When are service charges reasonable?
24th August 2023
24th August 2023
It is fair to say that leaseholders have little control over the costs incurred and works undertaken in the management of the development of which their flat forms part. They do, however, have the benefit of various statutory provisions that provide some protection as to whether or not the charges incurred by their landlord are fully, or even partially, payable by them. Many of those statutory provisions relate to procedural matters in respect of, for instance, the need to consult prior to embarking on major works (see our articles here, here and here on the consultation procedure) or the manner and content of demands (see here and here).
In this article though, we focus on the issue of whether a cost demanded of a leaseholder was reasonable and thus is payable in full or at all. We are going to focus on three cases, two of which we have previously discussed in Legal Updates and one that is new. The new case is only an FTT decision and so not a binding one but, as you will see, one that produced a whole lot of interest.
What is the test of reasonableness?
s.19 Landlord and Tenant Act 1985 is one of the statutory measures referred to above and requires that service charges are only payable by the leaseholder to the extent that they have been reasonably incurred and that the works are undertaken to a reasonable standard. The provision goes on to say that where service charges are demanded in advance, the sum payable by that demand must of no greater amount than is reasonable. The provision uses the word “reasonable” throughout and so there needs to be a test of what is reasonable in the specific circumstances of every case.
The London Borough Hounslow -v- Waaler
The case of The London Borough Hounslow -v- Waaler (2019) was one that we reported on back in 2019 following the decision of the Court of Appeal. Our Legal Update from 2019 here sets out the fuller detail of the case and the decision but in brief, the landlord had undertaken substantial works including necessary improvements (for which the landlord was entitled to recover under the specific leases) to facilitate necessary repairs - including the removal of asbestos cladding around windows in order to replace the windows etc. The leaseholder, Miss Waaler, argued that the extent of, or the chosen, improvements were unreasonable in the context of the type of leaseholder/nature of the development and so were not payable.
The relevance of Waaler in future decisions is that the Court of Appeal, in dismissing Miss Waaler’s claim, declined to set down specific guidelines for what would constitute reasonable charges for improvement works. It stated that there was no “bright line” difference between the approach to be taken regarding repair or improvement works. It stressed the need to look at all disputes on a case by case basis and take into consideration the particular facts of each situation.
It did, however, confirm that there was a real difference between works for which the landlord is obliged to carry out to comply with their repairing obligations and those which are an optional improvement. When considering charges incurred by the landlord following their repairing obligations, the views and financial position of a leaseholder are not of particular relevance. However, the leaseholder’s views, interests and financial status would be far more relevant when considering charges for improvement works.
Assethold Limited -v- Adam
The second case considered here is that of Assethold Limited -v- Adam, an Upper Tribunal decision from last year that we reported on in November 2022 - see here. Again, the full details of the case are set out in our earlier Legal Update at the link above but, in brief, the issue was whether a cost incurred, based upon professional advice, was reasonable where that advice was later shown to be questionable or wrong. Here the leaseholders were seeking to avoid a monthly £28,000 bill for a temporary waking watch.
The Upper Tribunal held that the landlord had been entitled to rely upon the reports of what it considered to be a reputable firm specialising in fire safety, whom they had employed and which had recommended the waking watch as an appropriate interim fire safety measure, pending completion of other essential fire safety remedial works. This was despite the harsh criticisms by the FTT in respect of the specialist’s reports.
However, whilst it was decided that the costs had been reasonably incurred under s.19(1)(a) LTA 1985, the sum of the costs incurred in the waking watch were reduced by 50% to £14,000.00 as a result of the FTT’s assessment that the actual quality of the waking watch was not of a reasonable standard to justify the costs in full. Accordingly, the landlord fell short in respect of s.19(1)(b) LTA 1985 and thus was only entitled to a partial recovery.
Fairleigh and others v St George South London Ltd and others
We now consider the most recent case, Fairleigh and others v St George South London Ltd and others LON/00AY/ LSC/2019/0338 and LON/00BJ/ LSC/2019/0330, notice of which was brought to us by Tanfield Chambers.
The issue in this case was around VAT incurred on staffing costs across a large number of flats situated in two prestigious developments on the south bank of the River Thames. The sum of the VAT incurred was around £500,000 and the leaseholders disputed that it was reasonable because, had the landlord taken steps to have the staff employed by itself, as distinct from the managing agent, the VAT might have been avoided.
Whilst the overall question, whether a cost was reasonably incurred, was essentially a basic one, the matter involved complex consideration of the rules around VAT. This complexity is borne out by the fact that this dispute, which was only in the FTT, involved eleven Barristers, of which three were Kings Counsel!
The FTT considered that both the management and tax risks involved in changing the arrangements for the employment of staff in line with what the leaseholders suggested as the tax saving alternative, were such that it was not unreasonable for a landlord to refuse to do so. Additionally, the FTT were satisfied that the set-up costs for any new model of employment would extinguish the benefit of the VAT savings for at least 2 years and that the ongoing costs of running a new model of employment would, even on the leaseholders' case, be more expensive than the current arrangements and on that basis, it was not unreasonable for the landlords not to have implemented a new scheme.
Ultimately, each of the above cases confirms that in assessing reasonableness the Court/Tribunal will not require a landlord to take risks just because that may save on the final service charge costs. The matter comes down to whether the steps taken in incurring a cost were taken following reasoned consideration of the route leading to that cost.
In Waaler, the improvements were a reasonable consequence of the need to undertake other repairs. In Assethold, the landlord had based his decision on what he reasonably considered to be good advice (and it was only penalised here due to the quality of the works leading from that decision and not the decision itself). Finally, in the Farleigh case, the landlord could not reasonably be expected to take risks just because that might lead to a lower costing outcome.
Any landlord, RMC and RTM company approaching a decision on whether to incur a cost must ask itself whether it has taken reasonable steps to understand what it needs to do and how that should be done, such that it can show that the decision to incur a specific cost was a reasonable one.
As always, the Golden Rule applies here in that if the landlord/RMC/RTM is unsure or at all concerned then, prior to making the decision to proceed toward incurring a cost, it should seek advice. The cost of seeking that advice is often miniscule in comparison to the cost of dealing with a dispute arising from the decision - we have no idea what the legal cost bill was in any of the above cases but each will have likely been more than the sum actually in dispute.
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This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above. The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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