Service charges: to repair or to replace?

Service charges: to repair or to replace?

Dehavilland Studios Limited v Peries and Voysey

Landlords who will be passing on costs to tenants via a service charge need to grapple with the question of how to deal with defective items. Is replacement or repair the better option and what considerations need to be taken into account?

While not making new law, the recent appeal before the Upper Tribunal (Lands Chamber) from a case in the First-tier Tribunal serves as a useful reminder of the principles: Dehavilland Studios Limited v Cecilia Peries and Paul Voysey [2017] UKUT 0322 (LC).

The repair or replacement option related to defective windows in a flat, one of 41 residential long leasehold flats within a London building.

The landlord (whose directors and shareholders were flat owners within the building) had a “good and tenantable repair” obligation and to repair repaint and redecorate “… when the landlord shall deem appropriate” with an ability to recover its expenditure from the tenants via a service charge.

Both landlord and tenant accepted that the windows were defective but, before the First-tier Tribunal, the tenant had argued that full replacement of the windows was the better option, while the landlord preferred the substantially cheaper option simply to repair them.

Unfortunately, the First-tier Tribunal’s decision had come in for criticism. In a nutshell, it had found that:

“The costs to be incurred in respect of repairing the windows are not reasonable. The tribunal considers that replacement of the windows is the most reasonable option.”

The difficulty with those statements, taken together, was that, if replacement was the “most reasonable option” it tended to imply that repair was also a reasonable option but not the one that the Tribunal would have chosen and notwithstanding its statement, in the first sentence, that repair was not reasonable. There were other inconsistencies which made it difficult to decipher its decision.

The appeal therefore came before the Upper Tribunal by way of a review rather than a re-hearing.

The Upper Tribunal accepted the landlord’s summary of the relevant law, namely that where a landlord is faced with a choice between different methods of dealing with a problem in the physical fabric of the building, there may be many outcomes, each of which is reasonable. However, the tribunal should not simply impose its own decision. If the landlord has chosen a course of action which leads to a reasonable outcome, the costs of pursuing that course of action will have been reasonably incurred, even if there was another cheaper outcome which was also reasonable.

Here, the Upper Tribunal found that the First-tier Tribunal’s view (once the expert reports and its own decision had been considered in detail) had been, in fact, that both repair and replacement were reasonable options to adopt, albeit the First-tier Tribunal’s preference was replacement.

Repair would not lead to as good a result as replacement but the windows were not at the end of their life and repair would extend that life by up to 15 years. Further, replacement was far more expensive. It had been a reasonable approach for the landlord to adopt.

In summary, the First-tier had taken the wrong approach. It had looked at the two options and decided that replacement was the preferred approach. However, this was the wrong test to apply. Its task was not to decide on which option it preferred but, instead, to decide whether the landlord’s own approach had led to a reasonable outcome. The landlord was accordingly entitled to a declaration that its decision to repair rather than replace was a reasonable decision and it could therefore recover the reasonable cost of the repair via the service charge.

William Lawrence