As Managing Agents are well aware there are protections for leaseholders to help ensure that leaseholders are not taken by surprise by an unexpected bill for works carried out in earlier years.
Jeremy Weaver, Brady Solicitors’ Head of Litigation considers the recent case of No.1 West India Quay (Residential) Limited v. East Tower Apartments Limited [2020], and obligations created by Section 20(B) of The Landlord and Tenant Act 1985
A quick review of S.20 (B) Notices
As a reminder Section 20B(1) imposes a limitation period in respect of the recovery of service charges from long leaseholders of residential premises; costs are not recoverable if they were incurred more than 18 months before they are demanded.
However, that obligation can be avoided if the tenant was informed, in writing, within 18 months of the costs being incurred, that those costs have been incurred and are recoverable from the tenant. This is commonly referred to by Managing Agents as a Section 20B(2) Notice.
Outline of the Case
The block was a large mixed-use development including a hotel and residential flats above. The flats were let on long leases and the respondent owned approximately 30 such flats.
The utility metering was complex, and the appellant retained specialist contractors to read the meters and produce individual bills to be recharged to each leaseholder. Between 2008 and 2012, it charged the cost of those contractors as a surcharge on the electricity costs.
Under the terms of the leases, the appellant was entitled to recover the costs of providing electricity. It was also entitled, through a separate covenant, to recover costs incurred in providing services to the building as a service charge.
In a previous Upper Tribunal (on appeal) decision between the parties it had been held that the costs were only recoverable as a service charge and not as a surcharge on the electricity ([2016] UKUT 553 (UT)).
The leaseholder argued that the consequence of that decision was that the earlier demands were contractually invalid (because they had been charged as a surcharge on the electricity and not via the service charge). That meant that there had not been a contractually valid demand for the purposes of s.20B(1). More than 18 months had passed since the costs were incurred. It was common ground that there had never been a s.20B(2) notice. The costs were therefore time barred and the Upper Tribunal found for the leaseholder accordingly.
Key considerations
In Brent LBC v Shulem B Association Ltd [2011] 1 WLR 3014, the High Court held that the “demand” for the purposes of s.20B(1) had to be a contractually valid demand. That decision was approved in Skelton v DBS Homes (Kings Hill) Ltd [2017] EWCA Civ 1139
In considering the historic case law the UT’s comments in No1 India Key are of interest to residential landlords and managing agents as it acknowledged that the decision in Shulem: “goes further than the apparent policy requires and could be liable to produce injustice in cases such as this” and that it may be more appropriate to “treat any demand for payment as sufficient to stop time running in relation to the sum demanded”.
However, until such time as there is a change the law, the decision in Shulem will have the affect outlined above.
So what does this mean for Managing Agents?
This decision is a reminder of the importance of ensuring that demands must be contractually compliant with the lease to satisfy s.20B(1), even if issued within 18 months of the relevant costs being incurred, and if that is not possible, they should serve a valid s.20B(2) notice.
For advice on how to deal with the 18 month rule and service charge demands, talk to the specialist property management solicitors at Brady Solicitors.
