Recovering the costs of works of improvement

Where a landlord intends to undertake works of improvement, and proposes to recover the costs as a service charge, what’s the correct approach in determining whether those service charge costs were “reasonably incurred”?

This issue has been the subject of recent consideration by the Court of Appeal in Waaler v Hounslow LBC [2017] EWCA Civ 45. 

 

Background 

Hounslow, as landlord, undertook a programme of major works. The works included the replacement of the flat roof of the block with a pitched roof, and the replacement of the windows with new units. Hounslow considered it necessary to replace the windows with new units because the hinges of the original windows were inadequate for the weight of the glass in the tilting windows. Replacing the window units necessitated replacement of the exterior cladding of the building and the removal of underlying asbestos.

The leaseholder received a demand for payment to the tune of £55,195.95. She subsequently applied to the First Tier Tribunal (Property Chamber) for a determination of her liability to pay those costs. The FTT found that the costs were substantially payable. The leaseholder appealed to the Upper Tribunal.

 

Decision of the Upper Tribunal 

The Upper Tribunal decided that the replacement of the windows with new units amounted to an improvement, rather than a repair.

The Upper Tribunal made a distinction between works of repair as compared to works of improvement. A landlord has an obligation to repair, whereas improvements are discretionary.

Because carrying out works of improvement is the exercise of a discretion, rather than the carrying out of an obligation, the Upper Tribunal found that the landlord must consider two factors before proceeding with the improvement.

  1. The availability of an alternative and less expensive remedy; and

  2. The views and financial means of the tenants who will be required to pay for the works.

[It is worth noting that the cost of replacing the hinges would have been in the region of less than £100 for this leaseholder.]

The decision of the Upper Tribunal therefore appeared to create a two tier approach in determining whether costs were reasonable, depending on whether the works were works of repair or works of improvement.

Accordingly, and given the financial impact of the Upper Tribunal, Hounslow appealed.

 

Decision of the Court of Appeal

The Court of Appeal dismissed Hounslow’s appeal, and agreed with the Upper Tribunal that Hounslow should have taken particular account of the interests of the leaseholders, their views on the proposals and the financial impact of proceeding.

Whilst the Court of Appeal does not agree that it is a two tier test, it has agreed that there is a real difference between repairs and improvements, and that there are different considerations to be taken into account in assessing whether costs have been reasonably incurred.

The Court of Appeal’s rationale is this: When a leaseholder either enters into or takes assignment of a lease where they will be obliged to pay for the cost of keeping their block in repair, it is possible to anticipate what kind of repair works may be on the horizon, and their likely cost. However, this contrasts entirely with discretionary improvements, because the scale and extent of discretionary improvements is unknowable. Because of this, when considering if costs have been reasonably incurred, there are different considerations that come into play when a tribunal is dealing with works of improvement.

Hounslow had tried to argue that the focus should have been on their decision making process, and whether they had acted reasonably in reaching the decision they had to carry out the works.

The Court of Appeal have said this is the wrong approach. Whether costs have been reasonably incurred is not simply a question of process; it is also a question of outcome.

If a landlord chooses a course of action that leads to a reasonable outcome, the costs of pursuing that course will be reasonably incurred, even if there is another cheaper outcome which is also reasonable. If there is more than one outcome that is reasonable, it is for the landlord (not the tribunal) to choose between them.

 

Comment

Although the legal test is the same for repairs and improvements, it is clear that different considerations can apply depending on whether a landlord is carrying out works of repair or works of improvement. The factors that a landlord should consider when carrying out improvements may well be more extensive than when carrying out repairs. It is not enough to show that the decision making process has led to a reasonable decision to incur the costs, but also that the course of action chosen has led to a reasonable outcome.

The Court of Appeal declined to give guidance for the future on the different kind of considerations that a landlord should consider when carrying out improvements because it felt that factual situations were almost infinitely variable and different considerations would come into play in different circumstances.

Helpfully however the Court have set out that where there is more than one possible reasonable course of action, it is for the landlord to choose which reasonable course of action to pursue, rather than the tribunal.

 

 

31 May 2017

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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