Room for improvement

Waaler –v- Hounslow LBC [2017] EWCA Civ 45

Summary

This case concerns the ability of landlords to recover the cost of improvements from tenants where the lease permits it, but the statutory regime for residential service charges also applies to restrict recovery. The decision is important for both landlords and tenants of residential or mixed use properties.

In this claim, the tenant of a residential block was challenging the cost of replacement windows, which constituted an improvement. Whilst the Court found that all works forming part of the service charge require the same legal test, there can be different considerations for improvements as opposed to repairs.

In particular, the landlord must consider the financial impact on the tenants if it wishes to recover the costs of improvements. This is a much higher administrative burden for the landlord than for a simple repair or for a purely commercial service charge.

The facts

The tenant was the owner of a flat on an estate owned by the landlord. The lease obliged the tenant to pay a service charge in respect of repairs, and to pay a proportion of the cost of any improvement works.

In November 2004, the landlord served notice on the tenant of its intention to carry out major works. This included replacing the roof, and replacing wooden-framed windows with metal ones. It also meant replacing external cladding and removing asbestos.

The tenant’s share was estimated to be £61,134.01. The landlord proceeded with the works, which were completed in May 2006. In March 2012, the tenant received a service charge demand for £55,195.95.

She applied to the First Tier Tribunal to determine what was reasonable.

The law

The Landlord and Tenant Act 1985 protects residential tenants from excessive service charges. It contains various requirements in terms of the amounts that landlords can recover, and the procedure that they must follow.

The 1985 Act defines “service charge” as an amount that:

  • Is payable by a tenant of a dwelling as part of, or in addition to, the rent;
  • Is payable directly or indirectly for services, repairs, maintenance, improvements, insurance or the landlord’s management costs; and
  • Varies, or may vary, according to the relevant costs.

It stipulates that landlords may only recover costs if they are “reasonable”:

  • The costs must have been reasonably incurred; and
  • Any works or services to which the costs relate must be of a reasonable standard.

Any landlord wishing to recover the cost of works through the service charge must comply with these requirements. Any tenant wishing to challenge the cost of the works can ask the First Tier Tribunal to determine what is reasonable.

The First Tier Tribunal decision

At first instance, the First Tier Tribunal found that the replacement of the roof and the windows and cladding could be recovered via the service charge.

The Upper Tribunal

The tenant appealed to the Upper Tribunal, which approved the first decision in respect of the roof, but overturned it on the windows and cladding.

The Upper Tribunal found that the landlord was obliged to carry out repairs, but only had discretion in relation to improvements. It concluded that the landlord should have taken particular account of:

  • The extent of the tenants’ interests;
  • The tenants’ views on the proposals; and
  • The financial impact of the works on the tenants

As the landlord had failed to do this, the costs for the improvements were irrecoverable.

This time, the landlord appealed.

The issue

The main issue before the Court of Appeal was whether the costs were “reasonably incurred” under the 1985 Act.

The landlord argued that the Upper Tribunal had suggested incorrectly that a different test should be applied to determine reasonableness if the works included improvements. It claimed that the focus should be on the landlord’s decision-making and whether it had been conducted reasonably.

The decision

The Court of Appeal dismissed the landlord’s appeal.

The Court agreed with the Upper Tribunal that the same legal test should be applied to all work falling within the definition of “service charge”, but that there is a difference between obligatory repairs and discretionary improvements. This means that the factors to be taken into account may differ. However, the Court distinguished its approach from the Upper Tribunal, as it felt that there was no “bright line” difference between repairs and improvements.

On the points raised by the Upper Tribunal, the Court commented:

  • The extent of the tenants’ interests – this could be determined easily by measuring the remaining lease terms;
  • The views of the tenants - whilst the landlord was not bound by the tenant’ views, it should place more weight on them where the works were discretionary; and
  • The financial impact of the works on the lessees – the landlord had to recognise that the tenants of a “luxury block in Knightsbridge” would be less likely to be affected than the tenants of “former council flats in Isleworth”. That the tenants were ultimately bearing the cost was an integral part of the context for deciding whether the costs were reasonable.

When a tenant agrees to pay for the cost of repair, it is possible to anticipate the works and costs that might be required. It is not possible to do this for discretionary improvements.

The landlord was wrong to argue that the focus should be on its decision-making and whether it had acted reasonably. In fact, the question of whether costs had been reasonably incurred is not purely a question of procedure; it is also a question of outcome. This means taking into account the impact on the tenant.

Landlords will be relieved to note that the Court did add that, where a landlord had chosen works that led to a reasonable outcome, the costs would have been reasonable, even if there was a cheaper alternative. Where there is more than one reasonable alternative, the decision is for the landlord, not the Tribunal.

The Court did not attempt to set out any guidelines for future questions of reasonableness because each case will always turn on its own facts.

Our comments

This decision confirms that, although there is no two-tier test, the factors that a landlord should consider when carrying out improvements may be more extensive than for repairs.

Whilst it does not provide certainty as to what will be reasonable, the view that it is for the landlord to choose which reasonable course of action to pursue will be welcome to landlords.

However, it is inevitable that this will increase the administrative burden on landlords to be able to prove that they have considered alternatives and the financial impact on tenants before incurring costs. Tenants will want to ensure that landlords have done this, as it gives a greater scope for the costs to be challenged if the landlord tries to recover them via the service charge.