The continuing problem of recovering the cost of improvements from leaseholders

The distinction between a repair and an improvement when a landlord carries out works to a property is often problematic. The volume and age of reported cases on this point shows this is not a recent problem. There are many varied reasons for the courts having to revisit the issue so often even now, which include:

1. that each case will generally turn on its own facts;
2. that judges at first instance are afforded a fairly wide element of discretion on the issue that will not be easily overturned – in other words, firm guidance is fairly thin on the ground;
3. building experts (who generally have to give evidence on these issues) often do not agree on the issue themselves;
4. the motive for landlords carrying out many works that might go beyond repair have changed over time with the advent of changes in insurance terms, building regulations, health and safety, government grants and litigation culture;
5. the value of property has risen disproportionately in most instances;
6. building technologies have advanced significantly, particularly in the last 10-20 years – new forms of roofing systems, and vast increases in energy efficient products such as glazing, insulation and cladding being most notable.

Difficulties encountered

The editors of Woodfall note that "a covenant to repair does not involve a duty to improve the property by the introduction of something different in kind from that which was demised, however beneficial or even necessary that improvement may be by modern standards".

This can of course be helpful when, for example, a landlord wishes to avoid the cost of installing a damp proof course where none existed. However, in a situation where a landlord is entitled to full recovery via a service charge of the costs of carrying out the repairs (and is thus not ultimately spending his own money), the temptation to keep the property in perfect condition is somewhat greater!

The question of what expenditure will be recoverable will obviously turn on the wording of the lease. Many modern leases expressly allow a landlord to incur the cost of improvement works if he sees fit. However, where there is not express provision and a tenant challenges whether it was reasonable for his landlord to incur the cost of the works (and then seek to re-charge them), the burden will generally be upon the landlord to show that what he has done can be "shoe-horned" into the covenants in the lease.

A classic example that often arises is upon the replacement of the covering to a flat roof. In that situation, building regulations stipulate that the landlord must, in replacing the roof covering, add insulation to the roof to bring it up to modern standards. Generally, this would still be considered a "repair", notwithstanding that it is also in fact an improvement, because it is the only (lawful) way for the landlord to carry out the repair. By way of example of such an argument, see Postel Properties Ltd v Boots the Chemists Ltd [1996] 2 EGLR 60.

The flat roof example is a reasonably easy one to understand. Other situations create rather more grey areas.

Waaler v London Borough of Hounslow

A further related problem can arise even where express provision for recovery of the cost of improvements is made.

In the recent case of Waaler v London Borough of Hounslow [2015] UKUT 0017 (LC), the Upper Tribunal had to consider the extent to which the landlord local authority was obliged to consider the views of the tenants when electing to undertake "optional" improvements. The rationale behind the decision may turn out to have far reaching implications, certainly extending to all residential service charge disputes, but quite possibly by analogy in a commercial context.
Hounslow, in common with many local housing authorities in recent years "blessed" with central government supported "Decent Homes" funding, carried out very extensive works of renovation to the block in which Ms Waaler was living. The total cost of the works on the estate was over £8million. Hounslow demanded a contribution from Ms Waaler of £55,195.95.

The works included replacement of the flat roof to the block with a pitched roof, and replacement of the wood-framed windows with new metal framed units. The reason for replacement of the windows was simply that the hinges to the original windows had an inherent design fault such that they constantly failed, and replacement hinges were said to be hard source. Unfortunately, in order to replace the windows, it was necessary to replace all the exterior cladding of the block and thus remove the underlying asbestos – at great expense.

Ms Waaler argued at trial that there should be no liability for any works which amounted to improvements, including the replacement of the windows and associated works. The FtT determined that virtually the entire sum demanded was payable. Ms Waaler appealed.

The lease in question expressly obliged Hounslow to keep the structure and exterior of the flat and block in repair and to make good any defect affecting the structure. Ms Waaler was expressly obliged to contribute to a service charge, the costs of which included those incurred by Hounslow pursuant to the repairing covenants. So far, so normal.

