Section 20B of the Landlord and Tenant Act 1985 prevents landlords from recovering service charges for items of expenditure that are more than 18 months old, unless the landlord has notified its tenants in writing within that 18-month period that the relevant costs will be included in their service charge contributions at a later date.
In Gilje v Charlesgrove Investments Ltd (No 2) [2003] EWHC 1284 (Ch); [2003] 3 EGLR 9; [2003] 36 EG 110, the High Court held that section 20B did not apply where: (i) a landlord had collected service charge payments on account; (ii) its actual expenditure did not exceed the amount received and (iii) no further requests for payment from the tenant needed to be or were, in fact, made. Consequently, the court did not decide what the position would have been had the landlord tried to make a balancing charge.
In Holding & Management (Solitaire) Ltd v Sherwin [2010] UKUT 412 (LC); [2011] PLSCS 8, the Lands Chamber of the Upper Tribunal had to consider, for the first time, whether section 20B applies where the landlord has demanded service charge payments on account and its actual expenditure exceeds the sums paid.
The landlord demanded £866 from the tenant on account for the service charge payable for the period 1 April 2006 to 31 March 2007 and, on 11 September 2008, invoiced it for a balance in the sum of £129. The tenant also paid service charge contributions in advance for the period 1 April 2007 to 31 March 2008 in the sum of £977 and, on 2 December 2008, received an invoice for a balancing charge of £354.
The President of the tribunal accepted that one possible interpretation of the legislation would be to apply section 20B to the whole of the landlord’s expenditure in the relevant service charge years, but decided the section was enacted to ensure that tenants are not presented with unexpected bills. Parliament did not intend to prevent landlords from recovering expenditure about which tenants have been sufficiently forewarned. Thus, section 20B does not limit a tenant’s liability for advance payments.
Since the costs taken into account in determining the advance payments were prospective, they had not been incurred more than 18 months before the demands for advance payments were made. They were therefore unaffected by section 20B, even though the landlord suffered a shortfall at the end of the year.
However, the demands for balancing charges related to sums that had actually been spent and the tenant did not have to contribute to any costs incurred more than 18 months previously. The outstanding costs in the service charge year 2006/07 were incurred on/after 20 March 2007 and the demand for the balancing charge was issued on 11 September 2008. The outstanding costs in the service charge year 2007/08 were incurred on and after 19 December 2007 and the demand for the balancing charges was issued on 2 December 2008. Consequently, none of the balancing charges was irrecoverable.
Allyson Colby is a property law consultant