Owners of leasehold apartments and flats usually have to pay a service charge to their landlord. The landlord will spend this service charge on maintaining and repairing the building and the common parts; for example, lighting the communal hallways, gardening the communal gardens, and maintaining the lifts.
To protect tenants from being wrongly charged or over-charged service charges, there are checks and balances in place.
- Landlords must demand the service charges in accordance with the lease.
- Landlords must also ensure that their demands comply with various statutory requirements. Where the charges are for ‘major works’, this includes consulting the tenants before the charges are incurred.
- Finally, landlords can only include costs in the service charge to the extent that they are reasonable. The test here is twofold:
- the costs must have been reasonably incurred, and
- the works / services to which they relate must be of a reasonable standard.
So what happens if the tenants believe that their landlord has charged ‘unreasonable’ charges? They can be challenged in the First Tier Tribunal (“FTT”). There have been a few cases this year on this point, both focussing on whether windows should be repaired or replaced.
Waaler v Hounslow London borouch council
The tenant owned a flat in a purpose built block. The landlord served a notice saying that it intended to carry out major works to the block. These works included replacing the block’s windows. The landlord estimated that the works would cost the tenant around £61,000.
The works were carried out and completed. Some 6 years later, the tenant received a service charge demand for just over £55,000. The tenant was unhappy and applied to the FTT, which confirmed that the costs were, on the whole, recoverable.
Upper Tribunal (Lands Chamber)
The tenant made a successful appeal to the Upper Tribunal (Lands Chamber) (“UT”).
The UT said that replacing the windows was an improvement rather than a repair. It held that where the cost of the works was high, and the result was that the building was totally different to the original building, the landlord should consider two factor before proceeding:
- The availability of an alternative and less expensive remedy; and
- The views and financial means of the tenants who would have to pay for the works.
The UT held that only part of the costs were recoverable by the landlord. The landlord appealed.
Court of Appeal
The Court of Appeal agreed with the UT and its reasoning.
The Court said that there was a difference between repairs that the landlord was obliged to carry out and improvements which were at the landlord’s discretion. Leaseholders could anticipate the costs of repairs before entering into a lease. However, it was not possible to anticipate the costs of improvements and they could not know the scale and cost of any such improvements. Therefore, the landlord should consider different things when looking at whether something was reasonable, depending on the facts of the situation.
The Court went on to state that if the landlord had more than one If there were more than one reasonable outcome, it would be up to the landlord to choose between the two options.
De Havilland Studios Ltd v Peries and another
Last week saw a new UT case, applying the rules set out in Waaler.
The tenant had a lease of a unit in a block. Within the lease, the landlord agreed to keep the communal parts in good and tenantable repair and condition, with the costs to be recoverable from the tenants through the service charge.
The block’s windows were defective, so the landlord wanted to repair them. The tenant, on the other hand, believed that they should be replaced, rather than repaired. The cost of replacing all the windows in the block was considerably higher than repairing them.
The tenant applied to the FTT to decide on whether the service charges were reasonable. The FTT held that the costs of repairing the windows were not reasonable. It went further to find that window replacement was the most reasonable option. The landlord appealed.
While it was clear that the FTT found that the costs of repair were unreasonable, it was less obvious whether the FTT had found that repair would have been a reasonable option. The UT found, all things considered, that the FTT had decided that both options (replacement and repair) were reasonable options, but in its view replacement was more reasonable. Following the decision in Waaler, the UT said that it was not for the FTT to decide which reasonable option should be taken, but for the landlord.
The UT set out reasons why repair would be a reasonable option in this case:
- Neither expert’s report said that repair was unreasonable, although they both regarded replacement as a better choice.
- Replacement would be much more expensive and money was limited.
- Repair would extend the windows’ life by 15 years.
- While it was apparent that results from replacing the windows would be better than repairing, it was agreed by all parties that repairing would greatly improve the position.
The UT said, therefore, that the landlord was entitled to a declaration that the landlord’s decision to repair the windows was reasonable, and that it was entitled to recover the reasonable cost of the repairs via the service charge.
Service charges can seem a complicated area, but our property litigation team can help. Call today on 0800 988 7756 for a free no obligation initial consultation.