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| SERVICE CHARGE RECOVERY | Further Guidance Topics |
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One of the most important aspects of maintaining a landlord’s investment in a property, is to ensure that it is kept in repair, and more fundamentally, that the costs incurred are paid by the tenants. The aim of this paper is to establish what principles govern the term repair, whether a landlord can claim for improvements, and what can be learnt from recent case history.
In the context of service charge recovery the proposed remedial works must also be considered in light of a number of different circumstances. These are identified by Lord Justice Nicholls in the case of Holding and Management Limited Vs Property Holding and Investment Trust plc and Others (1990) 50 EG 75, and includes some or all of the following.
The Court found that the landlord had not fully established the extent of the defect. The landlord’s consultants had carried out limited opening up works and established that in some places corrosion had occurred, which led to the assumption that all steelwork was defective. The Judge stated that the landlord had not established the extent of the corrosion to justify the wholesale removal of the cladding to facilitate the remedial works. Furthermore, when the leases were granted in 1973/4, the rusting of the frame had already begun, to the extent that cracking to the cladding was already evident. In the judges opinion the term repair did not include removal of the cladding in order to remove all the rust from the steel frame and to restore the steel frame to the rust free condition it enjoyed when the building was built. Nor would the term repair include the removal and replacement of every cracked brick or block. There were cracks when the leases were granted, and in a building of this nature, 60 years old, it was bound to have some cracks in the cladding. He summarised by using the case Brew Bros Limited Vs Snax (Ross) Limited (1970) 212 EG 281. He said that the correct approach is to look at the particular building, to look at the state which it is in at the date of the lease, to look at the precise terms of the lease, and then come to a conclusion as to whether, on a fair interpretation of those terms, in relation to that state, the requisite work can fairly be termed repair. However large the covenant it must not be looked at in isolation. Quite clearly this approach involves, in every instance, a question of degree. A similar case which conversely was found in favour of the landlord is Gibson Investments Limited Vs Chesterton plc (2002). In this case the Judge accepted that the landlord’s proposed works which involved opening up and treating the rusting steelwork were an acceptable way of repairing the building. The tenant who had proposed to only repair the cracked stonework covering the rusting steel frame lost as the Judge found that the tenant’s works would do little to prevent future rusting and would be required to be repeated every three years. It should be mentioned at this stage that there are statutory tests for reasonableness that relate to residential lettings and where Section 18 of the Landlord and Tenant Act 1985 apply, the provisions of Section 19 of the Act provide two statutory limitations on costs which can be included in the Service Change;
An example of this is the case Wandsworth Borough Council Vs Griffin (2000) 26 EG 147. The landlord of a block of flats replaced leaking flat roofs with pitched roofs and replaced the defective metal framed windows with PVCu double glazed units. The tenant argued that the landlord should have simply replaced the roof coverings and overhauled the window frames. It was held that these costs were reasonably incurred since they were better value for money over the term of the lease, taking into account both initial and future costs, even though the initial cost alone was higher.
In these examples below, assume that where the tenant is liable, it is also liable for contributions under the Service Charge where the landlord carries out the works. In the case of inherent defects a tenant may be able to argue that a property let to it with an inherent defect at the beginning of the term involved imposing a liability on the tenant. In the case Ravenseft Properties Limited V Davstone (Holdings) Limited, (1980) Forbes J said that the correct test to apply where an inherent defect has occurred was that “it is always a question of degree whether that which the tenant is being asked to do can properly be described as repair, or whether on the contrary it would involve giving back to the landlord a wholly different thing from that which he demised” In other words where the inherent defect has resulted in damage the tenant may be liable to eradicate the inherent defect itself as well as remedying the damage it has caused. However it may be that the eradication of an inherent defect may fall outside the scope of a covenant to repair. For example, if the inherent defect has not caused any physical damage to the property or whether remedy of the damage can be carried out without eradication of the inherent defect. Finally whether the remedial work is deemed to go beyond repair as a matter of fact and degree. Incidentally, the term inherent defect has no clearly defined meaning, and it would be preferable to refer to defects arising out of a failure to design and construct the building in a professional manner. Aside from the specific issue of inherent defects is the question of whether a serious defect affecting a property can be interpreted as going far beyond the contemplation of the repairing covenant, and could therefore be deemed to be an improvement, or a rebuilding of the property, which would not be the liability of the tenant under service charge recovery. In these cases it would always be necessary to look at the individual property, the circumstances surrounding the letting itself, and the documentation governing the letting. For example, if one considers, as in the case of Holding and Management Limited Vs Property Holding Investment Trust plc, the circumstances surrounding this letting. The property consists of a block of first class residential flats let on