The Landlord and Tenant Act 1985 imposes a number of limitations on a landlord’s ability to recover services charges from any ‘tenant of a dwelling’ (a tenant of residential premises). One such limitation is that costs can only be recovered if they are ‘reasonably incurred’.
The shorter the term of a lease, or the remaining part of it, the more the interests of the landlord and tenant are likely to diverge. That is particularly so where repairs or improvements to the property are concerned.
A tenant will not want to pay for a service that will be of little or even no practical benefit to it. The landlord will want to ensure that the value of its asset is protected or even enhanced in order to sell it for the best price or re-let on the best terms. The landlord’s considerations are entirely reasonable. So are the tenant’s. But whose considerations are to be preferred?
In Waaler v Hounslow LBC the landlord was looking to recover the cost of improvements to a residential property via a service charge. The Court of Appeal found that when determining whether or not the cost would be reasonably incurred, the landlord must take into consideration:
- The interests of the lessees, as measured by the remaining term of the lease;
- The financial means of the lessees, based not upon the actual tenants means, but upon of the type of property being let and the likely means of persons likely to rent it;
- The views of the lessees, this being the reason that the Act imposes a requirement to consult with residential tenants in certain circumstances.
Tenants do not have the final say, however. A landlord is not obliged to choose the cheapest option (it must be given a ‘margin of appreciation’), and where there are a number of reasonable options open to it is for the landlord to decide which one to choose. Where there is more than one tenant liable to pay the service charge different tenants might have competing interest, and the landlord will be looking to strike a balance between them.
It is also clear from the decision in Waaler v Hounslow LBC that the above considerations are likely to carry more weight where a landlord intends to carry out an improvement to the property that it is not obliged to carry out, than when it intends to carry out an essential repair that it is obliged to carry out under the terms of the leases.
That deals with whether or not it might be reasonable to provide a particular service. Landlords have sought to argue, sometimes successfully, that the requirement for a cost to be reasonably incurred does not mean that the cost must necessarily be reasonable in amount. Instead (they say) it is only necessary that it be reasonable to provide the service (dealt with above), and that the processes adopted be reasonable – i.e. that the cost is the result of an arm’s length market transaction. In that case the fact that a tenant could easily find exactly the same service elsewhere, for a cheaper price, would not mean the cost was unreasonably incurred.
The reasoning of the decision in Waaler v Hounslow LBC was used by the Upper Tribunal in Cos Services Ltd v Nicholson as support for a proposition that for a cost to be reasonably incurred it must also be objectively reasonable in amount.
The case involved the recoverability of insurance premiums through a service charge. The tenants had been able to obtain quotes for very similar cover at premiums that were 75% less than the premium paid by the landlord. The actions of the landlord in incurring the cost were reasonable, but nevertheless the Upper Tribunal found that the cost was not reasonably incurred because the discrepancy between the quotes that the tenants were able to obtain, and the premium paid by the landlord could not be justified.
A landlord of residential premises must be able to show that it has taken into consideration the interests, means and views of their tenants when deciding whether or to provide a particular service and/or how to go about providing it, and it should then obtain a number of quotes for providing the service in order to show (if necessary) that the cost is reasonable.