Limitation on recovery of service charges - “The 18 Month Rule”
24th May 2018
24th May 2018
Despite the serious consequences for landlords and management companies, including limitations on recovering service charges from residential leaseholders, “the 18 month rule” appears to be one of the least understood provisions amongst landlords, management companies and managing agents.
In this note, we remind you of “the 18 month rule”, what the provisions say and what you need to do to ensure that you and your clients do not fall foul of the rules.
What is “the 18 month rule”?
Section 20B (1) Landlord and Tenant Act 1985 (“the Act”) provides that where any “relevant costs” (e.g. costs or estimated costs incurred or to be incurred for which a service charge is payable) are incurred prior to 18 months of a demand for service charges, the leaseholder will not be liable for those costs. In other words, a landlord may not recover costs incurred (or to be incurred) by way of a service charge if it fails to demand payment from its long leaseholders within 18 months.
But, all is not lost!
Under section 20(B) (2) of the Act, if a landlord, within the 18 month time frame, has notified the leaseholder in writing that those costs have been incurred and the leaseholder would subsequently be required to contribute towards them by way of a service charge, the limitation does not apply and the landlord can seek recovery of those costs.
Why would costs not be demanded within 18 months?
There are a number of reasons why costs may not be demanded within 18 months. For example, re-charging costs incurred by the landlord or management company may be delayed due administrative reasons, including where there are delays in reconciling year-end accounts.
However, we see this issue most often when instructed on behalf of landlords and managing companies to enforce breaches of leasehold covenants, whether it be for non-payment of service charges or other breaches. It is imperative that no demands are sent out to leaseholders who are in breach in order to preserve the landlord’s right to forfeit the lease. As a result, service charge demands may not be sent out to a defaulting leaseholder for many months, sometimes longer, whilst the litigation dealing with the breach is resolved.
When are costs properly said to have been “incurred” for the purposes of “the 18 month rule”?
A cost is incurred either on the date a landlord receives a demand to pay for the relevant cost, or the landlord makes payment of the costs, whichever happens first.
In OM Property Management v Thomas Burr  EWCA Civ 479, a leaseholder sought to challenge the costs for the supply of gas when the landlord had mistakenly paid the wrong energy supplier and the actual supplier sought payment some time later. The leaseholder argued that the costs were incurred when the energy was supplied, and as that was over 18 months before the demand the costs were not payable by him. The Court of Appeal disagreed; a cost becomes incurred on the presentation of an invoice or when it is paid.
What about on account charges?
Whilst relevant costs may not have been “incurred” until some time after the due date of an interim or on account demand, the Court of Appeal decided in the recent case of Skelton v DBS Homes (Kings Hill) Limited  EWCA Civ 1139 that “the 18 month rule” does apply to on account demands.
Whilst by the time of the hearing the landlord company had gone into liquidation therefore no arguments were advanced on behalf of the landlord to challenge this position, for the time being this remains good authority. To err on the side of caution, when it comes to interim or on account charges, we would advise that the 18 months is calculated from the date of the last demand, even if relevant costs were not incurred by that date.
What about immediate landlords?
In another very recent case, Westmark (Lettings) Ltd v Peddle and Ors  UKUT 449 (LC), the Upper Tribunal held that, where service charge costs are passed down a chain of title (e.g. from freeholder to head leaseholder to occupational leaseholder), then the costs are “incurred” afresh for the purpose of s.20B(1), at each stage in the chain.
Therefore, the costs are incurred when the relevant landlord receives a demand for payment, and the 18 months runs for the occupational leaseholders from the date their landlord receives the demand for payment, which can be (and was) far in excess of 18 months from the date the costs were actually incurred by the superior landlord at the top of the chain.
Section 20B (2) Notices
In London Borough of Brent v Shulem B Association Ltd  EWHC 1663 (Ch), the Court held that the notification to be provided to leaseholders under Section 20B (2) must state a figure for the costs which have been incurred, even if that figure is an estimate and later turns out to be wrong. Landlords could protect themselves by stating the highest figure that they thought that the costs incurred might have come to. The notice has to inform the leaseholders that they would be required to pay a service charge in respect of the costs in question, but does not need to tell them exactly what that service charge would be (e.g. estimates will suffice).
For more information, please contact Kevin Lever at Kevin.Lever@kdllaw.com or on 01435 897297.
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