Uncrystallised liabilities are not costs for the purposes of s20B of the Landlord and Tenant Act 1985
Section 20B of the Landlord and Tenant Act 1985 prevents landlords from presenting tenants of dwellings with unexpected service charge demands for expenses for which they have made no provision. As a result, landlords are not entitled to recover service charge costs that are more than 18 months old, unless they have notified their tenants in writing within that 18 month period that the costs will be included in their service charge contributions at a later date.
OM Property Management Ltd v Burr [2013] EWCA Civ 479 provides landlords with useful guidance on the effect of section 20B when a third party sends a landlord an unexpected bill, which must be paid. The company was responsible for communal facilities, which included a swimming pool that was heated by gas. The company recovered its costs through a service charge. Due to a mix-up that occurred before it assumed responsibility for the provision of services, the company paid the wrong gas supplier. The mistake went undetected for several years, leaving the company with more than £100,000 to pay.
One of the tenants asked the Leasehold Valuation Tribunal to decide whether the company had incurred the costs when the gas was supplied, or on receipt or payment of the invoice. It ruled that the costs were incurred when the gas was supplied and should be excluded from the service charge.
The Court of Appeal has upheld a ruling overturning the decision. It agreed that section 20B was enacted to protect tenants from stale claims. However, the legislation prohibits landlords from recovering service charge “costs” – as opposed to “liabilities” – that are more than 18 months old. A liability does not become a “cost” until it has crystallised which, in this case, was when the company received, or paid, the gas bill.
The court rejected arguments that its decision flew in the face of the statutory safeguard that protects landlords who notify tenants that costs will be included in their service charge contributions at a later date. It thought that the safeguard protects landlords who dispute invoices or encounter difficulties allocating costs to tenants.
It did not say so, but this explanation could help practitioners respond to a question that the court left unanswered. Are costs incurred when an invoice is received or paid? It has been suggested that the answer could depend on whether a landlord has been prevaricating, or has been engaged in a genuine dispute about a bill. However, the suggestion that the statutory safeguard operates “where an invoice is disputed” highlights the risk that the court could decide that costs are incurred as soon as an invoice is received.
Consequently, landlords would be well-advised to keep an eye on the clock and, if payment of a bill is delayed for any reason, should notify tenants in writing that the costs will be included in future service charge demands. The 18-month deadline is relatively short and the court cannot extend it.
Allyson Colby, property law consultant