Landlord and tenant – Service charge – Major works – Respondents carrying out programme of major works to housing estates including re-cladding of exterior of blocks – Appellant leaseholder disputing liability to pay contribution to cost of works charged by respondents – Whether cost of works reasonably incurred – Whether more modest programme of repairs would have sufficed – Whether appellant’s service charge contribution to be reduced to take account of funding received by respondents from third party – Appeal allowed in part
The appellant was the leaseholder of a maisonette on one of two council estates in Sheffield dating from the late 1960s and early 1970s. The estates comprised a total of 40 blocks of flats and maisonettes of a non-traditional construction. Eighty units on the estates, including the appellant’s maisonette, were held on long leases, acquired pursuant to the statutory right-to-but provisions, under which a service charge was payable.
In 2011 and 2012, following statutory consultation with tenants, the respondents undertook a programme of major works to the estates which included the removal of the original cladding, with its wooden supporting frame, from the exterior of each of the 40 blocks and its replacement with new cladding material on steel frames. The work was undertaken to remedy problems identified in a 2003 report, including water ingress and a lack of thermal insulation.
The works cost a total of £11,438,801.80. The respondents sought to recover £615,323.64 of that cost from leaseholders through the service charge, with the contribution calculated at £9,378.72. A funding contribution obtained from a commercial energy company as part of the Community Energy Savings Programme (CESP) was not passed on directly to the leaseholders, as a set-off against their service charge contributions; instead, the respondent decided to use those funds as a contribution towards the cost of aspects of the work for which they had chosen not to charge leaseholders.
The appellant appealed against a determination of the leasehold valuation tribunal, under section 27A of the Landlord and Tenant Act 1985, that the cost of the major works had been reasonably incurred as required by section 19 of the 1985 Act and that she was accordingly required to contribute to them through the service charge. She contended that it was not reasonable for the respondents to incur the cost of complete replacement of the cladding, when a more modest programme of regular repairs to the original cladding would have suffice. She also argued that the costs recoverable through the service charge should be reduced to take account of the CESP funding.
Held: The appeal was allowed in part.
(1) The cost of the works had been reasonably incurred and the works had been carried out to a reasonable standard within the meaning of section 19 of the 1985 Act. It was reasonable for the respondents to incur the costs of providing a long-term solution to the structural problems by re-cladding the main facades of the blocks with an entirely new cladding system. Not only would the new cladding reduce future maintenance bills, it would improve thermal insulation and reduce energy bills for residents. Although the immediate cost for individual leaseholders was high, the only suggested alternative, of regular repair and replacement of missing or damaged tiles, would itself have been expensive and would have provided no long-term future for the estates. Moreover, the availability of alternative payment plans for those leaseholders who had exercised the right to buy was a relevant factor in considering the reasonableness of the respondents’ decision to incur the costs.
The need to incur the cost of repairs, and the reasonableness of that cost, did not depend on whether the repairs should have been carried out earlier. It was reasonable in 2012 to incur the cost of re-cladding the estates. A history of neglect would be relevant to a service charge claim, so as to provide a defence to all or part of such a claim, only if it could be shown that cost would have been avoided or reduced if the landlord had complied with its obligations in a timely manner, rather than leaving work to accumulate over a prolonged period: Daejan Properties Ltd v Griffin [2014] UKUT 206 (LC); [2014] PLSCS 172 applied. Even if a much higher standard of routine repairs had been achieved during the first 40 years of the estates’ existence, by 2011 there would still have been a need for a programme of major works to address the basic structural problems identified in the 2003 report. Consequently, the lack of significant repairs in the past had no effect on the liability of leaseholders to contribute towards the cost of the major works.
