When does a leaseholder have to pay for improvements?
30th August 2019
30th August 2019
Carrying out major works on a property or development is often followed by some sort of a disagreement from one or more property owners who have an obligation to contribute to such works. This can lead to a delay in the works starting due to the dispute itself, or because a property owner refuses to pay their share of the works.
For the most part, Landlords and management companies are in a strong position when faced with such disagreements and can rely on the provisions requiring the property owner to contribute to such works in the relevant agreements (Leases or Transfers). However, what happens if the Landlord is faced with a dispute by a Leaseholder claiming that the works are improvements and not repairs, and are therefore not payable? This Legal Update will look at what a Landlord should consider before imposing charges for major works if an element of improvement is included in the schedule of works.
When are works improvements?
Whether the proposed works are repairs or improvements will always depend on the specific facts of the case, considering the repairs, the Lease and building in question. Generally speaking, the term “repair” should be given its normal meaning and would be defined as “restoration by renewal or replacement”. One of the key questions when considering if the repairs go further and amount to an improvement is whether the works proposed would result in something wholly different in character, substance or nature than before.
When are the costs for improvements payable?
The first place to start, as should always be the case, is with the Lease itself, which will set out what works the Leaseholder is required to contribute towards. Usually, a Leaseholder is not expected to pay for the Landlord to upgrade his building and the Landlord is responsible for the costs of improvement works, unless there is express provision in the Lease requiring the Leaseholder to contribute towards improvement works.
Some Leases will include provisions for recovery of the costs for improvement works, but this does not mean the Landlord can simply charge for improvement works in the same way as repairs. These issues surrounding repair and improvement works were addressed by the Court of Appeal in the case of London Borough of Hounslow v Waaler  EWCA Civ 45.
London Borough of Hounslow v Waaler  EWCA Civ 45
The case of Waaler arose out of a dispute over works undertaken by the Landlord to replace the windows and the cladding on the property in question. The purpose of the works was to deal with an underlying defect in the construction of the property itself. The Landlord was entitled to carry out works of improvement under the Lease and required the Leaseholder to contribute by way of service charge. One Leaseholder, charged with over £55,000 for the works, argued that the costs were not reasonably incurred for the purposes of Section 19 of the Landlord and Tenant Act 1985.
The Court of Appeal decided that where a Lease empowers a party to make a discretionary decision which affects the rights of both parties (e.g. whether or not to carry out improvements), as opposed to an obligation (e.g. to carry out repairs), the exercise of that discretion should be limited to what is rational. The decision must be made consistently with the contractual purpose of the Lease and not so outrageous that no reasonable decision-maker could have reached it.
If a Landlord incurred costs that were not justified by applying the test of rationality, the costs would fall outside of the scope of the contractual recoverable service charge. If the costs were contractually recoverably, the statutory test was whether the cost of the work was reasonably incurred.
Part of the decision as to whether the costs of the works had been reasonably incurred was the fact that the works would be funded by the Leaseholders and not the Landlord. The Court of Appeal stated that the function of the Tribunal was not to merely consider the decision making process of the Landlord, they also had to consider the interests of the Leaseholders. Whether the costs had been reasonably incurred was not simply a question of process, it was also a question of outcome.
Impact of the Decision
The Court of Appeal declined to set down specific guidelines for what would constitute reasonable charges for improvement works, stated that there was no “bright line” difference between the approach to be taken regarding repair or improvement works. The Court of Appeal stressed the need to look at all disputes on a case by case basis and take into consideration the particular facts of each situation. They 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 repair 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.
All in all, Landlords need to be particularly careful when it comes to optional improvements to their buildings, if they want to recover the costs by way of service charges. Although the Court of Appeal declined to create specific guidelines on the issue in favour of maintaining the fluidity of the current test of reasonableness, it is clear that the views, interests and financial impact of the improvements should be taken into account when the Landlord seeks to recover the costs of such works.
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