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How long is the term of a contract?

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Summary: A recent case in the Upper Tribunal has highlighted the importance of very careful drafting when it comes to contracts that could be caught by statutory requirements, depending on the length of their term.

Landlords are required, under section 20 of the Landlord and Tenant Act 1985, to consult with residential tenants before entering into Qualifying Long Term Agreements (“QLTA’s”) for the provision of services (typically management, insurance, maintenance and repair) which will be paid for through the service charge.  Failure to consult will limit the amount recoverable from tenants under the service charge.

To qualify as a QLTA, an agreement must (among other things) be an agreement for a term of more than 12 months.

Landlords have, over the years, sought to bring long term agreements with service providers outside the consultation regime by drafting them in a way that limits any fixed or certain term to 12 months or less.  A recent case from the Upper Tribunal has highlighted that this is not straightforward.

In 2010, in the case of Paddington Walk v Peabody Trust  (a County Court decision) the relevant service agreement stated that it was for “an initial period of one year… to continue on a year-to-year basis with the right to termination by either party on giving three months’ notice at any time”. The parties in this case agreed that this wording meant that the agreement could be terminated at the end of 12 months, so the question for the court was whether it could be construed as an agreement for more than 12 months in the light of the continuing right to terminate after the initial 12 month period.  

The court decided that what was important was the length of the contractual commitment. As this contract term entailed a firm commitment for 12 months only and continued thereafter on a periodic basis, the agreement could not be said to be for a term of more than 12 months and was therefore held not to be a QLTA.

Conversely, in Poynders Court v GLS Property Management  (2012), the Upper Tribunal found that an agreement with no fixed term, but terminable on 3 months’ notice at any time, was a QLTA.  This was based on the Tribunal’s interpretation of the parties’ intention regarding the length of the agreement, as deduced from the nature of the services to be provided.  With this in mind, the Tribunal found that even though the contract was for an indeterminate length, it was for a term of more than 12 months.

More recently, in the case of Corvan (Properties) Ltd v Abdel-Mahmoud, the Upper Tribunal had to consider whether an agreement which was stated to run for a term of 12 months and would “continue thereafter until terminated upon three months’ notice by either party” was a QLTA. To do this, it had to decide whether:

  1. it was terminable at the end of the initial 12 month period, or
  2. whether the contract could only be terminated after 12 months (in which case it would qualify as a QLTA).

The Tribunal considered the Paddington and Poynders decisions and understandably found the reasoning in them difficult to reconcile. The Tribunal decided that the inclusion of the words “continue thereafter” in the relevant clause gave an indication that the agreement would necessarily continue beyond the initial 12 month period until terminated.  The question of when notice to terminate could be given (whether within the 12 month initial period or only after) was held to be irrelevant.  The inclusion of the words “continue thereafter” meant that the agreement had to continue for at least some time after 12 months, even if only for 1 day.  The Tribunal found that the agreement included a commitment for a term certain of at least 12 months and 1 day and was, therefore, a QLTA.  

Implications

This case emphasises the need for careful drafting of similar contracts, if landlords wish to avoid section 20 of the Act.  Any language that is in any way suggestive of granting a contract term of more than 12 months will probably be construed as a QLTA.

Landlords seeking to bring their long term service agreements outside the consultation regime should be clear that their initial term is for 12 months only and that the right to terminate can be exercised to be effective at the expiry of that 12 month period.  Also, having regard to Corvan Properties v Abdel-Mahmoud, the words “continue thereafter” should be avoided in an agreement that is intended to be for an initial fixed term of 12 months, to be continued on a periodic basis, to avoid it being caught by the consultation requirements.

Agreements of this nature are common place, particularly for estate management contracts, so landlords and estate managers would be well advised to review their standard form agreements. 

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