Assethold Ltd v Leaseholders Of Corben Mews (LANDLORD AND TENANT – SERVICE CHARGES – whether reasonably incurred – costs of a waking watch) (2022) UKUT 282 (LC)

An Upper Tribunal appeal of an FTT decision that the costs of a waking watch were not reasonably incurred by the landlord and so not recoverable under the service charge.

The building, a warehouse conversion had had a fire risk inspection in 2019, which had found some minor issues. Further, in 2020, there had been a subsequent inspection and report on external walls by a different firm, Hydrock, which found the building satisfactory subject to changing balcony flooring. This was done. But then in 2021, Hydrock issued a further report:

The report said that combustible materials were present in the external walls and that this presented an “intolerable” risk to the occupants, on the basis that the risk of fire was “medium” and the potential consequences of a fire were “extreme”. The report recommended remedial measures including the removal of combustible materials and the provision of cavity barriers; it also recommended that until that work was done the appellant should put in place interim measures, either in the form of an extended alarm system or by providing a waking watch.

Although astonished by the change, the freehold put in a waking watch straight away, at a cost of £28,000 per month. They commissioned a further report from Safety Consulting Partnership Limited, which concluded that the fire risk was low and didn’t merit a waking watch. The waking watch was ended after that report, so was in place for less than a month.

The leaseholders challenged the cost of the waking watch in the FTT. The FTT found that the cost was not reasonably incurred:

“78. Following the decision of the Court of Appeal in Waaler v. Hounslow London Borough Council (2017) EWCA Civ 45, whether costs have been “reasonably incurred” is to be determined by reference to an objective standard of reasonableness, not by the lower standard of rationality. The focus of the enquiry is not simply a question of the reasonableness of the landlord’s decision-making process, but also one of outcome. Where there was more than one reasonable course of action, the landlord did not have to choose the cheapest, and there is a margin of appreciation to be allowed to the landlord in choosing. The Court of Appeal approved the decision in Forcelux Ltd v Sweetman[2001] 2 EGLR 173 which had treated this as a two-stage process: first, whether the landlord’s process was reasonable and second whether the amount actually charged, i.e. the outcome, was reasonable. 

79. The tribunal considers that Mr Granby’s submission [for the landlord] that it is sufficient if Assethold acted reasonably in relying on the Hydrock Report to institute – and continue for many months – the waking watch, only addresses the first part of the Waaler test, and not the second.

80. As to the first part of this test, the tribunal considers that Assethold acted reasonably in obtaining the EWA from Hydrock, a reputable company for these purposes. However, when Assethold/Eagerstates received a report from Hydrock whose conclusions were radically different from the earlier Hydrock Report and from other reports of which it was aware, conclusions which its own surveyors JMC queried, the most sensible response would have been to instruct a second opinion from another fire safety expert. Mr Gurvits offered this to the tenants, but only on the basis that they paid for such a second report, and when they would not do so, he refused to arrange for Assethold to obtain such a further report. In failing to instruct a second report itself, the tribunal concludes that Assethold probably failed to act reasonably.      

81. As to the second part of this test, in any event the outcome must also be reasonable. Since the tribunal has concluded that the Hydrock Report was incorrect and its recommendations were not in fact objectively justifiable, it follows that the outcome, i.e. incurring the costs of a waking watch which was recommended by that report, was not reasonable. The tribunal accepts the submission of Mr Bromilow that those costs were unnecessary, and that unnecessary costs will not have been reasonably incurred. This is not a case where the landlord has selected one of a range of reasonable outcomes; rather it has opted for an outcome which was unnecessary because it was based on flawed advice.”

The freeholder appealed.

The Upper Tribunal upheld the appeal.

The FTT’s analysis of Waaler was correct, to there was no error of law in that.

However, the FTT had erred in its assessment of the landlord’s response to the Hydrock report as not a rational one.

The first is that the final Hydrock report, and the assessment of risk as “intolerable”, was not said to be made on the basis that circumstances had changed. It was a report based on a different inspection, in which different processes were followed and different aspects of the building examined. So the fact that this report reached a different conclusion from Hydrock’s and 4sites’s previous reports did not mean that there was a contradiction and did not itself mean that the latest report was wrong. The other difficulty is that I fail to see how any landlord, faced with a report from a reputable company signed by three professionals saying that the fire risk in the building was intolerable, could be said to be irrational for putting interim measures in place pending further reports or remedial work.

It might well be that a confident landlord, noting some of the flaws in the report that were evident to the careful but unqualified reader – in particular that the report was using standards appropriate for buildings more than 18m high, and that the risk matrix had been misapplied (see paragraph 23 above) – might have decided to do nothing pending a further report and that that would have been a rational choice in the circumstances. But I accept Mr Loveday’s argument that it was rational to act as this landlord did, and I take the view that the FTT’s conclusion to the contrary could not have been justified on the evidence before it.

Secondly, the FTT had erred in assessing the reasonableness of outcome.

What the FTT had to decide was whether it was objectively reasonable for the appellant to have put a waking watch in place as an interim measure in reliance upon the report in March 2015, in the light of what it knew or could readily have found out and of what the report said. Instead, the FTT made a decision on the basis of the hindsight provided by the evidence of the parties’ expert witnesses and following their cross-examination. As it turned out, as the FTT found, the report was wrong and it held that therefore expenditure incurred in reliance upon it could not have been reasonably incurred. That is an objective assessment, but it is one that depends upon the hindsight provided by the leaseholders’ expert witness. What the FTT had to look at was not what it knew as a result of the proceedings, but at whether the expenditure was reasonable in the circumstances and on the basis of the information available when the cost was incurred.

I have already said that to put in place an interim safety measure in response to a report that said the fire risk was “intolerable” cannot be said to have been irrational on the information then available. Nor can it be said to have been unreasonable. What the FTT had to decide was whether setting a waking watch in both buildings, pending further work or investigation, was a reasonable response to the advice the landlord received. It need not be the only reasonable outcome. But on the facts of this case only a supremely confident landlord would have done anything else.

The cost was reasonably incurred and payable. The FTT had further found that the quality of service of the waking watch was poor and reduced the £28,000 to £14,000 on that basis (before finding it wasn’t reasonable at all). There was no appeal of that finding, so the £14,000 was payable.