A common bone of contention between landlords and tenants is the extent to which a landlord can recover costs of improvements to the building from tenants through the service charge. The answer is not always clear cut.
The starting point is always the terms of the lease – does the lease allow the landlord to recharge the cost of improvements through the service charge? If not, and the landlord’s right to recover costs is limited to repair and maintenance, it is unlikely that the costs of an improvement, in the purest sense of the word, will be recoverable.
That said, there may be scope for argument about whether the proposed works are in fact improvements or necessary elements of the repair/maintenance works – the line between the two can often be blurred.
For example, it has been held that the replacement of a door or window to one which complies with modern materials and current standards; and with fire regulations/buildings insurance requirements, will not amount to an improvement even though the door or window was not replaced like for like.
There are many occasions where it would not be cost effective in the long term or practical to replace like for like, in which case what might on the face of it appear to be an improvement, may not be treated as an improvement for the purpose of the recovery of service charge.
If, on the other hand, the lease allows a landlord to recharge the cost of improvements, that is not necessarily the end of the matter for a landlord. The landlord still needs to show that the costs are reasonable under s19 of the Landlord and Tenant Act 1985, as it would for all service charge costs. However, a recent decision of the Upper Tribunal (UT) suggests that, in relation to improvements, a landlord might need to go further.
In Waaler v LB Hounslow [2015], the UT drew a distinction between repairs and improvements – repairs being a contractual obligation on a landlord and improvements generally being something that a landlord can do if it wants, but is not under a contractual obligation to do.
Because of this distinction, the UT found that a landlord has to give greater weight to the views of tenants and, in particular, must consider whether the tenants want the works and whether there are any alternative or less expensive remedies.
Effectively, this means that is likely to be necessary for the landlord to engage in some form of consultation process with tenants prior to carrying out the improvements, to get their views on the proposed works and to consider affordability of the works for the tenants.
If many tenants are against the proposed improvement works, a landlord is likely to be fighting an uphill battle in demonstrating that the decision to undertake them is reasonable.
Laura Checkley is a Partner in the Real Estate Dispute Resolution team at Pemberton Greenish LLP
