The vote for Brexit has caused uncertain times. What lies ahead is anyone’s guess. However, what is perhaps more certain is that existing commercial landlords of multi-let buildings will be immediately reviewing their existing portfolios with a view to maintaining tenant interest and capital values. Of course, these go hand in hand, in that the more interest your building attracts, the higher the likely rent on any new letting and the higher the capital value. Lenders will also be very interested in capital values, particularly in respect of existing debt.
In these situations the trend has been for landlords to bring forward planned preventive maintenance works. Furthermore, landlords have sought to modernise the common parts – an impressive reception is always more attractive. The air conditioning system and lifts are also often targeted.
That is all well and good, but if such works are carried out, who foots the bill? The landlord who benefits from the increased capital value, or the existing tenants who enjoy a better building or facilities as a result?
Disputed disrepair
This is where there is scope for a dispute. Some tenants welcome such works and are willing to pay for them through their service charge obligations. Others see this as an opportunistic step on the part of the landlord to increase their own capital values, and therefore refuse to pay for the works. For that reason, it is important to plan such works carefully and take proper advice from building consultants and lawyers.
Can landlords recover the costs from the existing tenants through the service charge provisions? This will depend on the specific terms of the leases. Normally, service charge provisions are drafted quite widely. It is extremely important, however, whether the landlord is under an obligation to do the works. Normally, a landlord is obliged to keep the structure of any building and the common parts in good and substantial repair and condition and to comply with such obligation by repairing, renewing and replacing.
If there is such an obligation, then the landlord would be in breach if the building or common parts fell into disrepair. The landlord must comply with its covenant by carrying out the works. Having carried out the works, the landlord is then entitled to recover the costs from the tenant through the service charge provisions. If planned properly, the landlord can also collect service charge on account before the works even commence.
So, is the building in disrepair? Let’s look at some examples.
Air conditioning
The chillers may be ageing and may be well beyond the published life expectancy. The key question, however, is whether they are in disrepair. The fact that they have reached the end of their published life expectancy is not necessarily relevant. Similarly, the fact that they might not be as effective or efficient as their modern equivalent is also not indicative of them being in disrepair. Consequently, these factors alone do not suggest disrepair. However, if they are suffering from frequent breakdowns or are non-compliant with modern legislation (eg the ban on ozone-depleting refrigerant gas R22), then replacing the chillers is likely to fall within the landlord’s obligation and the cost can be passed onto the tenants through the service charge.
Lifts
Similarly, life expectancy is not relevant. What is more important is whether they are safe and/or suffering from frequent breakdowns. Some lifts are not capable of being maintained under an annual contract due to their age. This might also point to disrepair and justify replacement.
Reception
This is a difficult one. Perhaps repainting worn surfaces and replacing an old carpet would constitute repair. However, installing modern lighting/planting/furniture and TV screens would probably amount to an improvement and, therefore, is not recoverable through the service charge.
Consultation breeds cooperation
As mentioned above, some tenants welcome “improvements” and will pay for them even though they are not caught by the service charge provisions. A sensible and commercial landlord will consult with its tenants early and then embark on a project of necessary repairs, agreed improvements paid for by the tenants and then perhaps further works which the landlord would pay for itself in order to achieve its commercial objective of making its building more attractive to both existing and prospective tenants and increasing capital values. It is important to take careful advice from the outset in order to achieve the optimum outcome as otherwise a protracted dispute will be costly and result in projects stalling or being aborted. In such a situation, neither the landlord nor the tenant wins.
Saleem Fazal is a partner and head of real estate disputes at Taylor Wessing LLP
The residential position
While many of the same overall considerations apply, the position is very different for residential properties, because these tenants have additional statutory protections, writes Jill Carey.
If the landlord wishes to carry out works that would cost more than £250 per flat, or to enter into a long-term arrangement, eg for maintenance at the property, it must first follow the consultation procedure set out in section 20 of the Landlord and Tenant Act 1985. There are three stages which must be completed and the landlord must serve all tenants with:
• Notice of intention
• Notification of estimates
• Notification of award of contract
Failure to comply can mean that the landlord is unable to recover more than £250 per flat.
Residential tenants also have the ability to apply to the First-tier Tribunal to challenge the level of service charges. The tribunal has the power to make an award as to what it considers to be a reasonable sum for the tenants to pay.
Jill Carey is a senior associate in real estate disputes at Taylor Wessing LLP
