Time to watch your purse strings! Costs of waking watch recoverable from leaseholders

In-depth analysis

Welcome to the first of our RED Alerts of 2023.

Featured in this month's update:

Assethold Ltd v Alexandra Adam and 14 other leaseholders of Corben Mews [2022] UKUT (LC)

Summary

In this case, the Upper Tribunal (Lands Chamber) (UT) considered whether costs associated with the use of a "waking watch" as an interim safety measure could be recovered via the service charge. The case was an appeal from the First Tier Tribunal (FTT), which had previously held that the costs were not recoverable from the leaseholders on the basis that they had not been reasonably incurred by the landlord.

The facts

This case concerned a warehouse building known as Corben Mews which had been converted into residential accommodation. Following a fire risk assessment in 2021 undertaken by the landlord's contractor, Hydrock, the landlord was informed that the risk of fire in Corben Mews was "extreme". Alongside more long-term remedial measures, Hydrock's report recommended that the landlord either install an extended alarm system or arrange for a waking watch for the building. A "waking watch" involves hiring a person to be permanently present on site in order to warn anyone in the building should a fire break out.

In reliance upon the recommendations in the report, the landlord hired a waking watch at a cost of £28,000 per month. The waking watch was in place for a little under one month before it was cancelled by the landlord. In June 2021, the landlord issued service charge demands to the leaseholders demanding payment of the costs of the watch.

The leaseholders applied to the First-tier Tribunal to determine whether the landlord was entitled to recover these charges.

The First Tier Tribunal Decision

The FTT decided in favour of the tenants and held that the landlord was not entitled to recover the costs of the waking watch.

The FTT referred to the Court of Appeal case of Waaler v Hounslow London Borough Council (2017) EWCA Civ 45 which confirmed that, when determining whether costs had been "reasonably incurred", the Court should consider whether the landlord's decision-making process was rational and whether the outcome of that process (i.e. the appointment of a waking watch) was reasonable. In this instance, the FTT held that:

the landlord should have sought a second opinion given the inconsistencies in Hydrock's report with earlier reports the landlord had commissioned as well as the conclusions of its own surveyors. In failing to do so, the landlord did not act reasonably.
In any event, incurring the costs of a waking watch was not reasonable as Hydrock's recommendation was incorrect and the waking watch was not in fact needed.

The Upper Tribunal decision

The landlord appealed the decision to the UT who upheld the appeal.

The UT accepted the FTT's analysis of the Waaler case. However, it concluded that the FTT's application of the test set out in that case was incorrect. In particular:

the UT held that the landlord had in fact followed a rational decision-making process in relying on the 2021 report given that Hydrock were a reputable firm specialising in fire safety. The UT agreed with the FTT that it would be rational for a landlord to commission a further report before taken any action given the flaws in Hydrock's report. However, the UT accepted the landlord's arguments that their decision to act on the recommendations made by Hydrock was equally rational in the circumstances.
the UT criticised the FTT for its assessment of the reasonableness of the costs themselves and held that the FTT had incorrectly based its decision on hindsight after having heard the evidence from the leaseholders' expert witness which confirmed that the conclusions of Hyrdock's 2021 report were wrong. On the contrary, the UT held that the decision to set a waking watch in the building pending further work or investigation was a reasonable response to the advice the landlord received based on the information available to it at the time.

Our comment

This decision will be welcomed by landlords who are facing potentially hefty bills for various fire safety measures they are required to put in place in order to comply with their fire safety obligations. This is especially the case given the passing of the Building Safety Act 2022 last year which sought to limit the costs payable by leaseholders in respect of fire remediation works.

However, this case also provides more general guidance on a landlord's ability to recover service charge costs, even outside the realm of fire safety. The UT's decision helpfully reinforces the correct interpretation of the test laid down in Waaler which landlords should bear in mind when considering whether or not to incur costs they intend to subsequently recover from leaseholders.