Section 20B of the Landlord and Tenant Act 1985 prevents 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.
OM Property Management Ltd v Burr [2012] UKUT 2 (LC) 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 and the company continued paying the wrong supplier for six years. Worse, a gas meter had been misread and the supplier that had been charging for the gas had undercharged by £135,337.
One of the tenants refused to contribute to the shortfall that was attributable to the period before his lease was assigned to him. Consequently, the tribunal had to decide when the costs were incurred. Were they incurred when the gas was supplied, in which case the tenant would have been entitled to refuse payment, or when the invoice for the shortfall was received?
The tribunal upheld the company’s claim. It noted that Parliament had used the word “cost” in section 20B and ruled that there is a difference between a cost and a liability. A liability does not become a cost until it is made concrete, either by being invoiced (or set down in a certificate under a building contract) or by being paid. In this case, the cost of the gas was “incurred” when the bill was presented to the company. The company had included the costs in its next service charge demand to tenants, which was well within the time limit set by section 20B.
The judge warned in passing that, if payment of an invoice is delayed, the date on which the cost was occurred may depend on the reason for the delay. If payment was delayed because there was a justified dispute about the invoice, the tribunal might decide that the costs were not incurred until the dispute was settled and the bill was paid. However, the tribunal would be very reluctant to allow deliberate prevarication to postpone the operation of section 20B.
The 18-month deadline is relatively short and the court cannot extend it. Consequently, landlords should keep an eye on the clock and, if payment of a bill is delayed for any reason, should safeguard their interests by notifying their tenants in writing that costs have been incurred and will be included in future service charge demands.
Allyson Colby is a property law consultant