What is the position if a landlord chooses to carry out works that go beyond repairs and to add the costs to residential service charges pursuant to provisions in its leases entitling it to do so? In London Borough Council of Hounslow v Waaler [2017] EWCA Civ 45; [2017] PLSCS 25 the landlord had charged its tenants for the cost of replacing roofs and windows. The total cost of the works to Miss Waaler was £55,000, which represented 62.5% of the value of her flat. She argued that the costs were unreasonable in that they ought to have been spread over several service charge years and that the landlord ought to have to considered the financial impact of the service charge costs on its tenants before proceeding with the work.
The Upper Tribunal accepted that the replacement of the roofs was a recoverable item for the purposes of the service charge. But it classified the installation of new windows as an improvement. The lease gave the landlord the right to make improvements and obliged the tenant to contribute to their cost, but the tribunal ruled that the landlord ought to have taken into account the extent of the tenants’ interests, their views, and the financial impact of the cost on them, before proceeding.
The landlord asked the Court of Appeal to overturn the decision. It argued that the requirement to consider such factors would lead to uncertainty about what contributions would be recoverable under service charges. But the Court of Appeal upheld the decision. It explained that it was fully aware of the desirability of predictability in the law and appreciated that landlords would want to avoid the risk of non-recovery of costs incurred in good faith. However, parliament had deliberately chosen an open ended and flexible test in the form of “reasonableness” and part of the context for deciding whether costs have been reasonably incurred is the fact that, in principle, the cost of the work is to be borne by tenants.
Lewison LJ explained that the extent of the lessees’ interests was to be measured by the remaining unexpired terms of the leases. Furthermore, landlords are already under a statutory duty to consult tenants about service charges and consider their views – and, where a landlord is exercising a discretionary power at the expense of its tenants, it made sense that their views should be more influential than in a case where a landlord is under an obligation to carry out the work. Lewison LJ added helpfully that landlords need not investigate the financial means of individual tenants; that would be impractical and intrusive. However, they are likely to know what kind of tenants they have – and tenants of luxury flats in Knightsbridge might find it easier to cope with a bill for £50,000 than tenants of former council flats elsewhere.
It is also worth noting that the court indicated that the weight to be attributed to the tenants’ views, and to the financial impact of the cost of work, will depend on the circumstances. For example, are the improvements being made to eradicate defects that might require expensive repairs in the future? Alternatively, is the landlord proposing to provide something new that did not exist before, and, if so, will all, or only some, of the tenants benefit? Or is the improvement for aesthetic purposes only?
Allyson Colby is a property law consultant
