In this blog, Tom White, Associate in Property Litigation, looks at service charges, exploring in detail a recent Court of Appeal case which highlights the importance of understanding what is capable of being included as part of the service charge.
What is a Service Charge?
It is usual that, under a lease, a tenant will be liable to the landlord for sums in addition to rent in respect of contributions towards repairs, maintenance, improvements, insurance, the provision of services to the property and the landlord’s management costs. These sums are known as service charges.
How is a residential tenant protected?
In the case of most residential tenants, they will benefit from protection against excessive service charges as a result of the Landlord & Tenant Act 1985 (“LTA 1985”). The LTA 1985 provides that landlords may only seek to include costs in the service charge to the extent that they are reasonable.
The Waaler v Hounslow case
Whether you are a tenant or landlord, it is essential to understand what is capable of being included as part of the service charge.
In the recent case of Waaler -v- Hounslow LBC , the Court of Appeal have provided guidance on the point by considering the landlord’s ability to recover the cost of improvement under the LTA 1985.
In the above case, the tenant owned a flat in a purpose-built block which formed part of an estate owned by the landlord council, Hounslow London Borough Council. The landlord served notice on the tenant that it intended to carry out major works to the block and estimated that the tenant’s share of the estimated costs through the service charge would be circa £61,000. The works undertaken included replacement of the roof, replacement of the windows and replacement of the exterior cladding.
First Tier Tribunal Decision – Costs payable by Tenant
After the works had been carried out the tenant received demand for payment of circa £55,000. The tenant subsequently applied to the First Tier Tribunal (“FTT”) for a determination as to its liability to pay the costs. The FTT held that the costs were largely payable by the tenant.
Upper Tribunal Decision – Work held to be improvement, not repair
The tenant successfully appealed to the Upper Tribunal (Lands Chamber) (“UT”) with the UT holding that the FTT was incorrect in concluding that it was reasonable for the landlord to replace the windows with new units as this amounted to an improvement as opposed to a repair.
Importantly, the UT considered that where the costs of works was high and the result of the works was a wholly different building to the original building, there were two factors that should be considered by the landlord:
- the availability of an alternative and less expensive remedy;
- together with the views and financial means of the tenants required to contribute through their service charge.
Court of Appeal Decision – UT decision upheld
The landlord appealed, but the Court of Appeal agreed with the UT stating that the correct approach in determining whether service charge costs had been reasonably incurred in accordance with the LTA 1985 was to consider how the different factual circumstances should effect the assessment of reasonableness. That is, the question of whether costs had been reasonably incurred was not simply a question of process, but also a question of outcome.
In this instance, the Landlord appears to be left to foot the bill for the works which it had originally considered of being passed through the service charge as. This case serves as an important reminder for Landlords to understand fully what they can recover through the service charge and, for tenants, what they could be liable for as part of the service charge.
The starting point, as always, is the lease.
- What does the lease say about the service charge?
- Does the Landlord have a right to seek a contribution from tenants for improvement works as well as repairs?
- What are the financial means of the tenants?
- What are the views of the tenants?
- In light of these questions, are the costs reasonable?
To find out more about the issues raised in this post, or to discuss any queries regarding services charges, disputes over property or landlord and tenant matters please get in touch with Tom White on email@example.com or firstname.lastname@example.org or call +44 (0) 161 829 2599.
The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by berg or any of its partners or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.