London Borough of Hounslow v Waaler [2017]:

Whether service charge costs were reasonably incurred

The background

The Respondent occupied a flat within a block owned by the Local Authority Appellant. The Appellant carried out works to the flats during the period 2004 - 2012, charging for these works to the tenants by way of a service charge demand; the Respondent received a demand for £55,195.55 and brought a claim in the First-tier Tribunal to assess whether or not the service charge sum was payable.

The lease contained the following obligation on behalf of the landlord:

“That the Council will keep in repair and redecorate when necessary the structure and exterior of the Flat and the Building including the drains gutters and external pipes thereof and will make good any defect affecting the structure…

That the Council will keep in good repair and condition all other property over or in respect of which the Lessee has been granted rights…”

The Respondent was required to pay an amount on account of service charge to the Appellant, as well as a fair proportion of the cost of any improvements.

The law

At First-tier Tribunal, the Court held that the service charge sum was payable and the Appellant was entitled to recover it from the Respondent.

The Respondent appealed to the Upper Tribunal, which allowed the appeal in part. It held that the works were classed as improvements, stating that the local authority Appellant should have considered the financial circumstances of tenants and whether works could have been carried out more cheaply. For this reason, the Upper Tribunal concluded that costs had not been reasonably incurred.

The matter moved to the Court of Appeal which was asked to review some aspects of the Upper Tribunal’s decision, in particular those relating to the replacement of windows, external cladding and removal of asbestos.

At the Court of Appeal, the question was asked of the Court whether the cost of the works had been reasonably incurred; the Court considered whether ‘reasonableness’ was to be assessed in accordance with objective reasonableness, or according to the lesser standard of ‘rationality’. The Respondent raised a further point that the Upper Tribunal had applied different tests when considering improvements and repairs.

The Court of Appeal held that the definition of reasonableness within s.19 of the Landlord and Tenant Act 1985 is an objective standard and not simply what can be considered as rational.

The decision

The Court of Appeal dismissed the Respondent’s appeal. The Court held that the outcomes of the works undertaken must also be considered in addition to reviewing the costs process. There may be any number of reasonable outcomes where works are carried out to a building; where the landlord had chosen to carry out certain works and the outcome was reasonable, the costs of those works could be held to be reasonably incurred even if another method would have been cheaper.

Further, the Court of Appeal concluded that the relevant test applied to all categories of works falling within s.18 of the Landlord and Tenant Act 1985 and the definition of ‘service charge’.

In its judgment, the Court reviewed the three points raised by the Upper Tribunal:

· The extent of the interests of the tenants: This can be measured by the unexpired terms of their leases.

· The views of the tenants: The landlord has a statutory obligation to consult tenants, having due regard to their views. The landlord isn’t bound by the tenants’ views but where works undertaken by the landlord are discretionary, it follows that the landlord should have greater regard for the views of tenants than where a landlord is simply complying with its obligations.

· The landlord must take into account the financial impact of works: The Upper Tribunal was not implying with this comment that the landlord should investigate the financial status of any particular tenant, only that a landlord is likely to know broadly the kinds of people occupying a property and their financial means.

JB Leitch comments on the decision:

“This case provides a Court of Appeal authority on the ability for a landlord to undertake improvements at a property. These cannot be carried out on the landlord’s whim as it wishes, but the landlord must first consider the interests of tenants, the tenants’ views and the financial means of the tenants before demanding reimbursement of costs.”