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Care needed when making demands for a service charge

A tenant sought to avoid payment of an “on account” service charge, following a demand by its landlord.

Background

A tenant sought to avoid payment of an “on account” service charge, following a demand by its landlord.

Under section 20B of the Landlord and Tenant Act 1985 (the Act):

  • a tenant is not liable to pay a service charge in respect of costs incurred more than 18 months prior to the date of demand;
  • but this will not apply if, within the period of 18 months, the landlord gives written notice to the tenant that costs have been incurred and that it will subsequently require the tenant to contribute by way of service charge.

This is referred to as the “18 months’ rule”.

What happened here?

In Skelton v DBS Homes [2017] EWCA Civ 1139, under the terms of the relevant lease:

  • the landlord was required to estimate the service charge annually in advance of its proposed expenditure and, with the estimate, to provide to the tenant a statement showing the expected costs; and
  • the tenant would not become liable to pay any service charge until the landlord had prepared and served the estimate.

The landlord made service charge demands at the start of each of the 2011/2012 and 2012/2013 accounting periods, but in each case it served an estimate only at the end of accounting period 2013/2014, some two years following the service of the later demand.

This meant that each demand only became effective more than 18 months after the landlord had incurred the costs to which the demand related.

What did the lower courts say?

The tenant argued that it was not, by reason of the 18 months’ rule, liable to pay the service charge. The landlord argued that the 18 months' rule did not apply because the demand was for an “on-account” service charge, rather than a charge for expenditure previously incurred. The First-tier Tribunal (Property Chamber) and Upper Tribunal found in favour of the landlord.

The Upper Tribunal said that the demand for payment became valid from the date the estimate was served (in 2014). Although more than 18 months had elapsed between the incurring of costs and the date the demand became effective, the 18 months’ rule did not apply to “on-account” payments. The court relied on Gilje v Charlegrove Securities Ltd [2003] EWHC 1284 (Ch), in which it was decided that the 18 months' rule did not apply to some service charges paid on account.

What was the Court of Appeal’s view?

The Court of Appeal allowed the tenant's appeal. It held that:

  • the definition of “service charge” in section 18 of the Act was sufficiently broad to catch costs to be incurred as well as costs already incurred; and
  • the case of Gilje (above) differed from the present case as, in that case, the demand for payment was made before, not after, the landlord had incurred costs. Here, of course, although the demand was served before the costs had been incurred, it only become effective in 2014, after the costs were incurred. There was nothing on the face of the lease contract to suggest that serving the estimate would validate the demand as at the date of the demand.

The court observed the possibility that, in similar but non-identical circumstances, a purchaser from a tenant of a leasehold interest may become liable for an earlier service charge when an estimate is served following purchase, thereby validating a demand made prior to purchase.

What does this mean for me?

If you are a landlord seeking to rely on the Gilje exception to the 18 months’ rule, you should actually demand service charges, rather than propose to do so, before incurring costs in respect of a leasehold property. It is important also to ensure that you observe carefully the procedure prescribed by your lease, to ensure that your demand is valid.

If you are purchasing a leasehold interest, you should ensure that earlier demands for service charge have been made properly, to avoid unexpected liabilities for demands that are only validated following your purchase.

If you wish to discuss any of the issues raised by this article, please contact Sian Evans, partner on sian.evans@weightmans.com or 0151 242 6821.