Anyone involved in residential block management will know about the so-called 18 month rule, and will know all too well the consequences of stale service charges if the time limit on making demands set down by section 20B is not adhered to.

Section 20B: a reminder

Section 20B of the Landlord and Tenant Act 1985 sets out one of the statutory limitations on the recovery of service charges. It requires a demand for payment of service charge to be made within 18 months of the relevant costs being incurred.

If a demand for service charges is not provided within 18 months of those costs being incurred, then a leaseholder is not liable to pay those service charges. They become what is commonly referred to as “stale” service charges.

Section 20B(2) allows those costs to be recovered (even if demanded outside of the 18 month rule) only if the leaseholder has been notified, in writing, that the costs have been incurred and that they’re going to be required under the terms of their lease to contribute to them by a payment of a service charge.

 

Skelton v DBS Homes (Kings Hill) Limited

The Court of Appeal in Skelton v DBS Homes (Kings Hill) Limited [2017] EWCA Civ 1139 were called upon to consider whether (and to what extent) the 18 month rule applies to on account demands for service charges.

 

The terms of the lease in Skelton

Almost all leases will provide for on account demands for estimated expenditure. And the lease in Skelton is no different.

The machinery for payment of service charge in this case is not uncommon either. It involves the service of a demand and an “estimate”.

Critically, under the lease, the liability on the part of the lessee to pay service charge did not arrive until the landlord had fulfilled its obligations to:

a. prepare estimates containing a summary of the estimated costs and serve them on the leaseholder; and
b. serve a statement showing the service charge payable by the leaseholder on account of those estimated costs.

This kind of machinery is not uncommon.

 

What happened in Skelton?

On 30 March 2011, the landlord served a service charge notice in respect of the 2011 – 2012 service charge year. No estimate was enclosed.

This was repeated by the landlord when it served its demands on 1 April 2012 (for the 2012 – 2013 year) and 1 April 2013 (for the 2013 – 2014 year).

None of the demands for those three years were served with an estimate.

In fact, it was not until April 2014 that the estimate for all of those years was finally provided.

 

Decision of the Court of Appeal

The Court looked very carefully at the definition of service charge, and reminded itself of section 18 of the Landlord and Tenant Act 1985.  A “service charge” includes an amount which the leaseholder agrees to pay for costs incurred, or to be incurred, by the landlord.

The lessee argued that the 18 month rule applies to an on account demand because the definition of “service charge” encompasses costs to be incurred as well as costs that have been incurred.

The demands were not valid until the estimate was served.

Unfortunately for the landlord, by the time valid demands had been served, 18 months from incurring the costs had passed. The landlord was out of time for serving any supplemental demand (which was permitted by the lease).

The practical impact therefore is that the service charges are stale, and therefore unrecoverable, and this leaves the lessee with the “windfall”.

 

Commentary: read, understand and implement……

This is a stark reminder to landlords (and management companies) of the importance of following the procedures and machinery set down by the lease.

Leases often set out preconditions to the payment of service charges. It is important to know what those preconditions are, and to adhere to them. Any failures can be fatal to the recovery of service charges.

Landlords and management companies (and their agents) should review the leases for their developments, understand the mechanics of recovering service charges, and ensure the provisions are followed.

The moral of the story?  Read the lease and ensure you fulfil any preconditions!