The London Borough of Hounslow v Waaler [2017] EWCA Civ 45

We saw the Upper Tribunal take a new approach to determining whether the costs of improvement works, passed on through the service charge, were reasonably incurred. The UT held that particular consideration should have been given to the views of the leaseholders, whether they could be done more cheaply and the financial circumstances of the leaseholders (our note).

However, Hounslow appealed to the court of appeal.

The charge at issue was for the replacement of the original wooden-framed windows with new metal framed units, which in turn required the replacement of the external cladding and removal of asbestos. The UT had found that this was an improvement and that, while the lease enabled Hounslow to recover the costs of improvements, for the reasons already mentioned, the full costs were not reasonably incurred.

The court of appeal took a slightly curious detour through a consideration of ‘rationality’ of public law decisions in a public law sense, and decided that Hounslow’s decision to carry out improvements was constrained by Wednesbury rationality, such that “the rationality test applies both to a choice as between different methods of repair and also to a decision whether to carry out optional improvements”.

But that decided, the judgment quite quickly and entirely rightly moves on to find that the definition of ‘reasonableness’ in section 19 Landlord and Tenant Act 1985 is not limited to public law rationality, vut instead is an objective standard of ‘reasonableness’.

Hounslow’s argument that the focus must be on the decision making process of the landlord alone – such that the question was the reasonableness of the landlord’s decision to carry works – was rejected:

If the landlord reasonably takes the view that his proposed course of action is a reasonable way of dealing with underlying defects he need not take account of the tenants’ views and the costs will have been reasonably incurred. In deciding that question the FTT should judge the landlord by reference to Wednesbury principles (cf. Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223).

I cannot accept this argument. Consider a case in which the issue is whether the work in question has been carried out to a reasonable standard. The landlord may have acted entirely properly and rationally in entrusting the work to a reputable contractor with a good track record. But if, as things turn out, the work is carried out badly then the work will not have been carried out to a reasonable standard, and the leaseholders should not have to pay for it. Whether the costs themselves were reasonable for the works in fact carried out must also, as it seems to me, be decided by reference to an objective test just as that test would be applied to deciding whether a price was a reasonable price. I can see no warrant for applying a different test when the question is whether it was reasonable for the landlord to carry out the works at all. In addition what Mr Beglan proposes is, in effect, a test of rationality and as he accepted that test is already part of the leaseholder’s contractual liability. Section 19 must have been intended to protect the leaseholder against charges that were contractually recoverable otherwise it would serve little useful purpose.

(…)

In my judgment, therefore, whether costs have been reasonably incurred is not simply a question of process: it is also a question of outcome. That said it must always be borne in mind that where the landlord is faced with a choice between different methods of dealing with a problem in the physical fabric of a building (whether the problem arises out of a design defect or not) there may be many outcomes each of which is reasonable. I agree with Mr Beglan that the tribunal should not simply impose its own decision. If the landlord has chosen a course of action which leads to a reasonable outcome the costs of pursuing that course of action will have been reasonably incurred, even if there was another cheaper outcome which was also reasonable.

So, then, what should be included in a consideration of whether the costs of an improvement were reasonably incurred?

In principle, therefore, I agree with the UT. There are, however, a number of points that need to be made. First, as I have said there is no bright line difference between repairs and improvements. Although Mr Beglan suggested that the UT had drawn such a line, I do not think that on a fair reading of the decision as a whole it did. Paragraph [41] recognises in terms that in some cases the line may be blurred. The contrast that the UT drew was between the discharge of obligations on the one hand and the carrying out of discretionary improvements on the other. Second, neither the decision of the UT nor the decision of this court is part of the statute. Observations, even if of a general nature, made in a judgment are not to be construed as if they were. Third, there is a spectrum of different factual situations which may give rise to different considerations and situations in which different weight should be given to common considerations. A number of examples of discretionary improvements were discussed in argument. At one end may be a case like this one in which improvements were carried out in order to eradicate the future possibility of failure of the windows due to a design defect in the original building. In the middle may be an improvement designed to benefit all tenants, such as the installation of security measures (e.g. CCTV or keypad locks) where none had existed before. Further along may be improvements which will benefit some but not all tenants (such as the creation of a childrens’ play area). And at the other extreme might be something of purely aesthetic interest such as the installation of a water feature to beautify the estate. The relevance of the lessees’ views and the financial impact on them may be given greater weight the further along the scale one goes.

Given that the UT had made no error of law, what was the UT to be found to have said?

The first of the factors identified by the UT was the extent of the interests of the lessees. I cannot see that this gives rise to any difficulty at all. The extent of the lessees’ interest is measured by the remaining unexpired terms of their leases. This is the same factor as that to which Nicholls LJ referred in Holding & Management when considering contractual recoverability. The second factor is the views of the tenants. As mentioned the landlord has a statutory duty to consult the lessees, and that entails having regard to their observations. So the duty to consult and to the duty to take account of the lessees’ views is already present in the statutory scheme. The only difference is that the UT said that the landlord should take “particular” account of those views where the works are optional improvements. I do not see why that should raise any practical problem. The landlord is not bound by the lessees’ views but where it is exercising a discretionary power at the lessees’ expense it makes sense that the lessees’ views should be more influential than in a case where the landlord is doing no more than complying with its obligations. The third of the criteria is that the landlord must take into account the financial impact of the works. It is important to stress that the UT was not saying that the landlord should investigate the financial means of particular lessees. That would indeed have been both impractical and intrusive. However, in broad terms the landlord is likely to know what kinds of people are lessees in a particular block or on a particular estate. Lessees of flats in a luxury block of flats in Knightsbridge may find it easier to cope with a bill for £50,000 than lessees of former council flats in Isleworth.

Hounslow’s appeal was dismissed. Ms W’s cross appeals were refused permission.

Comment

That is now court of appeal authority that improvements – if recoverable under a lease – cannot simply be carried out at the whim of the landlord.  While carrying out repair obligations pure and simple may mean that lessee’s views are less influential, where the works are of improvement, then the landlord must consider:

• the interests of the lessees – as measured by remaining term of lease
• the views of the lesses – not binding but influential
• the means of the lessees – not individual financial details, but a broad view of the ‘nature’ of the lessees and their likely means.

But of course the difference between a repair and an improvement can be a grey area. There will be a lot of challenges on that point. As there will on whether the views and means of the lessees have been adequately taken into account.

While the principle is sound, the likelihood is that many more tribunal cases will be the result.