On 2nd February 2017 the Court of Appeal considered the approach to be taken when determining whether costs had been reasonably incurred when considering the amount of service charge payable under section 19 of the Landlord and Tenant Act 1985. Importantly they gave particular consideration to the approach to be taken when considering costs relating to improvements as opposed to repairs.
The leaseholder (Waaler) was obliged to pay a service charge under her lease in respect of the costs of repair. She was also required to pay a proportion of costs for any improvements carried out by Hounslow. Hounslow carried out works to replace windows which were deemed to be improvements. The question, therefore, was whether the works to the windows were reasonably incurred.
The Court of Appeal took the view that the statutory test was whether the cost of the work was reasonably incurred by reference to an objective standard of reasonableness. This had to take into account the interests of the tenants. The Court of Appeal also found that the same legal test applied to all categories of works falling within the definition of “service charge” in s.18 of the Landlord and Tenant Act 1985. However, different types of work could create different factual and legal contexts. The different contexts should not be ignored when considering what costs had been reasonably incurred. The Court of Appeal took the view that there was a real difference between repairs which 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 extent of any such improvements. Therefore, different considerations came into the assessment of reasonableness in different factual situations.
Therefore, where a landlord is considering carrying out improvements they should make sure they take into account whether these will be reasonable and be aware that factors involved in considering whether the costs are reasonable may not be the same factors that are taken into account in assessing whether the costs of repairs are reasonable.
For further information or advice please contact Neil Lawlor or a member of the Leasehold Management Team.