EWCA Civ 45, 2 February 2017
Patten, Lewison and Burnett LJJ
The Court of Appeal has held that whether service charge costs are reasonably incurred, for the purposes of Landlord and Tenant Act 1985, s.19, is to be determined by reference to an objective standard of reasonableness rather than applying public law principles of rationality. A tribunal should not, however, impose its own decision where a landlord has adopted a course of action which led to a reasonable outcome, even if there was a cheaper outcome which was also reasonable.
Long leases of flats will typically require the landlord to keep parts of the building comprising the flats in repair, e.g. the structure and exterior. Many long leases will also provide that the landlord may carry out improvements to the building.
Long leases usually provide for the tenant to bear a proportion of the landlord’s expenditure on the building. Sections 18-30A, Landlord and Tenant Act 1985, as amended, govern liability for and recovery of such charges, including the costs of repairs and improvements. In determining the amount of a service charge, the landlord’s costs are to be taken into account only to the extent that they are reasonably incurred and, where they are incurred on the carrying out of works, only if the works are of a reasonable standard: s.19(1).
A decision of a public body is susceptible to challenge if the decision is so unreasonable that no reasonable decision-maker could ever have come to it. This standard is often referred to as “Wednesbury reasonableness” after Associated Provincial Picture Houses Ltd v Wednesbury Corporation  1 KB 223, CA (and see Council of Civil Service Unions v Minister for the Civil Service  AC 374, HL).
Where a contract gives one party a power to exercise a discretion which affects the rights and obligations of both parties to the contract, there is an implied term that the power should be exercised in good faith and in a Wednesbury reasonable manner: Braganza v BP Shipping Ltd  UKSC 17;  1 WLR 1661.
The respondent local authority was the owner of an estate comprising almost 1,000 dwelling houses. The applicant had a long lease of a flat in a four-storey building on the estate. Under the terms of that lease, the authority covenanted to keep the structure and exterior of the building in repair. The applicant covenanted to pay a proportion of the authority’s costs of doing so, as a service charge. The applicant also covenanted to pay a proportion of the cost of any improvement made by the authority.
Between 2005 and 2006, the authority carried out major works to the estate, including to the building in which the applicant’s flat was situated. The works included replacing the wooden-framed windows in the building with metal-framed units. As a consequence of the window replacement, the authority also replaced the external cladding. In 2012, the authority served a demand on the applicant in the sum of £55,195.95, which was said to be her share of the cost of the works.
The applicant applied to the First-tier Tribunal (Property Chamber) for a determination of her liability to pay the demand. She contended, inter alia, that the windows should have been repaired, instead of being replaced. The FtT held that the authority’s decisions to replace the roof and windows were not unreasonable and the costs were therefore reasonably incurred.
The applicant appealed to the Upper Tribunal (Lands Chamber). The UT allowed her appeal, so far as the windows were concerned:  UKUT 17 (LC).
The UT held that a leaseholder’s means are usually irrelevant to any consideration of whether costs of repair works are reasonably incurred, because the landlord will have an obligation to carry out such repairs. The financial impact on leaseholders will be more relevant when considering works of improvement, because the landlord will have a discretion as to whether or not to carry out such works. Where works which go beyond works required to remedy disrepair are carried out, the financial impact of any particular course of action may have relevance to the question of whether costs have been reasonably incurred.
As the authority had not proved that the windows needed to be replaced in order to remedy any disrepair, the UT remitted the case to the FtT for a determination as to how much of the cost of the window and cladding replacement had been reasonably incurred.
The authority appealed to the Court of Appeal.
The Court of Appeal dismissed the authority’s appeal. Applying Braganza, the authority’s contractual ability to undertake improvements was subject to the constraint of Wednesbury reasonableness. If s.19, 1985 Act was to have any purpose, the test of whether costs were reasonably incurred must be different to the implied contractual constraint.
Whether costs have been reasonably incurred, for the purposes of s.19, is not merely a question of process but also one of outcome. This does not mean that a tribunal should impose its own decision: if a landlord chooses a course of action which leads to a reasonable outcome, the costs of pursuing that course will have been reasonably incurred even if there was another cheaper, reasonable outcome.
While the same legal test applies to both repairs and improvements under s.19, this does not mean that the legal and factual context applicable to a particular category can be ignored. There is a real difference between works which the landlord is obliged to carry out and works which are optional. In particular, so far as improvements are concerned, three factors must be considered. First, the extent of the interests of the lessees, which is measured by the remaining unexpired terms of their leases. Secondly, particular account must be taken of the views expressed by lessees. Thirdly, the the landlord must take into account the financial impact of the works; this does not require a landlord to investigate the financial means of particular lessees but a landlord is likely to know what kinds of people are lessees in a particular block or on a particular estate.