Recoverability of cost of improvement works
On 2 February 2017 the Court of Appeal heard a landlord’s appeal from the Upper Tribunal (Lands Chamber) regarding recoverability of a landlord’s costs in relation to discretionary improvement works (The London Borough of Hounslow v Waaler  EWCA Civ 45). This case will make interesting reading for landlords and leaseholders alike, not only because of the distinction which was drawn by the Court of Appeal between obligatory repair works and discretionary improvements but also for the criteria, put forward by the Upper Tribunal and now approved by the Court of Appeal, which should be applied by the landlord when considering carrying out improvement works to a building.
Ms Waaler lived in a block of flats on an estate in Hounslow owned by the London Borough of Hounslow (“the council”). Approximately 140 residents in the flats were long leaseholders whose leases were created under the right-to-buy scheme (including Ms Waaler’s) and a further 850 residents were secure tenants.
In 2004 the council served a section 20 notice indicating an intention to carry out major works which included 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. Whilst the works were to be partly paid for by government loans under the Decent Homes initiative, the council’s intention was to recover the remaining cost from leaseholders through the service charge provisions in their leases. The works were completed in 2006, after which time Ms Waaler and the other leaseholders were each issued with a bill for £55,195.95.
Ms Waaler applied to the First Tier Tribunal under section 27A of the Landlord and Tenant Act 1985 for a determination of her liability to pay this service charge.
The First Tier Tribunal holding that the sum demanded was payable, Mr Waaler appealed to the Upper Tribunal, which was allowed. The question for the Upper Tribunal was whether or not the costs had been reasonably incurred.
The Upper Tribunal (UT) held on appeal that the works to the window frames and cladding constituted improvements which the council had only a discretion, not an obligation, to carry out under the terms of the leases. They held that, in the case of improvements, in determining whether the cost of the works was reasonable under section 19 of the Landlord and Tenant Act 1985 the appellants should have taken into account three factors:
- the extent of the interests of the leaseholders;
- the views of the leaseholders on the proposals; and
- the financial impact upon them.
The council appealed this decision.
The Court of Appeal dismissed the appeal. They held that the purpose of section 19 of the Landlord and Tenant Act 1985 was to provide protection against costs which otherwise would have been contractually recoverable. Whilst they were careful to point out that the same legal test applied to all categories of work falling within the definition of “service charge” of the 1985 Act, they made the point that the application of the test did not mean that the legal and factual context applicable to each category of works should 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. They approved the factors applied by the Upper Tribunal. They held that the extent of the leaseholders’ interests, measured by the unexpired term of their leases, was a relevant factor. With regard to the views of the leaseholders, where it was exercising a discretionary power at the leaseholders’ expense, it made sense that their views should be more influential than where the landlord was simply complying with its obligations. In terms of the financial impact of the works, they held that whilst the landlord was not obliged to investigate their financial means, they were likely to know what kinds of people were leaseholders in a particular block or on a particular estate.
The decision will undoubtedly not be welcomed by landlords. Not only will the requirement to apply the criteria as set out by the court when considering improvement works impose an additional administrative burden on landlords, but the decision could lead to greater scrutiny of service charge requests and potentially more litigation on this topic in the future.