“Reasonableness” of Service Charges
22 Aug 2023 | Shilpa Mathuradas
It is well known that the relevant costs that a landlord incurs in the provision of services, repairs improvements, maintenance or insurance under the terms of the lease must be considered when determining the amount of service charges payable by the leaseholder for a period.
Under section 19(1) of the Landlord and Tenant Act 1985 service charges must be
(1) reasonably incurred; and
(2) where they are incurred on the provision of services or carrying out of works, only if the services or works are of a reasonable standard.
It is also well known that the “reasonableness” must be determined on an objective standard of reasonableness and not the lower standard of rationality.
This test was considered in the case of Assethold Ltd v Adam and others [2022] in which leaseholders were issued with a service charge demand which included a sum of £28,000 for the cost of waking watch for the building. From October 2019 to August 2020 surveyors were commissioned by the managing agents to inspect the building for the purpose of health, safety and fire risk assessment. The external walls of The building were not found to present a significant fire risk.
However, in January 2021 a further external walls risk assessment was commissioned by the surveyors who had carried out the inspection in 2020. The surveyors concluded that combustible materials were present in external walls and this presented an “intolerable” risk with consequences of a fire. The remedial action recommended that an extended alarm system or a waking watch be implemented. The freeholder opted for the latter option.
The leaseholder applied to the Tribunal where the reasonableness of the decision making process was considered. It was stated that where two course of action were available the landlord did not have to opt for the cheapest. The leaseholders produced expert evidence that the freeholder’s action were not reasonable. Relying on this evidence The First Tier Tribunal concluded that the finding in the 2021 report was wrong given the vast difference between the 2021 report and the earlier reports and the freeholder should have commissioned a further report and acted unreasonably in not doing so. As a result they found the costs of the waking watch were unreasonable given that it was based on a report that was wrong.
The freeholder appealed on the basis that the question of what the freeholder should do is subject to a rationality test. An objective test of reasonableness applied to the price only. The Upper Tribunal disagreed and determined that the landlord’s choice of “what to do” required an objective assessment of whether the landlord had followed a reasonable decision- making process adopted a reasonable course of action. In the alternative they argued that if the objective standard of reasonableness was the correct test, the First Tier Tribunal had misapplied the same. The Upper Tribunal agreed.
It determined that the freeholder has acted properly in relying on 2021 report as it was from a reputable firm who specialised in fire safety. They also acted reasonably in putting in place a waking watch. The Upper Tribunal stated that the First Tier Tribunal has placed reliance on leaseholder’s expert and had therefore considered the issue with the benefit of hindsight. The First Trier Tribunal should have considered the issues on the information available at the time the costs were incurred and not a later date.
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