Contrasting the different approaches to be taken when seeking to recover as service charge the costs of repairs and improvements
In Waaler v Hounslow London Borough Council [2017] EWCA Civ 45; [2017] PLSCS 25, the Court of Appeal had to consider the recoverability of service charges incurred in carrying out major works (including improvements) to a large council estate. It is occupied by 850 residents of which 140 are leaseholders, the remainder secure tenants. The landlord (Hounslow) bore the expense of much of the work as landlord of the secure tenants but it can recover some of the costs from the leaseholders.
One of them, Ms Waaler, is facing a service charge bill of over £55,000. This is her share of the costs of works, which included replacing the original wooden-framed windows with new metal-framed units, replacement cladding and other work.
Challenging the charges
She challenged the charges in the First-tier Tribunal (Property Chamber) (“FTT”). Her application was unsuccessful, but her appeal succeeded in the Upper Tribunal (Lands Chamber) (“UT”), which decided that the windows and the cladding were improvements, not repairs.
Under the leases, Hounslow are entitled to charge for improvements but they should have taken account of the leaseholders’ interests, their views on the proposed improvements and the financial impact of the works on them. Only part of the amount claimed for the improvements was, therefore, recoverable. How much should be recoverable was remitted back to the FTT for a determination.
Hounslow appealed to the Court of Appeal.
Improvements and repairs
After reviewing the meaning of “repair” and “improvements”, the court considered also the service charge provisions in sections 18 and 19 of the Landlord and Tenant Act 1985. Service charges (which include the costs of making improvements) must be “reasonable”. They are recoverable only if they were reasonably incurred and of a reasonable standard (section 19(1)).
As there was no dispute that the works were of a reasonable standard, the issue was whether the costs were “reasonably incurred”. The UT held that while Hounslow had a duty to carry out repairs, undertaking improvements is discretionary. The exercise of such a discretion, when doing so imposes a financial liability on the other party, must be “rational.” Drawing on statements from a number of commercial cases (including Braganza v BP Shipping Ltd [2015] UKSC 17) the court concluded that a “rationality” test applies to a decision whether to carry out optional improvements (as well as to a choice between different methods of repair).
However, whether the costs of improvements were reasonably incurred (under section 19 of the Act) is a different matter.
The leaseholder’s views
The court rejected Hounslow’s submissions that one simply assesses the reasonableness of the landlord’s decision-making process where the views of the leaseholders are not relevant to this part of the process. The purpose of the statutory service charge provisions, reasoned the court, is to protect leaseholders against unreasonable charges that would otherwise be contractually recoverable. The leaseholders’ views must be considered as part of the objective assessment of the reasonableness of the landlord’s decision. Whether costs have been reasonably incurred “is not simply a question of process: it is also a question of outcome” (para 37). This is buttressed by the statutory consultation requirements (in the Service Charges (Consultation Requirements) (England) Regulations 2003), which require not simply the giving of information but also consideration of the views of the leaseholders.
Is the test different when the landlord is proposing to carry out improvement works? The court agreed with the decision of the UT: there is a difference between works which a landlord is required to carry out in the discharge of its obligation to repair, and those which involve optional improvement. For the latter, the landlord should take account of the views of the leaseholders who will be contributing to the costs and the financial impact on them.
The court agreed with the UT that there are three relevant factors to consider. First, there are the leaseholder’s interests to take into account (which can be measured by examining the unexpired lease term). Secondly, the leaseholder’s views, which in the case of proposed improvements may be “more influential” (para 45). Thirdly, the financial impact of the proposed works.
The court noted (in para 45) that a landlord is likely to know what kinds of people are leaseholders of a particular block or estate, adding, in a memorable turn of phrase: “Lessees of flats in a luxury block of flats in Knightsbridge may find it easier to cope with a bill for £50,000 than lessees of former council flats in Isleworth.”
Hounslow’s appeal was dismissed, so (presumably) the matter will now go back to the FTT.
Future cases
How should a tribunal exercise its discretion where the costs of improvements are challenged? Although the court accepted the “three relevant factors” it declined to express any general guidance beyond this. Given the “almost infinitely variable” factual situations and considerations that will come into play in different circumstances, such determinations must be left to the “good sense of the FTT” (para 46).
Residential flat leases will almost invariably require the landlord to carry out repairs and allow it to recover its costs as a service charge. It is probably unusual for private sector flat leases to include the power for the landlord to carry out improvements, though such clauses are common in leases granted under the right to buy.
Beyond right-to-buy leases, though, the very clear analysis of the Court of Appeal of a landlord’s decision-making process may prove influential to service charge challenges generally.
James Driscoll is a solicitor and a consulting editor to the Handbook of Residential Tenancies
Key points
■ Service charges for repairs and improvements are only recoverable if they are rational and reasonably incurred
■ Assessing the reasonableness of improvement costs involves consideration of leaseholders’ views and the financial impact on them