Additionally, the lease provided an express covenant on the part of Ms Waaler ‘if and whenever the Council shall make any improvement affecting the Flat or the Premises or any part thereof upon the service of a written demand pay to the Council a fair proportion of the cost of the improvement based on a comparison of the rateable value of the Flat…’

The power to recover the cost of improvements was not tied in to the service charge mechanism in any way, nor was there a corresponding power on the part of the landlord council to carry out improvement works. This did not trouble the Upper Tribunal for long, Siobhan McGrath sitting as a Judge of the Upper Tribunal finding that the lease had to be construed such that there is a power to carry out improvements at the landlord’s discretion.

However, the question of whether the cost of improvements could be recovered from leaseholders differed from recovery of the cost of repairs.

In residential service charge cases, costs of works (including, since September 2003, improvements) are only recoverable to the extent that they are reasonably incurred and that the works are of a reasonable standard (s19 Landlord and Tenant Act 1985). Similar considerations still apply in commercial service charge cases, just without the statutory footing.

Whilst the statutory test is the same for both repairs and improvements, the Upper Tribunal noted that the question of whether to carry out improvements is often a matter of landlord choice, not necessity. By contrast, a failure to comply with a repairing obligation would lead to a landlord being in breach of lease and vulnerable to claims being brought for damages or specific performance. At paragraph 42, it is noted:

“…if a landlord decides to carry out a scheme of works which goes beyond what is required to effect a repair and seeks contributions to the cost from a leaseholder then in my view he must take particular account of the extent of the interests of the lessees, their view on the proposals and the financial impact of proceeding.”

In this instance, of the 990 tenants affected by the scheme, 850 were secure social housing tenants and only 140 were leaseholders. It was therefore in the council’s favour that it had to pay for the works to 850 of the 990 units (and could thus say that it was entitled to have a significant say in the works). However, the works still had to be justified:

“46. So far as works of improvement are concerned however, the financial impact on leaseholders is in my view relevant. Improvement in this context means works that go beyond what is required to effect a repair. Where as here, the cost of a scheme of works is high and the product of those works is a building, or part of a building which is wholly different than was the subject of the original demise, then in deciding whether to proceed, a landlord must consider a number of matters before proceeding. First the availability of an alternative and less expensive remedy should be explored. Secondly, greater weight should be given to the views and the financial means of the lessees who will be required to pay for those works.”

Here, there was no evidence that Hounslow had explored alternate methods of dealing with the windows. Whilst they were entitled to take steps to deal with the issue, they should have explored different, cheaper, solutions. Further, there was "no evidence that any consideration had been given to the financial impact on the lessees of replacing both the windows and the cladding."

The appeal was allowed in part, with the case remitted back to the FtT for further consideration.

Lessons to take away

Waller v LB Hounslow may well prove a helpful case for leaseholders seeking to avoid contributions toward the cost of improvements. The reasoning behind the decision is plainly common sense – if improvements are carried out voluntarily, there must be a greater burden on the landlord to justify that expenditure than if there is an obligation to carry out works.

Whilst common sense, it could leave some landlords in a difficult position (or, it could be said, in an even more difficult position than they were already). No sensible landlord would argue that it should be entitled to ignore the views of its tenants (and in a residential situation, as a bare minimum, the statutory consultation requirements), but there will always be a divergence of views.

In a mixed development, there might be a combination of commercial and residential occupiers, and amongst those residential parts could well be people of vastly divergent means. Should a landlord hold off on improvement works solely so as to deal with the concerns of those with the least ability to pay? What if a landlord is unclear whether the works will amount to a repair or an improvement? 

Just because a landlord could carry out the works by proceeding with a less extensive scheme does not mean that, from an estate management point of view, it would be desirable to do so. The risk is that the landlord is being encouraged, by the application of the principles in Waaler, to give greater weight to the interests of those of lesser means than, for instance, the commercial occupiers on a development.

Whilst I am doubtful that this risk of a "lowest common denominator" veto¹  will materialise – common sense does, generally, still prevail – there are bound to be further cases over the next few years where such arguments will be played out, creating (at least short term) greater uncertainty for landlords.

The important thing, as ever, will be for landlords to justify their decision to proceed with improvement works and to be able to demonstrate that they have properly and genuinely listened to the views of tenants and fully considered their options.

1 As posted by an author recently on the "Nearly Legal" website.