Landlord and tenant – Service charge – Section 19 of Landlord and Tenant Act 1985 – Appellant local authority landlord carrying out scheme of major works to 1960s estate – Respondent leaseholder obliged to contribute to cost through service charge – Whether works amounting to repairs or improvements – Whether financial impact on leaseholders relevant to reasonableness of charge – Appeal dismissed
The respondent held a long lease of a flat on a 1960s estate in Hounslow owned by the appellant council. The estate contained four tower blocks, several smaller blocks of flats, a few houses and a block of sheltered accommodation. Around 850 flats were let on secure tenancies, while another 140 flats, like that of the respondent, were held on long leases created under the right-to-buy scheme of the Housing Act 1985.
Between 2005 and 2006, the appellants carried out a scheme of major works to the estate, which included replacing the flat roof of each block of flats with a pitched roof and replacing the wood-framed windows with metal-framed units, which in turn necessitated the replacement of the exterior cladding and the removal of underlying asbestos. The works were partly financed by government loans under the Decent Homes initiative. The appellants sought to recover some of the remaining cost from leaseholders through the service charge provisions in their leases. The respondent was billed for £55,195.95 and other leaseholders received similar bills.
On an application under section 27A of the Landlord and Tenant Act 1985, the respondent disputed his liability for the charge, contending that some of the works were improvements rather than repairs and that it was unreasonable to charge the whole cost of the works in one year without taking into account the financial impact on leaseholders.
The first-tier tribunal (FTT) held that, subject to certain minor adjustments, the sum demanded was payable. The respondent appealed successfully to the Upper Tribunal (UT), which held that: (i) the works to the window frames and cladding amounted to improvements which the appellants had only a discretion, not an obligation, to carry out under the terms of the leases; (ii) in the case of improvements, the appellants should have taken into account the extent of the interests of the leaseholders, their views on the proposals and the financial impact on them; and (iii) in the absence of any evidence that the appellants had considered those matters, the FTT should not have found that the service charge was reasonable within section 19 of the 1985 Act: [2015] UKUT 17 (LC); [2015] PLSCS 52. The appellants appealed.
Held: The appeal was dismissed.
(1) Where a contract, including a lease, empowered one party to make discretionary decisions which affected the rights of both parties, the law recognised that the exercise of that discretion gave rise to a potential conflict of interest. That was all the more so where the discretionary decision of one party to the contract imposed a financial liability on the other. The solution was to restrict the exercise of the discretion to what was rational. The exercise of a contractual discretion was constrained by an implied term that the decision-making process should be lawful and rational in the public law sense; that the decision should be made rationally, in good faith and consistently with its contractual purpose; and that the result should not be so outrageous that no reasonable decision-maker could have reached it. That was a different, and lower, standard than a test of objective reasonableness: Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] Bus LR 1304, Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935 and Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 1 WLR 1661 applied.
(2) If a landlord incurred costs that were not justified by applying the test of rationality, then the costs in question would fall outside the scope of the contractually recoverable service charge. However, the statutory requirements went further. Section 19 of the Landlord and Tenant Act 1985 must have been intended to provide protection against costs which, but for its operation, would have been contractually recoverable; otherwise, it would serve little purpose. The statutory test was whether the cost of the work was reasonably incurred, which required the application of an objective standard of reasonableness. Whether costs had been reasonably incurred was not simply a question of process. It was also a question of outcome.
(3) Part of the context for deciding whether costs had been reasonably incurred was the fact that, in principle, the cost of the work was to be borne by the leaseholders. The function of the tribunal was not simply to review the landlord’s decision-making process; instead, the interests of the tenants were to be taken into account in weighing up the relevant factors: Holding & Management Ltd v Property Holding & Investment Trust plc [1990] 1 EGLR 65, Forcelux Ltd v Sweetman [2001] 2 EGLR 173 and Garside v RFYC Ltd [2011] UKUT 367 (LC); [2011] PLSCS 246 considered; Wandsworth London Borough Council v Griffin [2000] 2 EGLR 105 distinguished.
(4) The same legal test applied to all categories of work falling within the definition of “service charge” in section 18 of the 1985 Act. However, the application of the same legal test did not mean that the legal and factual context applicable to one category of works rather than another could be ignored. There was a real difference between works which the landlord was obliged to carry out, and, on the other hand, work which was an optional improvement. When the leaseholder entered into an obligation to pay for the cost of keeping the structure and exterior of the flat and the building in repair, it was possible to form a view about what kind of works would be involved, and consequently what the scale of cost was likely to be. However, in the case of an obligation to contribute towards the cost of discretionary improvements, it would be impossible for the leaseholder to form any idea of the extent of his potential liability. There was a spectrum of different factual situations which might give rise to different considerations, and situations in which different weight should be given to common considerations.
(5) In the instant case, the UT had been entitled to take account of the three factors which it had. The extent of the leaseholders’ interests, which was measured by the unexpired term of their leases, was a relevant factor. The views of the leaseholders were also relevant. The requirement to consult the leaseholders and account of their views was already present in the statutory scheme. The landlord was not bound by the leaseholders’ views but, where it was exercising a discretionary power at the leaseholders’ expense, it made sense that their views should be more influential than in a case where the landlord was doing no more than complying with its obligations. The financial impact of the works was also relevant. While the landlord was not obliged to investigate the financial means of particular lessees, the landlord was likely to know, in broad terms, what kinds of people were leaseholders in a particular block or on a particular estate. Lessees of flats in a luxury block in Knightsbridge might find it easier to cope with a bill for £50,000 than leaseholders of former council flats in Isleworth.
(6) In considering whether the final decision was a reasonable one, the tribunal had to accord the landlord a “margin of appreciation”. If the landlord had chosen a course of action which led to a reasonable outcome, then the costs of pursuing that course of action would have been reasonably incurred, even if there was another cheaper outcome which was also reasonable. However, the UT had made no error of law in its deciding that the costs were not all reasonably incurred in the instant case.
Wayne Beglan (instructed by the legal department of Hounslow London Borough Council) appeared for the appellants; Graham Coyle (lay representative) appeared for the respondent.
Sally Dobson, barrister
To read a transcript of Waaler v Hounslow London Borough Council, click here
