The London Borough of Hounslow v Waaler

Whether service-charge costs were reasonably incurred under section 19 of the Landlord and Tenant Act 1985 depends on an objective assessment of both the landlord’s process and the outcome. A tribunal must allow the landlord a margin of appreciation where several reasonable courses are available. It must not substitute its preferred option merely because another reasonable course was cheaper.

The same legal test applies to repairs and improvements, but its application depends on their different factual and contractual contexts. For discretionary improvements, relevant considerations include the remaining duration of the lessees’ interests, their views and the broad financial impact. Statutory consultation requires conscientious consideration of lessees’ observations, although lessees have no veto and landlords need not investigate individual means.

The local authority landlord undertook major works to a mixed-tenure housing estate. The works included replacing wooden-framed windows with metal units, which required replacement cladding and asbestos removal. It demanded £55,195.95 from a long leaseholder.

The First-tier Tribunal substantially upheld the charge. The Upper Tribunal allowed the leaseholder’s appeal in part, holding that the windows and cladding constituted an improvement and that the landlord should have taken particular account of the lessees’ interests, their views and the financial impact. It remitted assessment of the recoverable amount. Its decision was reported at [2015] UKUT 17 (LC) and [2015] L & TR 24.

The landlord appealed. The central issue was how the requirement that costs be reasonably incurred under section 19 of the Landlord and Tenant Act 1985 applies to discretionary improvements. The leaseholder sought permission to cross-appeal on the total cost, roof works and recovery of litigation costs.

1. Appeal dismissed unanimously. The Upper Tribunal had made no error of law in identifying considerations relevant to whether the cost of discretionary improvements was reasonably incurred. Permission to cross-appeal was refused.

2. Lewison LJ held that a contractual discretion affecting both parties, particularly one imposing financial liability on the other party, is constrained by an implied requirement of good faith, rationality and consistency with the contractual purpose. That rationality standard applies both when choosing between methods of repair and when deciding whether to undertake optional improvements. It is distinct from the statutory test under section 19 of the Landlord and Tenant Act 1985.

3. The section 19 inquiry is objective and concerns outcome as well as process. A rational decision-making process cannot alone establish that costs were reasonably incurred. Nevertheless, several different responses to a building defect may each be reasonable. The tribunal must allow the landlord a margin of appreciation and must not substitute its preferred option where the landlord’s chosen course produces a reasonable outcome, even if another reasonable course would have been cheaper.

4. The same legal test applies to every category within the statutory definition of service charge, including repairs and improvements. Its application remains sensitive to context. Obligatory repairs differ from discretionary improvements because a lessee can broadly anticipate repair liabilities, whereas the scale of potential liability for optional improvements may be unknown. There is also no bright line between repair and improvement, and individual projects may contain elements of both.

5. For discretionary improvements, the tribunal may give particular weight to the remaining duration of the lessees’ interests, their views and the broad financial impact. The weight varies across a spectrum ranging from improvements addressing a building defect to works providing only aesthetic benefit. Financial impact may be assessed broadly by reference to matters such as the property’s nature, location and previous service charges. The landlord need not investigate individual lessees’ means.

6. The statutory consultation process requires the landlord conscientiously to consider and give due weight to lessees’ observations. Their views are therefore relevant in every case, although they confer no veto and no entitlement to insist upon the cheapest option. Once consultation is complete, the final choice remains the landlord’s.

7. The proposed cross-appeal disclosed no qualifying point of law, important point of principle or practice, or other compelling reason. The phasing issue involved findings of fact; the roof argument lacked evidential and legal definition; and the section 20C costs issue could be reconsidered by the First-tier Tribunal following remittal.

1. Court of Appeal (Civil Division): The landlord’s appeal was dismissed unanimously, and the leaseholder was refused permission to cross-appeal: [2017] EWCA Civ 45.
2. Upper Tribunal (Lands Chamber): The leaseholder’s appeal was allowed in part. The amount recoverable for the windows and cladding was remitted to the First-tier Tribunal: [2015] UKUT 17 (LC); [2015] L & TR 24.
3. First-tier Tribunal: The tribunal substantially upheld the landlord’s entitlement to recover the claimed service charge.