A landlord should look at reasonableness when deciding whether to replace or repair windows in a block.
In De Havilland Studios Ltd v Peries [2017], the Upper Tribunal (Lands Chamber) (“UT”) considered whether it was reasonable for a landlord to recover the cost of repairing windows rather than replacing them through service charge. In this case, the UT allowed an appeal by the landlord, who was the freehold owner of a block of flats, against the decision of the First-tier Tribunal (Property Chamber) (“FTT”) ruling that the landlord could not seek a service charge from two leaseholders for repairing the windows within their flat on the basis that replacing the windows was a more reasonable option than repairing them. In reaching its decision, the UT concluded that the FTT had applied the wrong test when deciding that replacement was the best option and, in doing so, disallowing the costs of repair.
The landlord wanted to repair the windows in a flat
De Havilland Studios, London E5, was a building comprising 41 flats which had been converted from a former factory. The application concerned Flat 12 De Havilland Studios, which was a first floor live/work unit within the building. Flat 12 was let by De Havilland Studios Ltd (“the landlord”) to Cecila Peries and Paul Voysey (the “tenants”) for a term of 125 years (the “Lease”). It was acknowledged that the windows within the building were defective. Pursuant to the Lease, the landlord had covenanted to repair, repaint and redecorate the retained parts of the building (including the windows in question) and was entitled to recover the costs of doing so from the tenants through service charge.
The landlord wished to repair the windows whereas the tenants considered that they should be replaced. The cost of replacing the windows within the building was significantly higher than repairing them. When the landlord attempted to recover the costs of repairing the windows from the tenants, to the tune of £100,242, through the service charge, the tenants disagreed that they were liable to contribute towards the cost of repairing the windows, maintaining that replacement was the better option.
The tenants appealed the landlord’s decision
The tenants issued an application to the FTT under section 27A of the Landlord and Tenant Act 1985 to determine their liability to pay service charge. In the landlord’s view, the windows were capable of being repaired and that was the solution it proposed. By contrast, in the tenants’ view, all of the windows in the building should be replaced (the cost of which was not recoverable by the landlord through service charge). The FTT held that the windows should be replaced, as opposed to repaired, as replacement was “the most reasonable option” and that, accordingly, the tenants were not liable for the element of service charge relating to repairing the windows. The landlord appealed.
The landlord then appealed the FTT’s decision
On appeal, the main issue before the UT was whether the FTT had found that both repair and replacement of the windows were reasonable options and, if so, whether the UT was at liberty to interfere with the landlord’s decision to repair rather than replace the windows.
The UT observed that it was unclear from the FTT’s decision whether or not the decision to repair the windows was reasonable. Although the FTT had found in favour of the tenants, it held that “the costs to be incurred in respect of repairing the windows are not reasonable. The tribunal considers that replacement of the windows is the most reasonable option”. As pointed out by the Judge in the UT, there was an obvious tension between these sentences. Whereas the first sentence supported the tenants’ contention that it was unreasonable to repair the windows, the second sentence inferred that both methods were reasonable but that, in the FTT’s opinion, replacement is the most reasonable. Dissatisfied with the result, the landlord contended that the FTT had erred in its decision as it had applied the wrong test. In particular, the FTT had not determined that it was unreasonable for the Landlord to repair the windows; rather, it had determined that both repair and replacement were reasonable but that replacement was the better option. Such an approach, as contended by the landlord, was wrong in law and contrary to authority.
The UT agreed with the landlord: replacement was more reasonable
The UT sided with the landlord and held that the FTT had erred in its decision by ruling that the replacement of the windows was a more reasonable option.
In reaching his decision, the UT judge referred to the earlier case of London Borough of Havering v MacDonald [2012] and cited the Court of Appeal’s decision in Waller v Hounslow LBC [2017], in which Lewison LJ said:
“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…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 pursing that course of action will have been reasonably incurred, even if there was another cheaper outcome which is also reasonable”.
According to the UT Judge, the FTT “has fallen foul of this principle” and, in deciding what is preferable between repair and replacement, of its own volition, has taken “a course which is not open to it”.
In Waller the local authority was the owner of an estate and the tenant had a long lease of a flat in a four-storey building on the estate. Under the terms of that lease, the authority covenanted to keep the structure and exterior of the building in repair and the tenant covenanted to pay a proportion of the authority’s costs of doing so as a service charge. Between 2005 and 2006 the authority carried out major works to the estate, including to the building in which the tenant’s flat was situated. The works included replacing the wooden-framed windows in the building and the external cladding. When the local authority sought to recover the sum of £55,195.95 from the tenant in respect of her share of the cost of the works, the tenant contended that the windows should have been repaired rather than replaced and applied to the FTT for a determination of her liability to pay the demand. When the case reached the Court of Appeal via the UT, the court held that whether costs have been reasonably incurred is not merely a question of process but also one of outcome. This does not mean that a tribunal (in this case the FTT and UT) should impose its own decision. Rather, if a landlord chooses a course of action which leads to a reasonable outcome, the costs of pursuing that course will have been reasonably incurred even if there was another cheaper, reasonable outcome.
Therefore, although the tenants’ contentions in Waller and De Havilland were at the opposite ends of the spectrum (in the former the tenant contended that the windows should have been repaired whereas in the latter the tenants contended that they should have been replaced) the salient point remains: where separate courses of action are shown to be reasonable (both in terms of the nature of the works to be carried out and the associated costs) then a landlord is free to elect between which course of action it pursues – it is not for the court or tribunal to make that election for the landlord.
The importance of this decision
- The decisions in De Havilland and Waller are important to residential landlords, fund/asset managers of residential portfolios and local authorities that own residential property and/or estates.
- Long leases of flats will typically require the landlord to keep parts of the building comprising the flats in repair and many long leases will also provide that the landlord may carry out improvements to the building.
- Such long leases will usually provide for the tenant to bear a proportion of the landlord’s expenditure of the building. Sections 18-30A of the Landlord and Tenant Act 1985, as amended, govern liability for and recovery of such charges.
- In determining the amount of service charge, the landlord’s costs are to be taken into account to the extent that they are reasonably incurred.
- As confirmed in these cases, a number of options for a landlord to comply with its repairing and maintenance covenants can be reasonable: there is a temptation to simply consider the level of costs incurred in selecting a course of action, and then compare those costs to those associated with a different course of action. But, that does not mean that the associated costs should solely be the barometer of what course of action is “reasonable”.
- Rather, the better and correct approach is to consider each option on its own merits and whether it will result in a reasonable outcome notwithstanding that a cheaper alternative may be available.