(2) It made no difference to the appellant’s liability whether the works were properly characterised as repairs or improvements. Both were recoverable under the terms of the lease. Where a building was in disrepair and there was a choice of methods by which a defect could be remedied, it was for the landlord to decide how to discharge its obligations. If one available remedy involved carrying out significant improvements, the decision whether to carry out that work still lay with the landlord and, provided that it acted reasonably, the cost of both repairs and improvements would be recoverable through the service charge. The leaseholder could not complain simply because the landlord could have adopted another and cheaper method of dealing with the defect. Section 19 of the 1985 Act made no express distinction between the cost of improvements and the cost of repairs, although, in deciding whether the cost of the works was reasonably incurred, a different approach might be required depending on whether the works were repairs which the landlord was contractually obliged to carry out or improvement in respect of which it had a discretion. While it would be relevant, in the case of improvements, to consider whether less expensive works would have been sufficient and to have regard to the views of those who would have to pay for the improvements, those factors did not affect the reasonableness of the respondents’ decision in the instant case since a lesser scheme of repairs would not solved the problems with the blocks and would, furthermore, have required regular and significant expenditure in future without improving the energy performance and thermal insulation properties of the buildings: Waaler v Hounslow London Borough Council [2015] UKUT 17 (LC); [2015] PLSCS 52 applied.
(3) The respondents had adopted a reasonable method of apportioning the costs between leaseholders, so far as they had identified a rate per square metre for the cost of cladding the building and then applied it to the external surface area of each unit, with the cost of works to the common parts apportioned equally according to the number of flats in each block. The result had been to identify a reasonable rate at which each leaseholder was to contribute to the cost of works to their own flat or maisonette.
(4) The appellant was not liable to pay the sums charged by the respondents to the extent that the works were funded by the CESP contribution. As a matter of principle, it was not open to the respondents to calculate the service charge without taking into account the receipt from a commercial third party of funds specifically intended to meet the cost of part of the works. The respondents had not “incurred” those costs, within the meaning of the lease, in circumstances where, in the course of the contract, it reached agreement with a third party which bound that party to reimburse part of the cost. Since the CESP funding was not limited to properties let to the respondents’ own secure tenants, but was equally applicable to work done to those belonging to its long leaseholders, the respondents could not treat the funding as if it were part of their general revenue. Had the respondents not carried out the specific items of work which it now sought to charge to charge to the leaseholders, it would not have received the CESP funds. In those circumstances, for them to retain the CESP funding while also recovering the leaseholders’ contributions towards the cost of the work in full would amount to double recovery.
It made no difference that the respondents were not asking leaseholders to contribute to the full cost of the refurbishment project and that their treatment of the CESP funding was informed by that decision. The respondents had acted in good faith by adopting a broad approach to the fair allocation CESP funding with a view to all leaseholders on the estates sharing equally whether or not the work carried out to their block was strictly eligible. However, the terms of the leases did not permit the respondents to share the benefit of the CESP funding in that way. The contractual provisions required the leaseholders to contribute to the cost of works of repair or improvement carried out to their own blocks, and not to the estate as a whole. If the respondents’ costs of work to one block had been reduced by the availability of CESP funding for that work, they were not entitled to share the benefit of that reduction more widely without the agreement of the leaseholders of the block on which the qualifying work has been carried out.
Moreover, even if it were permissible to spread the benefit of the CESP funding widely in return for the removal from the service charge of expenditure which might otherwise have been eligible to be included, the respondents would still have to show that individual leaseholders were the net beneficiaries of the set-off. They had provided insufficient information on which to determine whether the set-off resulted in a balance in favour of the leaseholders or the respondents. It followed that the respondents had not established that their treatment of the CESP funding was in accordance with the requirements of the lease. The appellant was entitled to be credited with the sum received in CESP funding on account of the works carried out to her flat, to the extent that the respondents had included those works in the service charge that it sought to recover. That figure was calculated at £1,885.44. A further adjustment to the appellant’s contribution was made to exclude the sum of £458.97 charged in respect of resurfacing carried out by the respondents to the appellant’s private balcony, for which she was not liable.
The appellant appeared in person; Christopher Baker (instructed by the legal department of Sheffield City Council) appeared for the respondents.
Sally Dobson, barrister
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