Our previous Legal Update looked at the question of how far back service charges and rents can be recovered and the law under the Limitation Act 1980. However, we have recently been asked how far back a leaseholder can challenge service charges, and this is where the law is a little bit more complicated.

Leaseholder applications in the FTT

A leaseholder can make an application under Section 27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) to the First-Tier Tribunal (“the FTT”), for a determination as to whether a service charge is payable. A service charge is only payable to the extent that it is reasonable, under Section 19 of the 1985 Act.

Where a landlord, RTM company or RMC is pursuing a leaseholder for unpaid service charges, we know that the limitation period for that claim is 12 years (or 6 years if the service charges are reserved as rent), otherwise the claim is time barred. But how long does a leaseholder have to make a Section 27A application?

In the case of Peter Cain -v- Mayor and Burgesses of the London Borough of Islington [2015] UKUT 542, the leaseholder, Mr Cain, made an application under Section 27A of the 1985 Act, challenging service charges going back 12 years. The FTT held that Mr Cain’s challenges relating to service charges that were more than 6 years old were ‘statute barred’ under Section 19 of the Limitation Act 1980 (as the service charges were reserved as rent), and that as Mr Cain had paid the sums, he was treated as having agreed or admitted each of the elements of the service charges.

On appeal, the Upper Tribunal upheld the FTT’s decision that Mr Cain had agreed or admitted the amounts due by paying them. However, importantly, the Judge also found that Mr Cain’s application did NOT fall within Section 19 of the Limitation Act 1980. The reason for this was that, if Mr Cain was successful, it would simply result “in a determination as to the reasonableness of the amounts claimed and nothing more”. In other words, it was not a claim to recover rent or service charges.

It is therefore evident that Limitation Act 1980 defences will not assist landlords, RTM companies and RMCs in connection with leaseholder service charge applications made to the FTT.  Therefore, it may be possible for leaseholders to challenge charges which are older than the usual 6 or 12 year limitation periods.

Claims for repayment

Of course, a leaseholder Section 27A application is a means to an end but not an end of itself. Where a leaseholder has paid service charges, which are then determined as not payable, a leaseholder must seek reimbursement from the landlord, RTM company or RMC. Where that payment is not made voluntarily, the leaseholder must seek reimbursement through the Courts. This is generally by way of a claim for restitution or unjust enrichment, on grounds of a mistake, e.g. to put the leaseholder back in the position had the mistake (payment, which the FTT finds not to be due) not been made.

There are various defences to these sorts of claims, which are beyond the scope of this Legal Update. However, it is important to note that limitation periods do apply. Whilst there is no statutory limitation period set out in the Limitation Act 1980, it is accepted that such a claim will be subject to a 6 year limitation period, albeit from the date the mistake has been discovered or could with reasonable diligence have been discovered. Again, this could see a leaseholder being able to claim reimbursement for service charges which are otherwise older than 6 or 12 years.

It is worth noting here that, depending on the terms of the lease, it may be the case that any such sums must be credited towards future years' service charges, and not re-paid to the leaseholder, in any event.

Laches

In addition to any limitation defence, landlords, RTM companies or RMCs may be able to rely on ‘laches’, in defence to any claim for reimbursement of sums determined by the FTT as not payable.

Laches is the principle that a party who seeks an equitable remedy must come to the Court quickly, if they consider that their rights are being infringed. So where a leaseholder pays service charges over a sustained period of time without objections, it might be possible to argue that (at least some of those charges) have been accepted as payable.

In Cain, whilst the Upper Tribunal agreed with the FTT that Mr Cain had impliedly admitted that the service charges were payable by making payment without objection over a sustained period, it confirmed that this was not on the basis of laches. Laches does not apply to Section 27A applications before the FTT as they are not claims for an equitable remedy. 

The take home

The practical effect of the above to landlords, RTM companies and RMCs faced with leaseholder Section 27A applications challenging historic service charges is :-

1.  In theory, there is no time limit on how far back in time leaseholders can go in their application to the FTT to determine whether a service charge is payable. This is because, as we have seen in Cain, the Limitation Act 1980 does not apply to such applications to the FTT;

2. Be wary of leaseholders who pay service charges but also provide a written qualification that payment is made without prejudice to their right to challenge the service charge. Otherwise, it might be possible that payment without objection over a sustained period payments could amount to an implied admission of the sums;

3. If leaseholders look to enforce any FTT decisions through the Courts to claim reimbursement of sums overpaid, limitation arguments may assist in a defence to at least some of those charges. In addition, a ‘laches’ argument might be deployed in response to such claims;

4. Section 4.10 of the RICS Service charge residential management Code suggests that “You should maintain efficient records relating to the building and keep records during the periods of statutory limitation of action. You should seek advice from clients and professional indemnity insurers.” Bearing this is mind, our advice is to maintain records for as long as practicably possible, even longer than the usual 6 or 12 year limitation periods where you can (of course, do also check with your PI insurers on this).

Conclusion

As is clear from the above, how far back leaseholders can challenge (and claim) service charges is a complicated question and one on which landlords, RTM companies and RMCs faced with such challenges should seek specialist advice.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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