Landlords of residential lettings running service charges should be aware of a recent case – Waaler v Hounslow LBC* – which has added an extra hurdle in seeking to recover service charge costs for improvements.
When carrying out improvements that can be recharged under a service charge the landlord must consider alternative cheaper remedies and the views and financial means of the tenants who will contribute to the cost. If he doesn’t, the landlord risks having to bear a significant part of the costs of the works himself.
Generally speaking, residential tenants have protection from excessive service charges under the Landlord and Tenant Act 1985. According to that Act, costs can only be included in the service charge if they have been reasonably incurred and if the works or services in question were of a reasonable standard. The Act also requires landlords to consult with tenants before carrying out works above a certain value or entering into any long term agreements in relation to services.
The Waaler case related to improvements, which (as is often the case) were permitted by the service charge provisions in the tenant’s lease. The landlord wished to replace the windows to the block, which also made it necessary to replace the exterior cladding of the building and remove some asbestos. The landlord served notice according to the Act (as it was a high value contract) and proceeded to carry out the works. The tenant was in the end asked to pay a little over £55,000 for the improvements and, not surprisingly, appealed. Although the landlord won at the first stage, the tenant appealed and was successful.
The tribunal found that the approach for deciding what was reasonable differed in relation to improvements, as opposed to genuine repairs, as improvements are more a matter of choice for the landlord. It decided that where the cost of the works is high and the result was a very different building, the landlord must consider:
- the availability of other cheaper remedies; and
- the views and financial means of the tenant.
On the facts of this case, the landlord had not considered other remedies and had given no thought to the financial means of the tenants, so the tribunal found in the tenant’s favour.
This case could cause landlords significant difficulties in the area of improvements:
- It may well be much more difficult than it was in this case to decide whether a particular item is an improvement or a repair, causing uncertainty for all parties;
- It will impose additional requirements on the landlord to consider alternatives and the effect on tenants before proceeding. There was no guidance given by the tribunal as to precisely how onerous the costs need to be (having regard to the tenant’s means) before the landlord should change its position, or whether the tribunal felt that provided the landlord has considered it properly, the actual conclusion can’t be challenged, unless (perhaps) it is obviously unreasonable.
Unfortunately, the case will result in significant uncertainty where service charge costs that may constitute improvements are concerned. Landlords will need to consider their position very carefully under these circumstances, take advice as to their obligations and record carefully the reasons for their decision, bearing in mind the above factors.
* Full case reference: Waaler v Hounslow LBC  UKUT 17 (LC) (13 October 2014)