Improvements and Service Charges in Residential Leases

Periodic tenants who pay a fixed rent may welcome major improvements to their building or estate whereas many hard-pressed leaseholders may dread the enormous cost of such major renovation programmes.

This scenario is all too common in large estates where there is a mix of secure tenants and long leaseholders many of whom have exercised the right to buy.

The Court of Appeal has recently had its say on this in a case involving Hounslow council.

The case involved a major block renovation programme on an estate where there were 850 secure tenants and 140 long leaseholders.

Under the lease, the landlord had an obligation to repair, but only a power to improve. The landlord was entitled to recover contributions by way of service charge from the leaseholders.

The individual tenant’s contribution was calculated at over £55,000.

Not unsurprisingly the leaseholder applied to the First Tier Tribunal to challenge whether the sum claimed was recoverable. The tribunal’s decision was appealed firstly to the Upper Tribunal and then to the Court of Appeal.

Whilst it was not argued that the works were not of a reasonable standard, the tribunal and the Courts were asked to decide whether they had been reasonably incurred.

In determining this issue the Court of Appeal supported a differential approach in the case of Repairs (which the landlord must carry out to comply with its obligations under the lease) and Improvements which are optional:   “…It is one thing to require the lessee to contribute towards the cost of works which can… be identified in advance and quite another to require the lessees to contribute towards the cost of works whose scale and extent are unknown and unknowable.”

The Court held that where the landlord goes beyond what is needed for repair and carries out improvements, the cost of which it seeks contribution from leaseholders, it should first “…take particular account of the extent of the interests of the lessees, their views on the proposals and the financial impact of proceeding.”

The end result was that the Leaseholder was obliged to contribute in full in respect of works termed as repairs, but was entitled to a reduction on the items of improvement to reflect the landlord’s failure to do so.