Service charges reasonably incurred?

In the London Borough of Hounslow v Waaler [2017] EWCA Civ 45 the court considered how they assess whether costs have been ‘reasonably incurred’ when determining the amount of service charge which is payable pursuant to s19 (1) (a) of the Landlord and Tenant Act 1985 (the Act).

The case comes after the local authority appealed against an Upper Tribunal decision that the replacement of windows and cladding did not give rise to a recoverable service charge.

The issue in this case was whether the costs of the works were 'reasonably incurred' and whether the Upper Tribunal had applied different tests in assessing the reasonableness of the costs of repairs as against improvements.

The tenant was a long lessee and was obliged to pay a service charge covering the costs of repairing the property. Under the terms of the lease, the tenant was  also obliged to pay a proportion of any improvements made.

A notice of intention was served by the local authority, which itemised the replacement of a flat roof with a pitched roof and the replacement of wooden framed windows with their metal counterparts. The works also required further external cladding and asbestos removal works.

The Upper Tribunal determined that the roof gave rise to a recoverable service charge but the window and cladding works did not, concluding that these works amounted to improvements.

The appeal was dismissed and it was found that the Upper Tribunal had made no error in law. In line with the Court of Appeal's reasoning, we suggest that there are three factors which landlords should consider:

1. The extent of the interests of the lessees: – this is easily determined by virtue of the remaining unexpired terms of the leases;
2. The views of the tenants: – although a landlord is not bound by any views, more weight should be placed upon such views when considering whether to carry out discretionary works;
3. The financial impact of any works: – this appears to be a common sense approach in that lessees of an affluent block are more likely to be able to meet a larger bill than others may be.