an agreement as the goods or services to be provided or the works to be carried out. So, depending on its term and cost, a service contract (for example for cleaning or maintenance) can be a QLTA, as can a managing agent's appointment. The consultation rules themselves contain specific wording about proposals to appoint a managing agent.

Whether a particular contract is "for a term of more than twelve months" can be harder to answer than it looks, especially for rolling or open-ended contracts. If that is your question, take advice on the specific contract.

The £100 threshold: how it is actually measured

Regulation 4(1) of the 2003 Regulations says section 20 applies to a QLTA:

if relevant costs incurred under the agreement in any accounting period exceed an amount which results in the relevant contribution of any tenant, in respect of that period, being more than £100.

Read that slowly, because the detail matters.

It is per leaseholder, not per contract. The question is what an individual leaseholder would contribute, not the headline contract price.
It is "any tenant". If even one leaseholder's share would be more than £100 in an accounting period, the consultation requirements apply.
It is per accounting period. Regulation 4(2) defines an accounting period as a twelve-month period beginning with a "relevant date". Regulations 4(3) to 4(4) set out how that date is fixed, so check it against the service charge accounting periods for your building.

Two further points from regulation 2(2) of the 2003 Regulations are useful when working out whether the threshold is crossed:

any estimate must include VAT where applicable; and
for a proposed agreement, it must be assumed that the agreement will terminate only by effluxion of time, meaning it runs its full term.

What is excluded

Regulation 3 of the 2003 Regulations lists agreements that are not QLTAs. They are:

a contract of employment;
certain management agreements made by a local housing authority with a tenant management organisation or with specified bodies;
agreements between a holding company and one or more of its subsidiaries, or between two or more subsidiaries of the same holding company;
an agreement where, when it is entered into, there are no tenants of the building or premises it relates to, and the term does not exceed five years.

Regulation 3 also has transitional exclusions for agreements made, or works publicly advertised, before the 2003 Regulations came into force. Those are unlikely to matter for a new contract today.

The practical point for an RMC is the first bullet. A caretaker or cleaner employed directly by the company on a contract of employment is not a QLTA. The same work bought in from a cleaning firm on a contract for more than twelve months could be.

What consultation looks like for a QLTA

Which consultation schedule applies depends on whether public notice of the relevant matters is required (regulation 5). The 2003 Regulations define public notice as notice published under the Procurement Act 2023. Where public notice is required, Schedule 2 applies. Otherwise, Schedule 1 applies.

Under Schedule 1, the landlord must:

Give a notice of intention to each leaseholder (and any recognised tenants' association). It must describe the relevant matters, give the landlord's reasons for the agreement, invite written observations and invite each leaseholder to propose the name of a person from whom an estimate should be sought. Responses are due within the "relevant period", which regulation 2(1) defines as 30 days beginning with the date of the notice.
Have regard to observations made within that period and try to obtain an estimate from a nominated person, following the rules in paragraph 4.
Prepare at least two proposals. At least one must be with a person wholly unconnected with the landlord. Where an estimate came from a nominee, there must be a proposal based on it. Each proposal must state any connection with the landlord, the estimated contribution per leaseholder where reasonably practicable, the provisions for variation of the price, the intended duration, and a summary of observations received with the landlord's response.
Give notice of the proposals, again inviting written observations within the relevant period, and have regard to them.
Within 21 days of entering into the agreement, give each leaseholder written notice of the reasons for making it and, if observations were received, a summary of them and a response. This last step is not needed if the contract went to a nominated person or to whoever submitted the lowest estimate.

Under Schedule 2 (public notice cases), leaseholders are not invited to nominate, because public notice is given instead. The notice of intention must say so.

Works carried out under a QLTA

A QLTA can include works, not just services. Where qualifying works are carried out under a QLTA to which section 20 applies, regulation 7(1) says a separate, shorter consultation in Schedule 3 applies to those works. The trigger for qualifying works is set by regulation 6: a relevant contribution of more than £250 for any leaseholder.

What happens if consultation is skipped

Under section 20(1) of the 1985 Act, where section 20 applies and the requirements have been neither complied with nor dispensed with by the tribunal, the leaseholders' contributions are limited. Section 20(7) limits each affected leaseholder's contribution to the amount prescribed, which for a QLTA is the £100 per accounting period set by regulation 4.

The landlord can still apply to the First-tier Tribunal for dispensation under section 20ZA, which applies to qualifying long-term agreements as well as works.

A quick checklist

Is the contract for more than twelve months?
Is it made by or on behalf of the landlord?
Is it excluded by regulation 3 (employment, group companies, no tenants and five years or less, and so on)?
Will any one leaseholder contribute more than £100 in an accounting period, including VAT and assuming it runs its full term?

If the answers point to a QLTA, consult before signing, not after.

This article is general information, not legal advice. It covers England only. For a specific contract, speak to a solicitor or the Leasehold Advisory Service (LEASE).

If you have received a Section 20 notice and want to check it against the rules, the Section 20 Free Check is a free download. See it on the shop