Landlord and tenant – Service charges – Waking watch – Appellant freeholder issuing service charge to cover cost of waking watch hired following expert assessment report that external walls presented “intolerable” risk to respondent leaseholders – First-tier Tribunal deciding cost not reasonably incurred – Appellant appealing – Whether cost of waking watch reasonably incurred as required by section 19 of Landlord and Tenant Act 1985 – Appeal allowed
The appellant was the freehold owner of Corben Mews, London SW8. The property was a warehouse conversion, in two separate but contiguous blocks (the building) which was originally divided into 14 flats over four storeys. More recently a developer had taken an airspace lease and added two penthouse flats. The respondents were the leaseholders who all held long leases of the flats.
In January 2021, following an external wall inspection, an expert report concluded that combustible materials were present in the external walls of the building that presented an “intolerable” risk to the occupants on the basis that the risk of fire was “medium”, and the potential consequences of a fire were “extreme”. The report recommended remedial measures including the removal of combustible materials and the provision of cavity barriers; and that until that work was done the appellant should put in place interim measures, either in the form of an extended alarm system or by providing a waking watch.
The appellant then hired a waking watch for the building, at the cost of £28,000 a month. The respondents instructed their own expert which reported that the fire risk at the property was low and did not justify a waking watch.
However, the appellant issued service charge demands to the respondents, requiring payment of a charge to cover the cost of the waking watch. The First-tier Tribunal (FTT) determined that that cost was not reasonable incurred as required by section 19 of Landlord and Tenant Act 1985. The appellant appealed.
Held: The appeal was allowed.
(1) The principal authority on the meaning of “reasonably incurred” in section 19(1) of the 1985 Act was Hounslow London Borough Council v Waaler [2017] EWCA Civ 45; [2017] EGLR 19 in which the Court of Appeal had to decide whether service charges in respect of repairs and improvements were payable in that they were “reasonably incurred”. In order for the service charge to be payable pursuant to the terms of the lease, the landlord had to have acted rationally. Pursuant to the Wednesbury rationality test, the decision remained that of the decision-maker, whereas on entirely objective criteria of reasonableness the decision-maker became the court itself.
Rationality was not the same as reasonableness. Reasonableness was an external, objective standard applied to the outcome of a person’s thoughts or intentions. A test of rationality, by comparison, applied a minimum objective standard to the relevant person’s mental processes. It imported a requirement of good faith, a requirement that there should be some logical connection between the evidence and the ostensible reasons for the decision, and an absence of arbitrariness, of capriciousness or of reasoning so defiant of logic as to be perverse: Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935 considered.
Merely applying a rationality test would not give effect to the purpose of the legislation. The statutory test was whether the cost of the work was reasonably incurred. To pass the test the landlord had to not only have a reasonable decision-making process but had to also achieve a reasonable outcome. It made no distinction between choice (what to do) and outcome (which contractor to choose on the basis of price).
(2) The appellant had also relied on Forcelux Ltd v Sweetman [2001] 2 EGLR 173, which concerned the recovery of insurance premiums. but in that case there was no choice as to what to do; the landlord had to insure. The only outcome in issue was price, and the tribunal decided that the choice of insurer had to be reasonable. That did not mean that in a case where the landlord had to make a practical decision as to what to do, that choice between different outcomes would not be subject to the test of reasonableness in section 19: Forcelux distinguished.
A landlord, in deciding what to do, had to follow a reasonable process and then adopt a reasonable course of action. There might be more than one such course of action; the court or tribunal was not to impose its own decision as to what should have been done. But even if the landlord followed a rational decision-making process, if the outcome of that process was not reasonable then the cost would not have been reasonably incurred. It follows that the FTT had not applied the wrong test.
(3) However, it was difficult to see how any landlord, faced with a report from a reputable company signed by three professionals saying that the fire risk in the building was intolerable, could be said to be irrational for putting interim measures in place pending further reports or remedial work. The FTT’s conclusion to the contrary was not justified on the evidence before it.
What the FTT had to decide was whether it was objectively reasonable for the appellant to have put a waking watch in place as an interim measure in reliance upon the expert report, in the light of what it knew or could readily have found out and of what the report said. Instead, the FTT made a decision on the basis of the hindsight provided by the evidence of the parties’ expert witnesses and following their cross-examination. What the FTT had to look at was not what it knew as a result of the proceedings, but whether the expenditure was reasonable in the circumstances and on the basis of the information available when the cost was incurred.
(4) On the facts of this case, only a supremely confident landlord would have done anything else. The adoption of one of the interim measures recommended could not be described as unreasonable, provided it was adopted purely as an interim measure. Accordingly, while the FTT applied the correct test, on the available evidence it misapplied that test and its decision would be set aside.
The Upper Tribunal would substitute its own decision to the effect that the appellant followed a rational process in commissioning and following the expert report; and setting the waking watch as an interim measure was reasonable. Accordingly, the sum of £14,000 was reasonably incurred by the appellant within section 19(1)(a) of the 1985 Act.
Mark Loveday and Richard Miller (instructed by Scott Cohen Solicitors Ltd) appeared for the appellant; Edward Denehan (instructed by Gregsons Solicitors) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Assethold Ltd v Adam and others