long leases of up to 75 years. A landlord, acting reasonably may deem it necessary to carry out works for the more convenient or efficient conduct and management of the building. Lord Justice Nicholls said in the case “as living standards rise, so this or that feature can be expected to be changed or added to the building. Examples might be high speed lifts or improving air conditioning”. Mr Dowding QC in the recent case Fluor Daniel Properties Vs Shortlands Investments Limited (2001) 4 EGCS 145 submitted that where the landlord has an obligation to keep in good and substantial condition, this may require the carrying out of works which go beyond repair. The obligation is only triggered when, as a matter of fact and degree, the subject matter is not in good and substantial condition. Where it is triggered, Proudfoot Vs Hart (1890) 25 QBD 42 standard applies. The obligation does not require or entitle the landlord to carry out works which go beyond what is sensibly needed to remedy the defective condition in question. The Honourable Mr Justice Blackburne accepted Mr Dowding’s submission, and added that if a service, in this case air conditioning, was still capable of rendering to the tenants the particular service which the landlord has covenanted to provide, the landlord is unable to recover the expenditure incurred in renewing, much less improving the service. However, if a service no longer conforms to the reasonable requirements of the tenants of the building, the landlord, provided it acts as required by the provisions in the lease, will be entitled to the reasonable cost of works to improve the service. Compliance with Statutory Obligations is another example of where a Landlord may improve the property. For example the imposition of Parts L1 and Part L2 to the Building Regulations will require in many instances improvements to, say, the windows of a property. However, the Regulations are not retrospective, and therefore the obligation will only apply when renewal of the windows is contemplated. The Landlord, if he is to recoup the costs under the service charge, can only consider renewal if the existing windows are in disrepair. Once again, it is a matter of fact and degree. The fact is that the windows are in disrepair and the only option available is to replace them. The degree is that new windows must comply with the new Regulations. The new windows may be an improvement, but the Tenant would still be required to pay for them. In summary, the landlord can only carry out improvements if the condition of the item is no longer reasonably acceptable, with regard to its age, character and location of the premises, to a reasonably minded tenant. Furthermore the landlord must have proper regard to the interest of the tenant, and act reasonably.
The case involves a high quality multi occupied office block built in or about 1980, and attracting substantial rents. The majority of leases are long term expiring 2016. If one applies the principles discussed earlier the obvious considerations are that it is in a good location, occupied by high quality tenants on long leases and the building has a considerable unexpired life span. The dispute was over whether the landlord was entitled to recovery by way of the service charge from the tenants, the cost of various works to the building. These included principally aspects of the buildings air conditioning plant. The landlord had recently carried out a full survey of the property, and as a result the managing agents reported to the tenants that it was necessary to replace large elements of the air conditioning system, in order to safe guard the continuing efficient use of the building. With due consideration to the prestigious location of the property and the need to maintain first class services and facilities the landlord maintained that it would be reasonable to carry these works out. The tenants obtained their own expert, and found that the equipment was generally in satisfactory order, and the dispute arose. The judgement was generally found in favour of the tenant, and as a result, there are a number of lessons that can be learnt:
Subsequently the tenants cannot complain simply because the landlord could have adopted the minimum standard of repair and consequently cheaper method. The landlord must however take into account the length of the tenants’ leases and standard of the works should be such that the tenant could be fairly expected to pay for. In the opinion of The Honourable Mr Judge Blackburn presiding over the Flour Daniel Properties case, the landlord cannot overlook the limited interest of the tenants who are having to pay for works that are calculated to serve an interest extending beyond that of the tenants. If the landlord wishes to carry out repairs which go beyond the tenants’ interest, then additional costs must be borne by the landlord. Finally the judge summed up that the landlord, if he is to recover the costs, is required to use its best endeavour to select that method of performing its obligations which results in the lowest reasonable cost. The emphasis is on reasonableness, and provided the landlord has acted so, he cannot be criticised merely because it can be shown that the materials, works or services could have been provided or performed at a lower cost.
The question of standard also relies on a number of circumstances as laid down by Proudfoot Vs Hart. The standard must have regard to the age, character and locality of the building and whether the condition of the subject matter of the dispute is reasonably acceptable to a reasonably minded tenant of the kind likely to take lease of the building. The landlord must have proper regard to the interests of the tenants, and in some circumstances may carry out improvements. As the environment in which the building operates is improved, a reasonable tenant may expect features to be improved such has high speed lifts, or more efficient air conditioning. In short, the landlord must act reasonably, have proper regard to the tenants’ interests, and the obligation to repair must not be looked at on its own, and in every instance it is a question of degree.
• Brew Bros Limited Vs Snax
(Ross) Limited (1970) 212 EG 281
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