Invalid demands for service charge payments on account, which were not validated for more than 18 months, fell foul of section 20B of the LTA 1985.
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.
However, in Gilje v Charlesgrove Investments Ltd [2003] EWHC 1284 (Ch), the High Court held that “the 18 months’ rule”, as it has become known, did not apply where (a) a landlord had collected service charge payments on account; (b) its actual expenditure did not exceed the amount received; and (c) no balancing payments needed to be made.
Skelton v DBS Homes (Kings Hill) Ltd [2017] EWCA Civ 1139; [2017] PLSCS 159 concerned a lease whose service charge provisions required the service of a service charge estimate, setting out the costs that the landlord expected to incur in the accounting period that followed, together with a statement showing the amount payable by the tenant on account of such costs. The landlord served demands for payments on account in 2011-12, 2012-13 and 2013-14, but did not provide the tenant with its service charge estimates until a couple of years after the close of the relevant accounting periods. Was the tenant liable to make the payments demanded, or did “the 18 months’ rule” apply?
The Court of Appeal accepted that the tenant’s liability to pay the sums demanded did not arise until the landlord had fulfilled its obligations to provide service charge estimates to the tenant. And, unfortunately for the landlord, it had allowed more than 18 months to elapse before it did so, validating the service charge demands at that later date – and not with effect from the date on which the demands were served.
The reasoning in Gilje was not applicable here because the landlord had made valid demands for payments on account in that case in respect of costs that had not then been incurred. Therefore, in Gilje, there had been no “demand for payment” after the landlord had incurred costs to which section 20B could apply. By contrast, in this case the landlord’s demands for payment were not validly served until long after the service charge costs had been incurred.
Consequently, the service charge demands were out of time – and, if the tenant had received a windfall in this case, it resulted from the landlord’s failure to comply with the terms of its leases.
Lady Justice Arden noted that it followed that if, having received the demand but not the estimate, the tenant had assigned his leasehold interest to a purchaser, the purchaser would have become liable for the service charge when the estimate was provided (subject always, of course, to section 20B). But that was not a reason for deciding the case in the landlord’s favour – and purchasers of leases will need to be mindful of this risk, going forwards.
Allyson Colby is a property law consultant
