Section 20 LTA 1985: two ways to fund qualifying works, and why the choice matters

A managing agent recently asked us whether a £68,000 lease extension premium received by a residents’ freehold company could fund planned maintenance works  and, if so, whether that would bypass the Section 20 consultation requirement under the Landlord and Tenant Act (LTA) 1985 altogether. The short answer is yes, potentially. But the conditions are strict, and missing any one of them creates a bigger problem than the shortcut saves.

Does Section 20 apply when the money’s already in the reserve fund?

Yes — and this catches people out. Section 20 is triggered by the cost incurred on qualifying works, not the cash demanded. Reserve fund money was collected as service charges and is held on trust under s.42 of the Landlord and Tenant Act 1987. It belongs to leaseholders, not the company. If any individual leaseholder’s share exceeds £250, the consultation process applies regardless of whether a fresh demand goes out.

Skip it without dispensation under s.20ZA and recovery is capped at £250 per leaseholder. On a ten-flat block, that means the company can only recover £2,500 — leaving a potentially significant shortfall that effectively has to be absorbed by the reserve fund. There’s no way around it on the service charge route.

What about using the lease extension premium instead?

A lease extension premium belongs to the freehold company outright — it’s not service charge money. Section 20 only governs ‘relevant costs’ under s.18 LTA 1985: costs recoverable through the service charge. Fund the works entirely from the premium with no demand to leaseholders, and s.18 simply isn’t engaged. Section 20 doesn’t apply.

The principle is sound. But all five of the following conditions must be met.

The conditions:

1. A formal company resolution. Board or members’ resolution, properly minuted. A group chat or verbal AGM agreement won’t hold up as a matter of company law or as evidence if challenged.
2. Unanimous member consent. All registered members and shareholders must agree in writing. One objector can bring an unfair prejudice claim under company law — the argument being that company funds were used to deprive them of a consultation they were entitled to.
3. No reserve fund top-up. If the works overrun and the reserve fund covers any shortfall, Section 20 applies to the whole project. You can’t split the contract into a ‘company’ portion and a ‘service charge’ portion — once service charge money is touched, the whole job is a qualifying works matter.
4. No subsequent recharge. Once you’ve resolved to fund from company money, the cost can’t later be recovered through service charges. Any attempt to do so makes the expenditure a relevant cost retrospectively and the £250 cap applies.
5. Universal membership. This route is not suitable where any leasehold properties did not participate in the freehold purchase. Non-member leaseholders would benefit from the premium without having contributed to acquiring it — unfairly prejudicing those members who did. If membership isn’t universal, take advice before proceeding.

Two further points worth raising with advisers before committing: the premium may carry corporation tax or chargeable gains implications, and if contributions were collected specifically for these works, the lease terms should be checked to determine how the resulting reserve fund surplus should be handled.

What SE-Solicitors would recommend

Where the reserve fund already covers the cost, run the Section 20 consultation. It’s a two-stage process — one notice inviting observations, a second attaching estimates — and takes two to three months. It’s not burdensome, costs little, and keeps all funding options open.

The premium route is legally viable but only where all five conditions are met. Miss one — a missing resolution, a dissenting member, a cost overrun, or a non-participating leaseholder and you’ve created a larger problem than the one you were avoiding.

The right question isn’t ‘can we avoid Section 20?’ It’s ‘is avoiding it worth the risk if anything goes slightly wrong?’ In most cases, the answer is no.

If you need further advice on reserve funds or lease extensions, please do not hesitate to contact Andy Goater here. As part of our guidance service, we offer a complimentary 30 minute consultation.