Section 20B of the Landlord and Tenant Act 1985 was enacted to prevent landlords from presenting tenants with unexpected service charge demands for payments to cover past expenses for which tenants have made no provision. As a result, landlords are not entitled to recover service charges in respect of expenditure that is more than 18 months old, unless they have notified their tenants in writing within that 18 month period that the relevant costs will be included in their service charge contributions at a later date.
Brennan v St Paul’s Court Ltd [2011] UKUT 403 (LC); [2011] PLSCS 25 concerned the reallocation of service charge expenses between blocks of flats following an error that resulted in the tenants of one block being charged a disproportionate amount. The costs had been incurred in 2006, but the adjustment was not made until 18 June 2008; the landlord accepted that the expenses had arisen more than 18 months previously.
However, in Gilje v Charlesgrove Investments Ltd [2003] EWHC 1284 (Ch); [2003] 3 EGLR 9; [2003] 36 EG 110, the High Court held that section 20B did not apply where: (a) the landlord had collected service charge payments on account; (b) its actual expenditure did not exceed the amount received; and (c) no further requests for payment from the tenant needed to be or were made.
The service charge adjustment in Brennan meant that the tenant’s service charge liability for the financial year ending 31 December 2006 rose by an extra £825. However, the landlord did not demand any additional payment from him. It was able to fund most of the shortfall from payments on account – and the balance was paid from the reserve fund.
The tenant refused to accept liability for the amount that had been debited to his account. He argued that a landlord would easily be able to sidestep the legislation if it could simply ensure that it collected sufficient sums on account that it could use at will. He also argued that if an unexpected old cost, about which he had not been warned, swallowed all or part of the sums that he had put aside to cover amounts that he had been warned about, he might still have to pay more than he had anticipated.
The judge sympathised with the tenant, but decided that it was impossible to ignore the statutory wording. Section 20B applies where a landlord demands payment for a service charge expense incurred more than 18 months previously (in this case, the landlord had not demanded any money from the tenant).
Tenants who are concerned that landlords may try to collect higher service charge payments on account as a result of this decision should be reassured. Section 19 of the Landlord and Tenant Act 1985 limits the recovery of service charges that are payable before costs are incurred to what is reasonable.
Allyson Colby is a property law consultant