Key points:
■ Service charges must be demanded within 18 months of the landlord incurring costs, under section 20B of the Landlord and Tenant Act 1985
■ A landlord “incurs” costs when it receives a demand for payment
■ Where there is a chain of landlords a fresh time limit arises each time a payment is demanded
To protect leaseholders against stale service charge claims, section 20B of the Landlord and Tenant Act 1985 (the 1985 Act) provides that a claim must be made within 18 months of the landlord incurring costs. Otherwise the costs cannot be recovered.
However, the landlord can protect its position by notifying the leaseholders that costs may be recovered provided this is done within 18 months of incurring those costs.
Failure to comply can be an expensive error: in Brent London Borough Council v Shulem B Association Ltd [2011] EWHC 1663 (Ch); [2011] PLSCS 168, for example, a housing association, the leaseholder of a number of flats in a development, did not have to contribute towards the costs of carrying out major works by the landlord because the landlord failed to comply with section 20B. There is no power to dispense with section 20B.
Chains of landlords
What is the position if there are one or more superior landlords which pass on the costs down the line to the occupational leaseholder in a block of flats? Do successive 18-month time limits apply to each demand made in the chain, or does section 20B(1) impose a single 18-month limit from the date on which the cost was first incurred by the superior landlord?
This was the main issue to be decided by the Upper Tribunal (UT) in Westmark (Lettings) Ltd v Peddle and others [2017] UKUT 449 (LC); [2017] PLSCS 210. Before examining this decision a word on when costs are “incurred”.
When is a cost “incurred”?
In OM Property Management v Burr [2013] 2 EGLR 84, another decision of the Court of Appeal, it was decided that costs are “incurred” when an invoice is served, or a payment is made, and not on the date when the service or works were actually provided.
Complicated chains of landlords for residential and mixed-use buildings are not uncommon. The Westmark case is no exception: the freeholder of the development in question is a local authority. But it does not have any responsibilities for repair or the insurance of the development. These responsibilities are held by a company under a headlease (Epic), which has granted an underlease to Westmark. Under Westmark in the chain is a management company and beneath it stand the respondent leaseholders of the 27 individual flats.
The chain of expenditure and recovery of the expenses incurred may be summarised in this way: Epic as head leaseholder is required to insure the building and to carry out any necessary repairs and maintenance. It can recover its costs from Westmark, which can recover those costs from the management company. It in turn recovers from the occupational leaseholders. In this way the head leaseholder’s costs of insuring and maintaining the building are passed down the chain to the occupational flat leaseholders.
Such a leaseholder has the right to challenge the charges if, for example, they are considered unreasonable (that is a challenge under section 27A of the Landlord and Tenant Act 1985). This was established in the landmark decision of the Court of Appeal in Ruddy v Oakfern Properties Ltd [2006] 3 EGLR 30, where a flat leaseholder who had a sublease was held to be entitled to challenge service charge expenditure undertaken by a superior landlord.
This left questions, such as: who in the chain has to deal with the statutory consultation requirements in section 20 of the 1985 Act? This issue was settled in Lessees of Foundling Court and O’Donnell Court v Camden London Borough Council and others [2016] UKUT 366 (LC); [2016] EGLR 59: the landlord which carries out the works must carry out the statutory consultation with all leaseholders, intermediate and occupational.
The decision
But what of the application under section 20B? The UT concluded that costs were “incurred” at each stage as the costs proceeded down the chain of intermediate leases. In other words, the 18-month time limit runs at each stage a landlord makes a payment. The UT rejected the leaseholder’s submission that the costs were incurred by the first landlord that paid them. Such a conclusion could work unfairly on the other landlords, it concluded. What if the first landlord only gave notice just before the expiry of the 18-month period? It might be difficult if not impossible for the landlords lower down the chain to comply. Such a result would mean that a landlord which paid the charges could not recover its costs.
The result, however, means that leaseholders could be required to pay charges several years after they were incurred.
The UT noted that leaseholders have other rights to demand that their immediate landlord gives them information of costs under the 1985 Act. Moreover, before a landlord carries out major works or enters into a long-term agreement it must first consult with all the leaseholders. (Would it be fairer if the landlord who incurs the original costs should, following the logic in Camden, give a section 20B notice to each leaseholder/landlord in the chain?)
It allowed the appeal by Westmark from the decision of the First-tier Tribunal. But, as to the application of this ruling, it emerged that there was no evidence that Epic had made a valid demand of Westmark or of the management company during proceedings before the FTT. As a result, the leaseholders are not liable to pay towards the service charges.
James Driscoll is a solicitor and a writer
