Service Charges: Whether costs incurred in implementing fire safety measures were reasonable and recoverable

The Upper Tribunal considers an appeal by a landlord following a decision by the First-tier Tribunal which concluded that costs incurred by implementation of a waking watch were not reasonably incurred.

The background

In Assethold Ltd v Adam and others [2022], a converted warehouse contained residential apartments held on long leases by the respondent leaseholders.

An inspection by 4site Consulting Ltd in October 2019 found minor defects and issued notices to leaseholders in relation to remedial works, although works were never carried out. Further surveys were carried out by Hydrock in 2020 and 2021. The earlier surveys indicated that the building was satisfactory, but subsequent assessment identified that external walls contained combustible materials which presented considerable risk and potential consequences. Remedial works were recommended, including removal of combustible materials, with interim measures recommended including an extended alarm system or provision of a waking watch. A waking watch was implemented by the landlord.

Leaseholders consulted Safety Consulting Partnership Ltd, which concluded that fire risk was low and the waking watch was not justified, recommending only minor works.

Service charge demands were issued to leaseholders which included costs of the waking watch. The leaseholders applied to the FTT for a determination as to the reasonableness and payability of service charges, arguing that the landlord could not make an ad hoc demand for service charge costs during the accounting year and that the waking watch costs were not reasonably incurred. The FTT found in favour of the leaseholders, concluding that Hydrock’s report had been incorrect and the waking watch not necessary on the basis of earlier reports. The landlord appealed.

The decision

The Upper Tribunal allowed the appeal, finding that the FTT had misapplied its test and concluding that following Hydrock’s recommendations to implement a waking watch had been reasonable.

The landlord referenced the two-part test set out in Forcelux Ltd v Sweetman [2001] which required assessment as to:

1. Whether the landlord’s decision-making process had been reasonable; and
2. Whether the amount charged was reasonable.

The landlord argued that the decision-making process was required to be rational, referencing London Borough of Hounslow v Waaler [2017] which stated that rationality applied to both the choice of method of repair and the decision as to whether to carry out works which were optional. The landlord stated that the FTT had been wrong to test the landlord’s choice as to method of repair against the reasonableness test. The UT distinguished this argument, finding that the FTT had applied the correct test.

The UT considered the Hydrock report which made different recommendations to 4site, following different inspections. Although the final Hydrock report reached a different conclusion than those undertaken previously, this did not result in the report being incorrect.

The UT found that the landlord had acted rationally in putting in place interim measures following Hydrock’s conclusions that extreme risk was posed to the leaseholders and the building. Few landlords would have acted differently. The FTT had therefore applied the correct test, but had misapplied it. The UT set aside the FTT decision, finding that the landlord had acted rationally in commissioning the Hydrock report, following its recommendations and implementing the waking watch. Costs had been reasonably incurred but, on assessment of the quality of service delivered, found that only 50% of the costs were recoverable.

Advice and action for landlords

This is an important decision for landlords facing high costs of interim measures implemented pending completion of major building safety works.

The landlord acted rationally and costs were reasonably incurred when, on identification of extreme risk, it implemented the waking watch even where such report recommendations contradicted those of earlier reports. Inspection methods had been different and there was no reason for the landlord to go against such recommendations.