Laura Severn of LMP Law provides us with a case study about ensuring that service charges are reasonably incurred.

If you’re going to recover residential service charges, you have to ensure that those costs have been reasonably incurred. There are differences between optional improvements and essential repairs. What is less clear, though, is what can be counted as a cost that has been “reasonably incurred.” The Court of Appeal considered this issue in The London Borough of Hounslow v Waaler [2017] EWCA Civ 45. The outcome was the provision of helpful advice for landlords looking for guidance in this respect.

Background To The Case

Ms Waaler was a Right To Buy occupier who had taken a long-term lease on a flat that was managed and owned by her local authority, Hounslow LBC. This organisation then chose to carry out major renovation works on the estate on which Ms Waller’s flat was located. Those works included the removal of the wood-framed windows, which were then replaced with units with a metal frame.

The problems arose when Hounslow LBC attempted to recover costs for the work carried out on Ms Waaler’s property. The amount was quite substantial, and she questioned if the costs had been “reasonably incurred.” The case was referred to the Upper Tribunal. The finding was that Ms Waaler could not be held liable for those costs since they were beyond the work required to rectify the problem. The local authority then appealed this decision.

The Court Of Appeal’s Decision

The case was then referred to the Court of Appeal, who went on to affirm the decision made by the Upper Tribunal. Their finding was that, although a design issue had been discovered with the existing wood-framed windows that meant they were able to be replaced, they weren’t considered to be in a state of “disrepair.” As a result, the work was considered to be only optional improvements rather than vital repairs.

The Appeal Court then considered if the cost of replacing the windows had been “reasonably incurred” in the scope of the 1985 Landlord & Tenant Act. Their overall finding was that there were three things for landlords to consider when choosing whether to repair or replace a fixture or fitting.

These three factors are:

• The interests of the lessee when taking into account the unexpired term remaining of their lease.
• The tenant’s views. While these aren’t considered to be binding, the court said they should receive more weight if the landlord is considering optional work over that which is required.
• The financial effect of the work to be carried out. Tenants living in some locations have a better ability to afford more costly work than those living in others.

While the court agreed that no clear differences exist between replacements and repairs, it is usually simpler to estimate the costs of repairs than the cost of long-term improvement works.

What Does This Mean For Leaseholders?

Leaseholders who wish to avoid making an unnecessary contribution towards the costs of any improvements carried out on their property will find this case a useful one to bear in mind. The decision shows that, in the case of voluntary improvements, landlords must face a larger burden of responsibility to justify any expenditure when compared to circumstances in which they are obliged to undertake works. Leaseholders can, therefore, feel confident that their views must be listened to by their landlords before any decision to make improvement works is taken.

What Does This Mean For Landlords?

The outcome of the Court of Appeal’s decision has a serious message for landlords, which are determining whether to repair or replace items in their properties. The decision confirmed that landlords have a responsibility to act reasonably in such matters.

This can raise issues for landlords of mixed developments where residents have varying means. In such cases, should they postpone any improvement works in order to handle the worries of those tenants who are less able to pay? Or what happens when the landlord isn’t sure if the works are an improvement or a repair?

While the costs of improvement are harder to predict than the costs of repair, a tribunal won’t interfere if landlords take action, which leads to an outcome that is considered to be reasonable, even when an outcome which would have been cheaper is also considered to be reasonable.

As a result, landlords who can prove that they have reasonably considered any financial impacts of their proposed work on their tenants can come more easily to the decision between replacement or repair works. While landlords should still weigh up all the options available within their lease terms carefully, if they’re able to prove that they have given all the above considerations reasonable weight, the scope for any disputes is potentially reduced. While this has been said, however, there will always be more disputes of this nature brought before the court, which will, in turn, provide further certainty to the matter.

Laura Severn is a Partner at LMP Law who act directly for investors, developers, freeholders, managing agents, residential management companies, property managers, and leaseholders.